Celsius owes $4.7B to customers as first bankruptcy hearing takes place

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The first bankruptcy hearing for Celsius took place on Monday, with lawyers for the digital currency lender revealing that the company has half a million creditors to which it owes over U.S.$5 billion—the overwhelming majority of which is owed to its customers.

Monday’s hearing in the Southern District of New York also revealed that Celsius’ proposed pathway to recouping its massive losses depend on the success of its wholly owned digital currency mining subsidiary, Celsius Mining. The judge presiding over the proceedings, Judge Martin Glenn, approved U.S.$5 million in expenditure to help Celsius bring its mining project to completion.

However, both Monday’s hearing and filings in the U.S. Bankruptcy Court show that Celsius’ financial position is dire and that its customers are last in line for any unlikely recovery from the platform. Rumours about Celsius’ liquidity have been swirling since the beginning of June, rumours which were confirmed within a week by an announcement that Celsius would be suspending all customer withdrawals. The bankruptcy proceedings in New York have now revealed the full extent of Celsius’ financial woes.

According to court filings, Celsius’ deficit is U.S.$1.2 billion off the back of $5.5 billion in total liabilities. $4.7 billion of that is said to be owed to customers, according to company leadership. Among the factors to blame for Celsius’ dire position are ‘poor asset deployment decisions’ amid the broader sell-off in digital assets over the past year. According to a sworn statement by Celsius CEO Alex Mashinsky from July 14, the so-called ‘crypto winter’ and the well-publicised crashes of Luna, TerraUSD and other high-profile projects created a “growing industry-wide reluctance to do business with companies, such as Celsius, that held crypto assets.”

That Celsius was able to accumulate an impressive amount of customer creditors is a testament to the success of the lender’s marketing. Even as Celsius makes its way through the bankruptcy courts, the platform advertises that it can provide up to 17% APY on customer digital assets, the promise of which had secured 1.7 million users as of June 2022 (in the bankruptcy proceedings, CEO Mashinsky said that Celsius paid out an average of approximately 5%).

The idea of collecting customer deposits and then loaning them out for interest is common—after all, that’s how banks work. But a promise of yields reaching 17% is obscene; the typical yield for regular savings accounts held with U.S. banks is 0.09%, according to the National Credit Union Administration. What’s more, despite Celsius explicitly holding itself out as a replacement for traditional banking, Celsius is in reality nothing like a bank, and is subject to none of the stringent requirements that the law imposes on such entities. Most relevant to the 500,000 creditors is the fact that deposits into banks are insured by the FDIC, which means that in the event of a bank’s collapse, consumers are protected.

Under currently regulations and regulatory attitudes, deposits into platforms like Celsius are given no such protection. Quite the contrary, it’s clear from Celsius’ bankruptcy filings that they consider that any customer deposits amounted to the transfer of ownership of those assets to Celsius, which make its customers unsecured creditors. In other words, its users will be at the bottom of the list of those hoping to recoup money from Celsius.

This is a far cry from the position taken by CEO Alex Mashinsky in better days:

https://twitter.com/mashinsky/status/1178411318203879426

As Celsius’ bankruptcy plays out, it shines a light on the uncomfortable truth that there is no difference between Celsius and any other ‘crypto lender’ that hasn’t yet happened to blow up. As long as these companies remain outside the reach of regulators, their customers are at risk of being left out to sea, as Celsius’ customers are discovering.

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