Crypto lender Celsius Network, which suspended withdrawals in June after massive sell-offs in the digital asset markets, has filed for bankruptcy protection in a New York federal court.
Celsius is the latest domino to fall in a line of digital asset funds and crypto lenders halting redemptions or filing for bankruptcy. This, in turn, has exposed several Cayman crypto funds to potential losses.
The New Jersey-based company said the Chapter 11 process would provide the opportunity to stabilise the business and allow for a restructuring.
Members of a special committee of the Celsius board of directors said in a press release the “filing follows the difficult but necessary decision by Celsius last month to pause withdrawals, swaps, and transfers on its platform to stabilize its business and protect its customers.”
In the statement, Celsius defended freezing customer funds, saying a run on deposits would have otherwise paid the customers first to act in full, while forcing others to wait for Celsius to generate value from illiquid or longer-term assets.
“This is the right decision for our community and company,” said Alex Mashinsky, Co-Founder & CEO, Celsius.
Celsius said it has $167 million in cash on hand, which will provide liquidity to support certain operations during the restructuring process.
Customer claims would be addressed through the Chapter 11 process.
Celsius was created in 2017 and became one of the first cryptocurrency platforms allowing user to “earn rewards” on deposited crypto assets or take out loans using the transferred crypto assets as collateral.
Celsius has a global workforce of about 670 staff, more than 1.7 million registered users and approximately 300,000 active users with account balances greater than $100.
Cayman funds among the creditors
The company’s bankruptcy court filing, published by Offshore Alert, shows that the 50 largest unsecured creditors have made claims for more than US$600 million.
The largest unsecured creditor is Cayman Islands-domiciled Pharos USD Fund SP with a claim for US$81 million.
Invictus Capital Financial Technologies SPC, which is undergoing liquidation in the Cayman Islands, is owed $9.9 million and the company’s Cayman Crypto10 SP fund has a claim for $7.8 million.
Last month, Invictus Capital announced the closure of two Cayman funds, Bitcoin Alpha and Stable Growth, following the collapse of stablecoin TerraUSD, adding that two other funds Crypto10 and Crypto20 were exposed to, and impacted by, Celsius Network’s halt of withdrawals.
All four funds are segregated portfolios of Invictus Capital Financial Technologies SPC. The fund vehicle’s holding company New World Holding is in liquidation in Cayman.
In total, the court filing listed between $1billion and $10 billion in assets and liabilities and more than 100,000 creditors.
Crypto credit crisis
Celsius is one of several crypto services providers that were hit by large-scale market sell-off of cryptocurrency holdings earlier this year, as investors sought to divest risky assets in response to several interest rate hikes.
Like traditional banks, crypto lenders make money from the difference between the interest they pay on customer deposits and the higher interest charged on crypto loans.
In May, the collapse of $40 billion stablecoin Terra/Luna exacerbated the decline in digital asset values causing several crypto funds to fail and prompting exchanges and lenders to put a freeze on withdrawals.
Amid the turmoil, Three Arrows Capital, one of the largest crypto funds with reportedly more than $3 billion in assets in April 2022, collapsed and is in liquidation in the British Virgin Islands.
The liquidators of the Singapore-regulated, BVI-domiciled fund said in a court filing that the founders of Three Arrows, Zu Shu and Kyle Davies, were uncooperative and their whereabouts unknown.
Cayman Islands-domiciled TPS Capital, a company that at one point described itself on its LinkedIn page as the over-the-counter trading arm of Three Arrows Capital, issued a statement earlier this month distancing itself from the failed fund, stating that it was an independent firm with separate management.
Three Arrows had been a shareholder for a brief period following the company’s incorporation in December 2020 but had not held any shares in TPS since January 2021, the statement said.
Shu and Davies retain a stake in the company but are passive investors, TPS Capital added. Cayman-registered Tai Ping Shan Ltd is named as another shareholder in the company.
Meanwhile, Canadian crypto lender Voyager Digital, another platform offering lightly regulated financial and quasi-banking services, has also failed and filed for bankruptcy, after it said Three Arrows defaulted on a $650 million loan.
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