"Suspension, reorganization and bankruptcy" are the three key phrases for crypto lending platforms. Collateral damage from Defi deleveraging continues to accumulate as falling collateral values force more margin calls.
The cryptocurrency lender Celsius filed for Chapter 11 bankruptcy on July 13, the latest development in the liquidity problems in the crypto credit industry.
Celsius was one of the first crypto firms to be affected by the TerraUSD and Luna crashes, which have huge exposure. The platform is suspending all withdrawals, transactions and transfers between accounts due to extreme market conditions, and has taken billions of dollars from more than 1 million accounts, Celsius said On Tuesday. On June 30, the agency said it had hired advisers and was considering restructuring its debt.
As of May, Celsius lent more than $8 billion to clients worldwide at an 18% interest rate and had nearly $12 billion in assets under management.
Celsius used 50,000 Ether coins ($66.34 million) and 9,500 WBTC coins ($242 million) on FTX immediately after a liquidity crisis began.
But the cash still cannot meet the liquidity requirements of Celsius users. In filings with the Court in the Southern District of New York, the company said it had initiated a financial restructuring process to stabilise its business and complete a comprehensive restructuring transaction while developing a restructuring plan for all stakeholders.
Celsius said in a press release that Celsius and some of its subsidiaries have filed a voluntary reorganization petition with the court under Chapter 11 of the U.S. Bankruptcy Code to implement the reorganization.
Celsius is required to submit a list of creditors holding the 50 largest unsecured claims. Including the creditor's rights against which the debtor has raised objections.
On a consolidated basis, Celsius is estimated to be between $1 billion and $10 billion in liabilities.
Kirkland & Ellis acted as legal adviser, Centerview Partners acted as financial adviser and Alvarez & Marsal acted as Celsius restructuring adviser, according to court documents.
The suspension was a difficult but necessary decision, Celsius explained. Without a suspension, accelerated withdrawals allow some customers -- the first to act -- to be paid in full, while others can only withdraw their money while waiting for Celsius to stabilize from illiquid or long-term asset deployment activity.
"This is the right decision for our community and our company," said Alex Mashinsky, Celsius co-founder and CEO, adding Celsius has a strong and experienced team to lead it through the process.
Celsius bets on failure cost supporters as well. At the end of 2021, the company raised $750 million from investor WestCap and Canada's second-largest pension fund, Caisse de Depot et Placement du Quebec, valuing it at more than $3 billion.
As part of the process, Celsius said, we intend to come up with a plan to restore activity across the platform, return value and provide choice for customers.
Celsius currently holds $167 million in cash, which it will use to support some of the restructuring process.
Asked "When clients can withdraw assets," Celsius said most account activity will be suspended until further notice. Withdrawals, swaps and transfers between accounts will continue to be suspended, and rewards will stop accumulating from the filing date. Celsius does not currently require authorization to allow customers to withdraw money.
In the meantime, existing loans initiated by Celsius's affiliate will continue to be serviced. Maturities, margin calls and interest payments will continue as in the past. Celsius will not make new loans for now.
Celsius repaid all its debts to decentralized apps Aave, Compound and MakerDAO in the past month, accumulating more than $900 million, according to blockchain data provider Zapper.
Voyager Digital filed for Chapter 11 bankruptcy protection in the Southern District of New York on Tuesday (July 6) before Celsius became the victim of a "filing for bankruptcy." Voyager Digital CEO Stephen Ehrlich said that while optimistic about the future of the industry, the long-term volatility and contagion in the crypto market over the past few months, as well as three Arrows Capital defaulting on its loans, have forced it to take prudent and decisive action.
Separately, Three Arrows Capital, a failed cryptocurrency hedge fund, has been ordered to liquidate.
"The turmoil has only increased the urgency for regulators to impose tougher checks and balances on the industry." European officials have now put the finishing touches on landmark crypto asset market (MiCA) legislation after nearly two years of deliberations, UBS strategists Moritz Diller and James Malcolm wrote in a research note. Separately, a draft opinion to establish an EU-wide definition of what constitutes a "taxable cryptocurrency market" is due to be voted on in September.
The MiCA proposal is a draft proposal for crypto asset markets put forward by the European Commission in September 2020. It is also part of the EU digital Finance Package to develop a European approach to promoting technological development and ensuring financial stability and consumer protection.
On 30 June 2022, the Council of the European Union and the European Parliament reached an agreement to include crypto assets, crypto asset issuers and crypto asset service providers within the MiCA regulatory framework for the first time. This regulatory framework will protect investors and maintain financial stability, while allowing innovation and fostering the attractiveness of the crypto industry.
In addition, Moritz Diller and James Malcolm say the unwelcome news for the crypto industry is that greater centralization is needed to regulate cryptocurrencies more broadly.