Key Takeaways

• Celsius wants to ‘restart’ as a user-owned crypto miner.
• Some creditors disapprove the company’s attempt to restart, citing regulatory issues.
• The company aims to partially repay customers by the end of the year.

Celsius lawyer Christopher S. Koenig told  the US Bankruptcy Court that Celsius aims to restart as a user-owned Bitcoin miner. The company also stipulated that it wants to partially refund customers whose crypto has been frozen in Celsius accounts by the end of the year.

Restart Is Crypto Customers’ Best Option, says Celsius

During a hearing with the New York bankruptcy court, Christopher S. Koenig, a legal representative for Celsius, informed  the judge of Celsius’ plan to restart its business as a user-owned Bitcoin miner.

Celsius aims to establish the new company following the proceedings of its Chapter 11 plan, using $450 million in capital as well as financial support from Fahrenheit LLC, a consortium now managing Celsius, led by investment firm Arrington Capital.

Chief Judge Martin Glenn, a United States Bankruptcy Judge for the Southern District of New York, has yet to make a decision on the proposal.

If Judge Glenn approves the plan, it would mark the first time a failed crypto platform is reborn under Chapter 11. However, the plan faces opposition primarily from creditors.

Although Koenig reassures the court about Fahrenheit’s intentions, stating, “Fahrenheit believes in the business. They are putting their money where their mouth is,” creditors disagree with the proposal.

An affiliate of Lantern Ventures, claiming Celsius owes $82 million, cites their disapproval due to Celsius overvaluing its new business. They also argue that the new planned business needs approval from regulatory bodies such as the US Securities and Exchange Commission.

Celsius told CCN “Since the closing of the voting, we’ve started reinstating assets of our users, eligible users that are unable to withdraw their locked crypto should contact us via dm and we will guide you through the process of withdrawal of your Coin.”

A hearing on the matter is scheduled for October 3rd.

Celsius Interim CEO Chris Ferraro will also testify in support of the bankruptcy plan on the same day.

Celsius Seeks $45M Approval for Core Scientific Site

“We are pleased to resolve all existing litigation related to Celsius Mining,” said  Adam Sullivan, CEO of Core Scientific.

“Securing the Cedarvale site further increases Celsius’ commitment to West Texas, growing our self-mining portfolio to an impressive 300 megawatts,” reports Chris Ferraro, Chief Restructuring Officer and Interim Chief Executive Officer of Celsius Network.

“This outcome was made possible through the collaboration of Celsius and US Bitcoin Corp, who played a key supporting role in structuring and executing the transaction. We are pleased to settle all existing litigation and look forward to focusing on expanding the Cedarvale capabilities and completing the site.”

Asher Genoot, president and co-founder of US Bitcoin Corp also said “We’re extremely pleased with the success of this transaction, a milestone that significantly bolsters NewCo’s mining division. It reinforces our confidence in the potential that NewCo will capture through Fahrenheit’s leadership.”

He added: “We are committed to driving further value to the Celsius estate prior to emergence and are eager to lead the development of the Cedarvale assets.”

Now, Celsius/Fahrenheit and Core Scientific await approval from the US Bankruptcy court to approve the sale as part of Celsius’ Chapter 11 procedure.

Celsius and Core Scientific did not immediately respond to a request for comment.

Redistribution Plan Approved

The document  filed by Celsius’ lawyers shows that the majority of Celsius’ creditors approve of the redistribution plan put forth by the company. 

And, according to the plan filed by the company in August, creditors would receive the totality of nearly $2 billion in Bitcoin and Ethereum tokens, as well as shares in “NewCo”, the new entity created by Celsius’ new mother company, Fahrenheit.

“NewCo will operate and further build out the Debtors’ Bitcoin mining operations, stake Ethereum, monetize the Debtors’ other illiquid assets, and develop new, value-accretive, regulatory-compliant business opportunities,” reads the company’s August filing .

Now, it’s up to the US Bankruptcy Court to approve the plan by October 2.

The SEC Doesn’t Want Coinbase To Get Involved

To distribute the tokens according to Celsius’ redistribution plan, the company needs a trusted exchange to oversee the process. For that reason, Celsius chose Coinbase, the biggest US-based crypto exchange, as a distribution agent for international customers.

However, Coinbase is currently at legal odds with the US Securities and Exchange Commission in a lawsuit where the regulating body claims the exchange illegally traded in unregistered securities.

As a result, the SEC filed an objection  to the US Bankruptcy Court, claiming Coinbase’s involvement in Celsius’ bankruptcy. According to the SEC, Coinbase’s involvement in Celsius’ proceedings “[goes] far beyond the services of a distribution agent, contemplating brokerage services and master trading services.”

Whether the SEC’s objection to Coinbase being included in the redistribution plan will have any effect on the US Bankruptcy Court’s decision due on the 2nd of October will only be seen as time goes on. However, as far as things appear, Celsius’ redistribution plan is seemingly going as planned.

Coinbase did not immediately respond to a request for comment.

Change In Personnel

In a court filing  by Celsius Network LLC, the company affirms the five plan supplements made to the company’s liquidation filing. 

More importantly, the document explains the process of selecting the board of directors who would oversee the liquidation process and the company’s transition to NewCo. 

“Upon extensively deliberating and diligently reviewing the qualifications, experience and independence of each of the candidates, the seven-member Committee voted to select Elizabeth A. LaPuma, Max Holmes, Emmanuel Aidoo, and Frederick Arnold as the independent directors to the New Board,” reads the company’s filing.

Moreover, “the remaining members of the Committee who did not seek appointment to the New Board voted to select Scott Duffy and Thomas DiFiore as the prepetition creditors to the New Board.”

The document goes on to name each member of the board. However, Arrignton’s name and bio have been crossed out, only to be replaced by Ravi Kaza.

Arrington announced his departure from the board without specifying the reasons, but he emphasized his disagreement with the board’s decisions.

“I disagree with some of the decisions made around board constitution and, in particular, the board observers. Because of this, I chose to remove myself from the board of directors,” read his X post .

Some speculators point towards Simon Dixon, Founder of Bnk To The Future, being somehow connected to Arrington’s decision, saying his “disloyalty” may be a factor.

 

Phishing Attacks

Users on social media platforms have been reporting a slew of phishing attacks targeting Celsius creditors as they wait for bankruptcy payouts.

Scammers created a fake website using the name Stretto, the bankruptcy services platform for crypto lender Celsius and its creditors. The scam link removes one ‘s’ from the original link.

Upon clicking on the link, users are prompted to connect their crypto wallets which allows the scammers to quickly drain all of their contents.

Experts anticipate an increase in scams as the company’s liquidation plan deadline approaches. According to one expert, ‘Creditors will be keen to make last-minute adjustments or verify supposed distributions. Exercise extreme caution; beware of malicious links and take necessary precautions.’

Previous server breaches have led scammers to acquire data on Celsius creditors, enabling them to reach out to creditors through text messages and emails. Moreover, creditors were prompted to enter KYC data in order to vote on the company’s Chapter 11 plan.

Indictment Charges

The US Department of Justice issued an acceptance letter  for Cohen-Pavon’s plea. He admitted guilt on four out of seven charges, including conspiring to manipulate CEL token’s price, involvement in a fraudulent scheme related to CEL token, aiding and abetting price or volume manipulation of CEL token, and aiding and abetting wire fraud connected to defrauding CEL token investors.

If convicted on all charges, the former Celsius executive could potentially be sentenced to approximately 65 years in prison, fined an amount to be determined by the court, and ultimately deported from the United States due to his non-citizen status.

Furthermore, the DOJ is likely to use Cohen-Pavon as a witness in the case against Celsius and founder Alex Mashinsky as part of the plea deal. 

Celsius CEO’s Assets Frozen

A note on the document indicates that the document stayed sealed to avoid permitting Mashinsky to drain his bank accounts before his case was settled.

“We write to request the unsealing and docketing of the attached Post-Indictment Restraining Order (the “Order”), which Judge Rakoff issued in the above-captioned case on August 16, 2023. The Government sought sealing of the Order to avoid any third parties interfering with the execution of the Order before the relevant institutions could be notified and accounts could be frozen.

“The relevant institutions are now aware of the Order, and we do not believe that further sealing is required. The application and affidavit in support of the Order should remain under seal at this time because they reveal confidential information about our ongoing investigation.”

Furthermore, ALEXANDER MASHINSKY, the Defendant, and all related parties, including attorneys, agents, employees, and anyone acting on his behalf, shall refrain from directly or indirectly transferring, selling, assigning, pledging, encumbering, or otherwise disposing of any property or interests subject to forfeiture. This includes any actions that may reduce or harm the value of such assets.

According to the court document , Mashinsky’s assets in Goldman Sachs, Merrill Lynch, First Republic Bank, and Sofi Bank are all under the court’s restraining order.

Finally, Mashinsky’s recently-purchased house “located at 2004 East 8th Street, Austin, Texas” is currently being foreclosed by the US government.

Celsius did not immediately respond to a request for commentary.

 

“We’re pleased..”

The company’s announcement regarding the $4.7 billion fine lacked appropriate language finesse. While Celsius reassured customers about its distribution plan, it failed to acknowledge the losses suffered by its customers due to its business failure.

Followers specifically pointed out the redundancy of the phrase “a successful Chapter 11 Plan.”

Another misaligned aspect was Celsius’ optimism about its future. The company’s Twitter account announced its commitment to ongoing cooperation with regulators and government bodies.

New “Special” Committee

On top of all of that, Celsius announced  that it had reached a deal with the government where the company enjoys protections that come with filing for a Chapter 11 bankruptcy. 

Long story short, the company currently has $167 million in liquidity. However, Celsius will not be using any of that money to pay back its customers. 

Celsius plans to use the funds for its normal operations, including employee payments and benefits. Customer withdrawals are not currently authorized, and claims will be addressed during the Chapter 11 process.

“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.”

Co-Founder & CEO of Celsius, Alex Mashinsky reported that “This is the right decision for our community and company,” adding that “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.”

Speaking of new leadership, Celsius also used this announcement as an opportunity to introduce David Barse, a former XOUT Capital CEO, and Alan Carr, founder and managing member of Drivetrain.

Mashinsky’s Behind Bars

Celsius CEO and co-founder Alex Mashinsky was arrested  on Thursday, July 13th, and accused of wire fraud and multiple other crimes. 

Mashinsky has already pled “not guilty” to all of the crimes alleged. He also managed to reach a bail agreement with the court where he agreed to a $40 million personal recognizance bond, co-signed by his wife and another person.

Celsius’s former chief revenue officer, Roni Cohen-Pavon was also accused of four counts, including fraud. However, Cohen-Pavon is not on US soil and authorities are yet to make any comments regarding potential extradition. 

Celsius As A Creditor

“The number and value of the tokens at issue is substantial.  Celsius entrusted to StakeHound:  in January 2021, the nodes for approximately 25,000 staked native ETH (with Rewards, worth more than $50 million at recent prices) that Celsius previously had staked in November 2020; and in February 2021, approximately 35,000 native ETH which was then staked by StakeHound (with Rewards, worth more than $70 million at recent prices),” reads a court filing  submitted to the US bankruptcy court for the Southern District of New York. 

Celsius claims that it staked $150 million worth of tokens with StakeHound, a company that provides crypto liquidity. The tokens in question include 25,000 staked native ETH, 35,000 native ETH, 40 million MATIC, and 66,000 DOT.

The court filing requests the dismissal of StakeHound’s arbitration attempt, as StakeHound refuses to exchange stTokens and claims it lost the keys to 35,000 Celsius ETH, thus denying responsibility for their return.

On top of that, StakeHound blames Fireblocks for losing the keys, resulting in a lawsuit  filed in 2021. Celsius responds by stating that StakeHound’s Fireblocks issue does not relieve the company of the obligation to return the tokens.
Celsius Liquidation Plan Is A Go

“[Celsius] may sell or convert any non-BTC and non-ETH cryptocurrency, crypto tokens, or other cryptocurrency assets other than such tokens that are associated with Withhold or Custody accounts (collectively, the “Altcoins”) to BTC or ETH commencing on or after July 1, 2023,” reads a court filing, officially giving the green light for the bankrupt lender to commence its liquidation plan.

The company will be selling all altcoins, besides Ethereum, LiteCoin, and Bitcoin Cash, held in customer accounts and converting them to ETH and Bitcoin. But what does that mean for the altcoin market?

According to records , Celsius holds altcoins worth over $90 million in customer accounts. A crypto analysis firm, Kaiko , also points out that Celsius holds over $240 million worth of its native token CEL.

However, Kaiko also notes that altcoins associated with Celsius have seen significant drops in value, ranging from 6% to 84%. 

The main concern is that the liquidation plan will also negatively impact holders of altcoins who are not associated with Celsius. As the company plans a huge liquidation dump, said altcoins will likely see a sharp drop in value.

Considering coins such as MATIC, ADA, and SOL are already suffering from a mass banishment – from major trading platforms such as Robinhood, eToro, and Revolut – the upcoming Celsius mass liquidation may cause these altcoins to drop steeply, threatening their futures as viable investment options.

Earlier this month, the federal government ordered Celsius to refund 74.2% of Withhold Claims holders and 72.5% of Cryptocurrency coins for General Custody Claims holders. However, Earn clients were left without a means to recover their losses following Celsius’ bankruptcy filing.

The company has now devised a plan to address the issue with Earn accounts. The official Celsius account tweeted that will be using “(a) Liquid Cryptocurrency (BTC and ETH); (b) NewCo Common Stock; and (c) Litigation Proceeds. Some creditors will receive all three types of distributions (collectively, the “Unsecured Claim Distribution Consideration”).”

The distribution of customer refund funds is as follows, according to the plan:

 86.9% for Holders of Retail Borrower Deposit Claims, which represents a midpoint recovery based on the average loan to value (“LTV”) ratio of the total Retail Borrower Advance

Obligations against the Retail Borrower Deposit Claims:

• 70% for Holders of Convenience Claims;
• 69.7% for Holders of General Earn Claims;
• 72.5% of the Cryptocurrency coins for Holders of General Custody Claims (creditors who accept the Custody Settlement as described further herein); and
• 74.2% for Holders of Withhold Claims.

Celsius NewCo

Among the many convoluted details the company announced is the emergence of NewCo, a new company created by the same board of directors, that will operate in partnership with Fahrenheit, Celsius’ new acquirer. 

The failed crypto lender didn’t divulge too much about this “NewCo” except for how it will be funded and the fact that it will focus on crypto mining.

The company’s Twitter said “NewCo will be seeded with up to $500 million of the Debtors’ Cryptocurrency. Subject to the direction of the NewCo board of directors, the Fahrenheit Group presently intends to utilize much of NewCo’s balance sheet to invest in and grow the NewCo staking and mining businesses, and to develop and execute the partnerships that Fahrenheit is bringing to NewCo.”

Chapter 11

On June 7, the court released the Chapter 11  document outlining Celsius’ financial status and Fahrenheit’s acquisition of its assets. The document specifies important details, including the timeline for milestones in the takeover, the debts during Celsius’ solvency, and the proof of claim deadlines for creditors.

The timeline for the takeover’s milestones goes as follows:

• Fahrenheit will need to place their deposit on the bid by June 26th
• Celsius will need to provide Fahrenheit with a complete draft of the plan by June 23rd
• Celsius will need to officially file all the documents regarding the disclosure of the deal by June 30th
• The court would start the official process by August 15th
• The court would complete officiating the takeover process by September 30th
• The takeover would officially take place by October 31st

Full List of Celsius Debtors

The Chapter 11 document also states the entities involved, regarding the funds to be given back to investors, according to the ruling set by the bankruptcy court. Each body within Celsius is assigned to refund the claimers involved. The list includes the following:

• Celsius Network LLC
• Celsius Network Inc.
• Celsius Network Limited
• KeyFi LLC
• Celsius Mining LLC
• Celsius Networks Lending LLC
• Celsius Lending LLC
• Celsius US Holding LLC
• GK8 Ltd.
• GK8 USA LLC
• GK8 UK Limited

How To Register As A Debtor

The bankruptcy court has identified a list of debtors who have already filed a proof of claim against Celsius. However, debtors are still able to add their names and owed amounts to the last by filling in the Proof of Claim form .

The document also states that there’s currently no set deadline for handing in further proof of claim against debtors. Stating that  “There is currently no deadline for account holders to file proofs of claim, and the Debtors will provide separate notice once an updated Account Holder Bar Date has been established.”

What The Celsius Is Going On?

Celsius filed for Chapter 11 bankruptcy protection on July 13, 2022, with only $167 million in liquidity.

In the process of filing for Chapter 11 bankruptcy, the crypto lender froze its users’ accounts in June 2022, citing the reason being “extreme market conditions.” According to the platform’s terms and conditions, in the case of bankruptcy:

• Any cryptocurrency assets used to earn cryptocurrency or as collateral for loans may not be recoverable;
• Users do not have any legal remedies or rights in connection with Celsius’ obligations; and
• Users may be treated as unsecured creditors.

After the bankruptcy judge’s ruling, Celsius will repay only $44 million of its client’s outstanding debt. This amount comes from “Pure Custody” accounts, where users deposited their crypto assets without seeking profit.

Although Custody accounts held over $200 million in assets, the majority of the funds were interests from the company’s Earn system. The Earn system enabled clients to invest their assets with Celsius, receiving around 20% annual interest. 

Judge Glenn’s decision declared that Earn account holders had signed off their assets to Celsius, meaning that they took a risk with their money and failed. The same goes for Custody account holders whose assets were gained from the Earn program.

At its peak, Celsius raised over $900 million in funding. Before filing for bankruptcy, Celsius declared  assets at $4.3 billion and $5.5 billion in liabilities ($4.7 billion owed to users).

To put things in perspective, Celsius is only paying back $44 million out of the $4.7 billion they owe. For anyone wondering about the math on that one, that’s less than 1% returned to account holders.

With Celsius causing clients losses of over $4.5 billion, Earn and Custody account holders can explore additional legal options. Meanwhile, Pure Custody account holders are eligible for a 72.5% refund, distributed in two stages: the first half upon signing and review, and the second half at year-end.

New Management

With all the legal commotion and investor freakout going on, crypto consortium Fahrenheit LLC managed to win the bid to take over Celsius for $2 billion. The conglomerate includes the likes of Arrington Capital and miner US Bitcoin Corp.

This raises a ton of questions:

• Why would Fahrenheit want to inherit such a mess?
• What does that mean for Celsius’ clients?
• What does Fahrenheit plan on doing with Celsius’ assets?

To decipher the mysteries proposed above, it must be understood what Fahrenheit is bidding for. So, the actual question is: What is Fahrenheit getting for $2 billion?

The bid involves Fahrenheit acquiring Celsius’ loan portfolio, staked crypto, mining operations, and other investments, which represent a significant amount of invested capital. In 2021, Celsius invested $500 million  in mining operations, partnering with Bitcoin miner Mawson (MIGI) for a 100-megawatt co-location and a $20 million debt deal in March of the same year.

In related news, US Bitcoin Corp, part of Fahrenheit, recently announced adding more than 120,000 miners to its managed fleet, boosting their total managed hash rate by 12.2 EH/s. So while other Celsius assets are undoubtedly valuable, Fahrenheit is bound to make serious money from their new mining operation. 

But what about Celsius’ primary business, crypto lending? At one point, Celsius had over 1 million users and $20 billion in assets. Fahrenheit plans to launch a new decentralized lending platform offering improved rates and transparency.

While this approach seems promising, potential investors and crypto holders may still have reservations about such platforms.

Recurring Theme?

Is Celsius yet another episode in an all-too-familiar pattern? The market has witnessed the fallout of FTX, costing clients over $8 billion, and the 3AC disaster, where investors lost over $3.5 billion. Now, Celsius, with its massive funding and investments, has suffered a similar fate.

The issue with these financial collapses lies in the staggering losses borne by their clients. In Celsius’ case, the losses are remarkable. 3AC creditors are still waiting for more than $40 million of their lost funds.

What can we learn from Celsius? First, scrutinize terms and conditions. Second, be cautious when major crypto investment platforms offer unrealistically high returns like Celsius, FTX, and 3AC did. Always remember, crypto investments, like any financial investments, come with risks; higher rewards often mean higher risks.