Celsius Network's repayment options to creditors suggest either accepting "cash at a discount" or remaining long-term crypto holders, but this is yet to be decided as the crypto lender's bankruptcy case carries on.
Celsius filed for court protection against bankruptcy last week. The crypto lender's case involves billions of dollars of customers' assets tied with the platform; however, experts are yet to find a solution as they are puzzled about how cryptocurrencies should be treated under the US bankruptcy code.
According to Bloomberg, Celsius customers will be represented by an official voice from a committee of creditors in the case once the panel is appointed by the office of the US Trustee - an arm of the US Department of Justice that oversees corporate bankruptcy cases.
The crypto lender suggested, via a slide presentation posted on the company’s bankruptcy website, for its part that it may give customers “the option, at the customers’ election, to recover either cash at a discount or remain ‘long’ crypto.”
The company also said on the opening day of the Chapter 11 bankruptcy hearing on July 17 that it promises not to force customers to accept repayment they may be owed in fiat currency.
Patrick Nash, a bankruptcy lawyer for Celsius, said some users could be interested in receiving cash recoveries, but a "substantial majority" will prefer to fight through the crypto winter by remaining "long crypto."
However, Celsius' bankruptcy case rides on uncertainty as even veteran US Bankruptcy Judge Martin Glenn, overseeing the bankruptcy case in Manhattan, is fighting to grapple with several fundamental questions. Glenn must find a way to see how he can crack this puzzle of a case involving a firm that bills itself as a lender but has none of the traditional protections enjoyed by regulated banks.
Adding more to the turmoil, Celsius’s terms of service state that its users’ digital assets are “unsettled” and “not guaranteed” in the event of insolvency, which could mean that users may be treated as unsecured creditors.
According to Bloomberg, "under US law, traditional banks are not allowed to declare bankrupt; instead, they are taken over by regulators and customer deposits are protected. However, bank holding companies that do not hold any deposits will sometimes use Chapter 11 to reorganise themselves and pay off creditors."
However, Chirs Giancarlo commented about the bankruptcy case to CoinDesk, noting that the “Chapter 11 filing is different” and the bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code allows a company to regroup, not put it out of business. That period of restructuring and reorganization "is exactly what Celsius is attempting to do,” he added.
Giancarlo, a senior counsel at law firm Willkie Farr & Gallagher, also pointed out that in most cases, “we often think about bankruptcy as the final step at the end of a company or enterprise’s existence.”
The former Commodity Futures Trading Commission Chief also believed the case would be one of those mile markers in the progression of this new asset class, resulting in “the regime that will be followed on a bankruptcy will be more clearly articulated,” as "it will be the first time a federal bankruptcy court will weigh in on a crypto collateral-based bankruptcy."
In favour of Celsius' effort of restructuring, the crypto lender also received approval during the July 17 hearing from Glenn to spend $3.7 million in construction costs at a new bitcoin mining facility in Texas.
The bankruptcy case is "not a liquidation,” Nash told Glenn. “All is not lost. We intend for this to be a reorganisation.”
Glenn also approved $1.5 million on customs and duties on imported bitcoin mining rigs for Celsius.
As part of the restructuring process, the bitcoin mining facility is a means for the company to repay debts.
Nash told Glenn that Bitcoin mining could provide a gateway to repay customers whose assets were frozen before the firm's bankruptcy filing.
"In a world where the crypto market rebounds, the mining business has the potential to be quite valuable," Nash said.
Prior to bankruptcy
According to a report from Blockchain.News, the crypto lender suspended all withdrawals and transfers around a month ago, citing unfavourable market situations as the crypto market plunged, cutting off access to savings for individual investors.
Celsius left 1.7 million customers unable to redeem their assets by freezing withdrawals and transfers, prompting state securities regulators in New Jersey, Texas and Washington to investigate the decision.
According to Reuters, Celsius had about 23,000 outstanding loans to retail borrowers as of July 13. It added that the loans totalled $411 million backed by collateral with a market value of $765.5 million in digital assets.
Celsius officially filed for Chapter 11 bankruptcy on July 13 at the U.S. Bankruptcy Court for the Southern District of New York. However, a $1.19 billion deficit was listed on the company's balance sheet the next day.
Celsius had positioned itself in the market by promising more than 18% in interest to peoples' holdings who deposit their digital coins. In turn, the crypto lender lent those coins out, Bloomberg reported.
However, the crypto lenders' business model came under scrutiny following a sharp crypto market sell-off spurred by the collapse of major tokens terraUSD and luna in May.
Image source: Shutterstock
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