- As of July 13, Celsius claims it has $765.5 million worth of digital assets in outstanding loans.
- The crypto lender’s bankruptcy filing reveals some shady details about its operations.
A day after crypto lender, Celsius network, made a chapter 11 bankruptcy filing, an analysis of the filing shows a $1.19 billion deficit in the crypto lender’s balance sheet. The new jersey-based crypto firm paused withdrawals a few weeks ago, blaming the current crypto winter.
Hence, users couldn’t access their funds, causing additional fear in the fragile crypto market. Celsius sent its bankruptcy filing to the US bankruptcy court for New York’s south district. The filing also showed that the crypto lender loaned out $40 million to crypto hedge fund, Three Arrows Capital.
The crypto hedge fund also filed for bankruptcy earlier in the month. On the day Celsius filed its bankruptcy, it had $411 million in outstanding loans to retail borrowers. These loans are backed by collateral of digital assets worth $765.5 million.
Crypto lenders soared in popularity during the heat of the pandemic two years ago. They used high-interest rates and easy accessibility of loans to attract depositors. Even traditional banks would never offer such easy loan access. Also, these crypto lenders made profits by loaning out digital assets, most of whom were institutional investors.
However, there was criticism of this business model following the bearishness in the crypto market. The bearishness was caused by intense sell-offs of digital assets and the sudden crash of the terra network, including its TerraUSD stablecoin in May.
A few weeks ago, voyager digital (another us-based crypto lender) sent in its bankruptcy filing. Before its bankruptcy filing, voyager had paused withdrawals and deposits. Also, another crypto lender with headquarters in Singapore, Vauld, filed for bankruptcy.
Some shady details
Additional scrutiny of Celsius’ bankruptcy filing shows that the crypto lender may have been running a ‘shadow bank.’ A shadow bank is bank-like operations (usually lending operations) but not within the standard banking sector. Famous crypto critic and economist, Frances Coppola, wrote on her blog that it is unlikely that Celsius’ customers would receive their money back.
Coppola explains that deposits in banks and even assets under management are unsecured loans to the bank. They are not customer assets and are entirely at risk during bankruptcy. Hence, banks can refuse customers to withdraw their funds when they don’t have enough cash to pay. This is true even when the banks clearly state that the customers can access their funds anytime.
Meanwhile, a detailed study of Celsius’ terms and conditions shows that the crypto lender states that depositors might not be able to access their funds should a bankruptcy happen. Nevertheless, many industry experts believe Celsius should have opted for a Securities Investor Protection (SIP) instead of a chapter 11 bankruptcy.
Cory Klippstein (founder of Swan Bitcoin) said a sip filing would have given Celsius’ customers ownership of the firm’s assets. By comparison, Celsius still retains ownership of these assets under the chapter 11 bankruptcy filing.
Warning people about Celsius saved people more money than I'll ever make in my life.
Never, ever stop being "toxic," Bitcoiners. That's what it takes to puncture the crypto scammer noise bubble. pic.twitter.com/Z8ebvrOlQO
— Cory Klippsten (@coryklippsten) July 14, 2022