Celsius officially filed for Chapter 11 bankruptcy last Thursday, (July 13th, 2022) writing that was on the wall after they completely halted all withdrawals last month.
If you’re like me and the millions of others of users who don’t have access to their funds, you might be curious (as I was) to see Celsius’ future plans for they’re considering to possibly repay their investors/customers. On July 19th, they tweeted out a link providing instructions for how to file a claim with them as well a power point of their proposed legal plan. Reading through some of the court documents and different analyses of other news outlets, the next few items that I’m going to cover are what I found to be the most significant observations, and why they might be important to you or someone you might know that is hoping to get out Celsius’ fallen house of cards.
Why a Chapter 11 (versus a Chapter 7) matters
A Chapter 11 bankruptcy filing gives an opportunity for a company to possibly recover through restructuring, and is significantly different than a Chapter 7 fire sale where everything gets liquidated, which is the bankruptcy path a traditional brokerage would have to go through. In other words, the key difference between the two is that in Chapter 11, the priority is to restructure the company to keep it going, in a Chapter 7 — the priority is to sell things off in order to get money back to the investors.
What’s interesting in this case is that if Celsius was considered a regular brokerage firm, they most likely would have had to gone through a Chapter 7, not a Chapter 11. The path that Celsius is taking highlights a key emphasis — the crypto you’re holding is not yours. On a brokerage like Fidelity for instance, if you hold stocks on their brokerage account and they go under, the stocks are still considered to be “customer property.” With Celsius however, this is apparently still up for debate. This lack of defined ownership leads me to my next point:
Whose keys are they?
On slide 3 of their legal presentation, the very first legal question that was asked, and I would argue the most important to any retail investor was:
“Are the crypto assets in Celsius’ possession property of the estate? Is the answer to this question different for crypto assets held under the Custody vs. the Earn Program? ”
If you’re looking for an answer to this on crypto twitter, you’ll probably see a lot of people say “Not your keys, not your Crypto,” but there’s a lot of discrepancies here that would say otherwise. For instance like many people including myself, if you paid taxes on your gains from Celsius I would argue that there is an implication that these are your gains and not Celsius’, otherwise Celsius is essentially able to have their cake and eat it too.
Furthermore dissecting the second part of their 1st legal question, it made me realize that although everyone got screwed, some people got even more screwed. Because I only held my crypto in the Earn program, I didn’t even realize until reading the power point what Celsius’ “Custody service” entailed. If you remember back in April 2022, Celsius preemptively was trying to sidestep possible regulations by not allowing American investors (unless you were accredited making significant 6-figure income) to gain rom Earn, and instead introducing their Custody Service.
Essentially with the custody program, users were told that “Celsius cannot use coins without instructions from the customer,” which…makes it sound like people could use them almost like a 3rd party wallet. I completely understand the risks involved when people are trying to leverage their assets or to earn yield, but the custody service users weren’t doing any of that — they were simply just holding their crypto with Celsius not earning anything.
Celsius lost more than what was initially reported, but perhaps the hole isn’t as big
Since March 30, 2022, they lost $17.8 billion dollars worth of assets. Don’t get me wrong, this number is atrocious, but $12.3 billion was due to the inherent loss of crypto assets (like ETH/BTC dropping by 80% over the course of a month), and nearly $2 billion from user withdrawals:
Out of the $17.8 billion, it appears roughly $2.9 billion can be attributed to bad loans, investments and liquidations. It also appears from these figures, “the $2 billion dollar hole” that was reported when FTX denied giving Celsius support and the reported $12 billion total assets under management figure that Celsius reported that they had in May, has apparently shrunk down to $1.2 billion (Total assets — Total liabilities = Celsius hole).
It’s going to take a while
I’m not a financial advisor nor am I a bankruptcy lawyer, but I think any layman can say that with this kind of corporate structure, there’s a lot of stuff that needs to be parsed out:
With multiple different transnational entities, Celsius was engaged with millions of users across more than a hundred different countries. Given the complicated nature to how many investors were affected, I wouldn’t be surprised at all if this takes significantly longer than Mt. Gox — a bitcoin heist event that dates back to 2014, where users are still trying to be made somewhat whole after roughly 850,000 BTC were stolen.
Will $BTC mining save us?
Another item I was ignorant of prior to reading through the documentation was in regards to Celsius Mining, LLC —a crypto mining operation that’s assets are valued at around $718 million dollars. According to the court presentation, “Celsius operates over 43,000 rigs and plans to operate 112,000 rigs by Q2 2023.” If we assume that the price of $BTC continues to rise, then mining could be extremely lucrative, but in Celsius’ case there’s a big catch — they don’t appear to have fully opened up shop yet. According to Coindesk, Celsius’ lawyers asked approval for $5 million dollars over two months in order to complete their setup operations— this includes releasing mining rigs that are currently held up in customs and finishing construction of the actual mining center.
Can this really make the company solvent? Well let’s do some quick calculations. “the mining subsidiary apparently “was anticipated to mine 10,100 bitcoins in 2022 and was now mining 14.2 bitcoins per day.” Assuming this is true, that means that they are on track to mine (14.2 x 365) approximately 5,183 bitcoin a year, which is a far cry from the “anticipated” 10,100 (only 51.3% of the way there in fact.) Assuming a constant price of $BTC at roughly $22,500, that means that means in order to fill a $1.2 billion dollar hole, the mining rigs would be able to make Celsius solvent after…1.2 billion / ($22,500 x 5,183 $BTC) = 10.29 years. If the $5 million dollars gets approved so that they can operate 112,000 rigs instead of 43,000, assuming all other variables of the same, then Celsius Mining should be able to produce $BTC approximately 2.6x’s faster, meaning that hypothetically Celsius could be made solvent after roughly 3.95 years.
I’m not an accountant and I don’t even pretend to play one on TV, but what I can say is that this is going to take a long time to sort out, and that retailers need to get vocal and active in order to have any say in what happens with the future of Celsius. That being said, there’s a couple ways I found to put in some input, and that’s through either filing a claim directly with Stretto (Celsius’ bankruptcy manager) or give your input with Bnk to the Future Capital who is trying to consolidate retailer input before going in for a shareholder meeting.
Is this guaranteed to give us our money back? Of course not. But it will at least hopefully be able to allow us to have our opinions heard.
