News: Chapter 11 for Celsius

The struggling lender paused withdrawals on the 12th June, but is still hanging in there..

Summary

• Celsius Network are a Defi platform that offered industry leading rates

• On 12th June, they paused withdrawals, effectively locking out all their investors and signalling that they were insolvent

• Reviewing their on chain activity, we can see that they are paying back their loans

• They filed for Chapter 11 in the US on 14th July 2022

Celsius network is a fin-tech lending platform that pays users interest on deposited cryptocurrencies or take out crypto collateralised loans. They are SEC compliant and regulated.

Celsius in trouble

Amid the turmoil in the cryptocurrency markets, caused largely by tightening monetary policy that is being rolled out to fight rampant inflation, we saw many Defi platforms suffering. We saw the collapse of Terra, which caused great instability across the Defi ecosystem. One of the major lenders to suffer was Celsius. There was ongoing speculation about their business model, as they offered outsized returns on their deposits, with rates as high as 17%.. On 12th June these fears were realised.. They announced a pause on withdrawals, trades and transfers on their platforms, essentially declaring that they were insolvent. Then on 14th July 2022, they filed for voluntary chapter 11 protection.

Insolvency is generally defined in law as 'being unable to pay debts as they becoming due'. This means there are two 'types' of insolvency:

Cash Flow insolvency - This means they have assets but they are locked up, this isn't the end of the world

Balance Sheet Insolvency - This means they are essentially out of money and assets.

Now figuring out which type of insolvency was the important part of this crisis. Was Celsius out of money or is it all just locked up in illiquid assets? Well this is where things get interesting because they are still paying back loans implying that they are not totally insolvent. They have made statements saying they have over $167 million in assets to aid in the continuation and restructuring of their business. They paid back in $1 Billion in loans to date.

Paying back their loans

In the past week, Celsius repaid about $78.1 million worth of USDC stablecoin to lending platform Aave, according to tracker Etherscan. It also repaid $35 million worth of stablecoin DAI on platform Compound.

Since the beginning of the month, digital wallets belonging to Celsius paid back more than $300 million worth of debt to various platforms, including Maker. You can see all of this on the blockchain through Etherscan.

Decrypt visualised the wallets and their allocations courtesy of Apeboard https://apeboard.finance/dashboard

As you can see from the portfolio above, most of their holdings are in WBTC, and they have $258,084,253 in debts. STETH is currently trading slightly undervalued to Eth, which may explain why their assets were so illiquid on June 12th.

Chapter 11 filing

Chapter 11, named after the U.S. bankruptcy code 11, is a bankruptcy generally filed by corporations and involves a reorganization of assets and debt. It allows the company to keep running day to day in order to restructure and pay back creditors.

In an email sent out to their community, Celsius claimed they will be restructuring and building a stronger company.

Celsius email to community 14th July 2022

Moments ago, we announced that Celsius voluntarily filed petitions for Chapter 11 reorganization. You will be able to find the official announcement here.

Today’s filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, Swap, and transfers on its platform to stabilize its business and protect its customers. Without a pause, the acceleration of withdrawals would have allowed certain customers—those who were first to act—to be paid in full while leaving others behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities before they receive a recovery.

Following the stated pause on June 12, 2022, we want you to know that we spent a great deal of time exploring our options.

These Chapter 11 cases provide the Company with the best opportunity to stabilize the business, consummate a comprehensive restructuring transaction that maximizes value for all stakeholders, and emerge from Chapter 11 positioned for success in the cryptocurrency industry.

We apologize that communication with our teams and community has been very limited over the past few weeks, and we look forward to being able to offer greater transparency with everyone through our reorganization, which encourages dialogue with all stakeholders.

For additional information regarding Chapter 11 protection, please watch this video.

Additional information about the Chapter 11 filing, including Court documents, can be found at https://cases.stretto.com/celsius. Stakeholders with questions may call Celsius’ Claims Agent, Stretto, at [phone] (U.S.) or [phone] (international) or email [e-mail].

Acting in the best interest of our stakeholders, including our entire customer community, is our top priority. We are also entering this process with the intention of emerging as a stronger company.

We thank you for your patience. It is our pleasure to serve you.

Celsius

What this means for the many investors that have tokens locked away with the company is still yet to be discovered.

Lessons Learned

It seems a little soon to be looking back and taking lessons, it very much still feels like the whole space is in crisis. One thing is clear though, that with both Celsius and Luna... if something appears too good to be true, then it usually is. In a bull market, the unsustainable projects, fuelled by speculation and a torrent of new investors, can grow into behemoths of the industry. Much like the internet bubble that preceded this, there was too much speculation and exuberance and not enough prudent thought on whether these projects could sustain themselves.

Lessons from history - beware of overly good deals. Ask yourself - is this really sustainable?