2022 has become a major nightmare for cryptocurrencies and the DeFi market. The market has come under a brief spell of crypto winter with many platforms getting buried under the avalanche of bearish price runs. Some of the well-known DeFi platforms which crumbled under the pressure include — Luna, Three arrow capital and Voyager. Now, the Celsius network joins the slew of firms facing one such huge crisis.
What is Celsius Network?
Celsius Network LLC made its debut as a crypto lending firm in 2017 and was one of the pioneers in the yield generation market. It is one of those lending firms that followed a centralised finance architecture and offered its clients yields on a variety of tokens and assets including Bitcoin, Ethereum and stablecoins. The firm seemed to function both like banks and hedge funds with the majority of its income being sourced from asset management practices.
How does Celsius Network work?
Investors can deposit their tokens with Celsius and earn interest on deposits. Only, the interest rate for the deposit promised by the firm was way higher than the average (eg: APY of up to 17%). The firm also allowed its users to borrow funds and use their tokens as collateral. Given its portfolio which provides high returns and covered a wide range of stablecoins, it managed to garner massive interest in the market and did exceptionally well over the last couple of years.
While Celsius Network saw a huge portion of its income stemming from lending activities, a major part of its income was from yield generated using tokens deposited by clients. The firm had a practice of consistently generating more yields using clients’ assets than the yield which they delivered to their clients. An example, when the firm promised 9% of interest on some token, then they used the same tokens to earn a higher yield.
Given their successful track record of generating consistent higher than average yields, the firm had even managed to see several rounds of successful investments. The most recent funding round took place in November of 2021 during which the firm managed to raise a massive investment of US$ 750 million helping rise the firm’s valuation to nearly US$ 3.25 Billion.
Cause of Meltdown!!!!
As the bear market geared up in the month of May 2022, several major cryptocurrencies and stable coins saw a sharp fall in value. Two major cryptocurrencies Bitcoin and Ethereum saw a decline of nearly 30% & 50% of their total market value within a very short time frame. This brought to light some of the problems with the Celsius network’s yield generation activities.
While they worked fine in a bullish market, a sharp nose dive in price activities proved that the firm’s asset management activities weren’t exactly fool-proof or in this case resilient to bearish activities. While most firms battled the bear market in various ways such as downsizing the firm and changing interest rates promised for the yield generation deposits, Celsius flat out halted their clients’ withdrawals and transfer requests starting mid-June locking the funds within the firm.
This raised a huge red flag as rumours flew abound on the possibility of the firm going insolvent. Given the transparent nature of blockchain functionality, the community decided to track some of the positions held by Celsius Networks. This did not look good as the firm continues to use the locked-out clients’ funds to further add collateral to their loans instead of repaying the loans. The firm has taken loans with huge interest and is now adding more collateral multiple times on their loans which are already over-collateralised.
The firm has also reportedly hired banking giant Citi Group, law firm Akin Gump Strauss Hauer & Feld and management consultants from Alvarez & Marshal to explore potential financing options. As of 28th June 2022, the firm continued its stance to avoid bankruptcy regardless of advisers and lawyers recommending filing for Chapter 11 bankruptcy further cementing rumours in the market of its insolvent capacity.
Filing for Chapter 11 Bankruptcy
The firm filed for bankruptcy in New York on 13th July 2022 and as per a court filing, Celsius estimated its assets and liabilities as between US$ 1 billion to US$ 10 billion. The company is liable to more than 100,000 creditors and has $167 million cash in hand.
The statement released by the firm claimed that this move to file for bankruptcy will provide it with an opportunity to stabilize its business and finalise a comprehensive restructuring transaction helping maximize value for all stakeholders.
Speaking at this event, members of the special committee of the board of directors said “Today’s 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. 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”.
Alex Mashinsky, Co-Founder & CEO of Celsius Network said “This is the right decision for our community and company. 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”.
Moving forward on the operations front, the firm has filed with the court for a series of customary motions to allow the firm to continue operating in the normal course. The firm has requested to pay its employees and continue their benefits without disruption. However, it has not requested authority to allow customer withdrawals right now stating that withdrawal requests will be addressed via the chapter 11 process.