We are watching what happens when a “crypto bank” goes bankrupt.
Major cryptocurrency lender Celsius has filed for Chapter 11 bankruptcy protection under U.S. law after suffering severe losses due to the impact of market turmoil and liquidity shortage.
The United States District Court for the Southern District of New York will oversee the case, according to Celsius’s official statement on Wednesday.
What’s Going On With Celsius?
Following Three Arrows Capital (3AC) and Voyager Digital, Celsius is the next crypto lending platform to join the bankruptcy list. Both Voyager and Celsius have filed for Chapter 11 bankruptcy, indicating that they are seeking the same goal.
Under the U.S. Bankruptcy Code, Chapter 11 refers to reorganization or restructuring. A bankruptcy filing under Chapter 11 will allow businesses to keep their operations normal while completing the organization’s restructuring.
This will pay the way for Celsius to restructure, renegotiate, and obviously have more time for repayment. Prior to this predictable move, Celsius had been in the headlines over the last few weeks as the company conducted several actions to cope with the liquidity crisis.
The first shot came last month with the system’s suspension of withdrawals, swaps, and transfers. Celsius cited the purpose of customer protection.
However, Celsius Network has not yet taken any action to protect users, other than hiring lawyers to help negotiate with banks where users deposit.
The second shot broke when the company was reported paying off loans from creditors, including Maker DAI, Aave, and Compound. In addition, Celsius sent a majority of its wrapped BTC to FTX.
The End of The Line?
Bankruptcy could be the final shot before starting the game over.
The crypto community had predicted this outcome; therefore, when it came, it came with no surprise. For Alex Mashinsky, Celsius co-founder and CEO, it is not an easy decision but it is, “the right decision for our community and company.”
Mashinsky said that the team was well prepared for this day:
“We have a strong and experienced team in place to lead Celsius through this process. I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”
Can’t Bank With No Cash
Celsius Network came onto the crypto scene in 2017. Its ambition is to become a cryptocurrency lender that offers customers better returns and lower risks than banks.
Last year, the company was valued at more than $3 billion after raising $750 million in a funding round led by WestCap investors and a Canadian pension fund. With an impressively high interest lending mechanism, the company quickly became a major figure in terms of crypto lending services.
Celsius issues large loans with very small collateral.
The document shows that Celsius has very little support in the event of a recession, making it very difficult for investments here to get out as customers rush to cash out. The 18% interest rate seems to work well when the market surges.
But the market crash was the last thing we acknowledged.
Celsius was in financial trouble due to an 18% interest rate and was on the verge of bankruptcy. The so-called “crypto bank” is now more unsafe than traditional banks.
According to the bankruptcy filing, Celsius Network’s assets and liabilities are valued between $1 and $10 billion. The company stated that it has $167 million in assets on hand to secure operations while it is undergoing restructuring.
The End of the Lending Party?
It looks like lending platforms with high interest rates are nothing more than empty dreams.
There is no such thing as high-interest rates with a lower risk. Those bank-like platforms hold the assets of others with no collateral.
Starting with them, however, is playing your assets with fire. You get burned eventually.
Celsius’ bankruptcy will have a massive impact on a large number of investors; small investors may lose everything.