Key Takeaways
- Celsius’ collapse was one of many falling dominoes that plunged crypto into a deep winter.
- Now Celsius will emerge from bankruptcy with a plan to return some crypto to customers and create a new company.
- The new company, NewCo, aims to mine bitcoin and validate blockchain transactions.
- Celsius will sue founder Alex Mashinsky, who faces allegations of misleading customers.
The beleaguered crypto lender Celsius Network filed for bankruptcy on July 14, 2022, taking with it $4.7 billion of its customers’ assets. In its last moments as a functioning business, it had only $167 million in liquidity remaining, with billions missing.
The company cited “extreme market conditions” as its reason for halting customer withdrawals in June 2022. However, under its terms and conditions, users had no legal recourse to recover their crypto if Celsius went bankrupt. The company’s users faced major losses, with hundreds of thousands attempting to claw back their funds.
Here we go over the timeline of the the Celsius saga, right up until Judge Martin Glenn approves the bankruptcy plan, and beyond.
Mashinksy Departs And Legal Drama Ensues
Following the imposition, Alex Mashinsky resigned as Celsius’s CEO in September 2022 after helping to found the firm back in 2017. The entrepreneur said his role had become an “increasing distraction” as users faced “difficult financial circumstances.”
But the distraction wouldn’t end there. By the end of 2022, the Justice Department issued an indictment against Mashinsky, Celsius, and former chief revenue officer Roni Cohen-Pavon, for multiple fraud charges. However, it remained sealed until July 2023. The DOJ also froze Mashinsky’s bank accounts and foreclosed on a recently purchased property in Austin, Texas.
Then, on January 5, 2023, the New York attorney general sued Mashinsky for allegedly making false statements that led to billions in investor losses. The United states Commodity Futures Trading Commission (CFTC ) and United States Securities and Exchange Commission (SEC ) filed their own civil cases against Mashinsky on July 13, but settled with Celsius itself.
On the same day, the United States Federal Trade Commission (FTC) announced a $4.7 billion fine against the bankrupt crypto lender, banning it and its affiliate companies from “offering, marketing, or promoting any product or service that could be used to deposit, exchange, invest, or withdraw any assets.”
On September 14, 2023, Cohen-Pavon pleaded guilty to multiple charges, including inflating the price of the company’s proprietary token CEL. The former executive also agreed to cooperate with prosecutors and will potentially testify in court. However, the former chief revenue officer has a long way to wait until his sentencing on December 11, 2024. Mashinsky himself denies all wrongdoing.
Not All Celsius Customers Are Treated Equally
While the legal cases against Celsius were brewing, the judge in charge of its bankruptcy, Martin Glenn, delivered a ruling . On January 4, 2023 he said that Celsius’ Earn Program customers were unsecured creditors. Unfortunately, they had assumed the risk and lost and consequently would be lower down the priority list for repayment.
Glenn ruled the same logic applied to Custody users whose balances included Earn rewards. On the other hand, “pure” Custody accounts were liable to be reimbursed, as Celsius was merely holding their funds. The judge also gave permission for Celsius to use Earn Program assets to fund a growing list of Chapter 11 administrative expenses.
In the end, secured creditors and non-interest account holders had first claim on repayments, despite Celsius customer agreements declaring deposited assets as company property.
On December 7 2022, Glenn ordered Celsius to return crypto worth $50 million to users of Custody accounts. The judge argued that, unlike customers using its Earn or Borrow programs, the funds still belonged to the customer. Subsequently, some Celsius’ Custody customers began withdrawing their funds in early March.
The lack of reimbursement must have stung. At its peak, Celsius managed over $20 billion in assets. At the time of bankruptcy, the company held assets worth $4.3 billion against liabilities of $5.5 billion, including $4.7 billion owed to depositors.
Enter New Management Under Chapter 11
On May 25, 2023, crypto consortium Fahrenheit LLC won a bid to take over Celsius for $2 billion. The deal included the acquisition of Celsius’ substantial loan portfolio, staked holdings, mining operations, and investments. This represented major capital for the consortium to deploy and profit from.
https://twitter.com/CelsiusNewCo/status/1673606487795462144
The Chapter 11 plan that tied the deal together involved several key provisions, including the distribution of Celsius’ liquid cryptocurrency to account holders, settlements with various groups, and the creation of a new regulatorily compliant reporting company known as “NewCo.”
The new company was entrusted with managing Celsius’ illiquid assets, such as the institutional loan portfolio, mining business, and alternative investments—all for the benefit of account holders. Importantly, Celsius’ account holders would take 100% of the new equity in NewCo as a form of repayment.
Creditors Vote On a Bankruptcy Deal
In August 2023, creditors of Celsius were given approval to vote on a reorganization plan that involved the sale of its assets to the crypto consortium, Fahrenheit . Court filings estimated creditors could recover between 67% and 85% of their holdings under the plan, compared to just 47% if assets were simply liquidated. Creditors had from August 24 to September 22 to submit their votes.
In September 2023, the results of the creditor vote were announced. Creditors voted more than 98% in favor of Celsius’ reorganization plan. This overwhelming approval marked a major step toward Celsius exiting bankruptcy and returning funds to customers. However, some objections were raised, so a final confirmation hearing was scheduled for October 2 for the bankruptcy judge to give final approval.
In a twist, Bloomberg reported on August 2 that Celsius had found a way to fund a relaunch as a user-owned Bitcoin miner. The firm’s lawyer, Christopher S. Koenig, told a New York bankruptcy court the new iteration of Celsius would be seeded with $450 million in financial backing. The new company would be identified as “NewCo” in official documents until a permanent name is selected.
Victims Hope for Payouts by the End of 2023
The proposed restructuring offered a glimmer of hope for Celsius’ distressed customers and creditors. If approved by regulators and the bankruptcy court, the new entity would distribute $2 billion worth of crypto assets and equity in NewCo. to compensate victims of the collapse.
However, not everyone is convinced by the lofty vision presented. Some creditors have raised concerns about the valuation of the new business, which will be drastically different from Celsius’ original lending model. Celsius maintains that restarting as a Bitcoin miner is the best path forward to repay customers and that its metamorphosis would help make creditors whole.
Celsius interim CEO Chris Ferraro told a Manhattan courtroom: “This should be a company that has a great future.” The plan has received overwhelming support so far, with 95% of customers backing the reboot.
Celsius Suffers Setbacks Along the Way
Celsius endured other legal troubles on its tortuous path through bankruptcy. In July 2022, the court authorized the company to liquidate illiquid crypto holdings, exacerbating plunges in altcoin prices.
The following month, Celsius filed a lawsuit against crypto-staking firm Stakehound for failing to unlock and return $150 million worth of Ethereum and other tokens. Stakehound claimed it had lost private keys for 35,000 ETH and was not liable. Celsius insisted Stakehound must make good on the assets regardless.
On September 22, the SEC also objected to Celsius’ plan for Coinbase to distribute frozen funds to international customers. The regulator argued this went beyond a typical distribution agent’s remit.
In order for Celsius’ planned Bitcoin mining rebirth to go through, Judge Martin Glenn, and securities regulators, will have to approve the proposals. If given the green light, it would mark the first time a bankrupt crypto firm has emerged from Chapter 11.
Further Warnings of Phishing Emails
As creditors waited for news of the plan’s approval, on October 27, Celsius issued its tenth warning about phishing emails being sent to Celsius customers. The first instance was reported in November 2022.
These unauthorized emails deceitfully present two scenarios:
- Claiming recipients are “eligible for a partial withdrawal from their Celsius account.”
- Urging account holders to “access the secure withdrawal link” by clicking the “Withdraw” button within the email.
Celsius and their legal team emphasized that these messages are not authorized and strongly suspect them of being phishing attempts to obtain sensitive account information and financial assets.
Judge Tells SEC to Hurry Up
As creditors held their breath, a judge has told the SEC to make a decision quickly. On October 30, Judge Glenn told an SEC lawyer during the court hearing that he hoped the regulator would progress through its own decision-making process quickly. This was because Celsius and its creditors themselves moved through Chapter 11 relatively rapidly.
Celsius’s bankruptcy plan proposed repaying customers through a combination of cryptocurrency and stock in the new publicly traded Bitcoin mining company, NewCo. Both the SEC and Glen would have to green-light the proposals for them to go forward.
If the plans fail, Celsius could be forced to liquidate. However, some creditors would prefer that scenario, as it would mean receiving more cryptocurrency, which they see as a more reliable asset than stock in the new mining company.
Judge Glenn said: “The SEC will make whatever decision it believes is the correct one. I just hope the process will move forward, so if there are any bumps in the road we can try and work those out along the way.”
Judge Glenn is looking to make a decision as soon as possible.
The next major court event is currently scheduled for November 30th. The hearing should update creditors on the progress of the bankruptcy plans, including potential news of exiting Chapter 11 proceedings. Both in-person and virtual attendance options will be available for the hybrid hearing format, and will kick off at 10 AM Eastern.
Celsius had previously said it wants to begin refunding outstanding customers before the end of 2023.
Celsius Receives Approval to Emerge From Bankruptcy
On November 9, Judge Glenn approved a restructuring plan that would return some cryptocurrency to Celsius’ 600,000 customers and create a new publicly traded company. Celsius is now expected to emerge from bankruptcy in early 2024.
Led by hedge fund Arrington Capital, the revived company, NewCo, will mine bitcoin and earn fees validating blockchain transactions. “We are eager to make things whole for our creditors,” said Arrington Capital’s Michael Arrington.
Following US Bankruptcy Judge Martin Glenn’s approval of Celsius’s restructuring plan, customers, with around $4.4 billion in Celsius accounts, are set to receive repayments and equity shares. Fahrenheit LLC, overseeing the reorganized business, is injecting $50 million for a minority stake and plans to list on Nasdaq.
Legal action is on the horizon for Mashinsky, its former CEO, who is currently facing criminal charges and a civil lawsuit. Mashinsky still maintains he did nothing wrong.
Celsius advised users on October 31 to verify their account information and confirm wallet details in the Celsius app. For additional information or inquiries, users were told to visit Celsius Cases Portal .
Celsius has also addressed speculations in post dated November 15, refuting rumors that suggested a potential shift to an “Orderly Wind-down” (OWD) instead of the planned transition to “NewCo.” The company clarified that, as of the mentioned date, the official strategy remained in favor of proceeding with the establishment of NewCo.
SEC Requests More Info
On November 20, 2023, the Celsius Revamp Plan encountered a hurdle. The SEC demanded more details about former crypto lender’s assets currently undergoing reorganization via bankruptcy, according to a CoinDesk report.
According to a source familiar with the matter, an ongoing exchange of information is unfolding between the SEC, the Celsius Creditors Committee, and Fahrenheit, the winning bidder in a May contest to issue shares for a new crypto venture based on the bankrupt lender’s remaining assets.
The SEC’s request for more information appears to signal a dialogue. The committee must now decide how to address the regulatory body’s inquiries and navigate the next steps in the business restructuring.
Celsius Enables Limited Withdrawals
On November 28, Celsius Network enabled additional withdrawals for eligible custody users, the cryptocurrency lending company announced. Users can now withdraw certain custody assets from the Celsius app, including Bitcoin, Ethereum, and USD Coin. All other cryptocurrencies remain unavailable for withdrawal currently.
Celsius urges users to withdraw available assets immediately and save any useful records. This is because the app will only be accessible for a limited period. Multiple users reported issues accessing the app and making withdrawals, suggesting potential technical problems.
Planned Transition to MIning Company Approved by Court
Celsius Network received court approval on December 28 to pivot to a new bitcoin mining company. The crypto lender will partner with US Bitcoin to form MiningCo and take advantage of rising bitcoin prices.
Celsius customers will own the stock of the Mining NewCo, managed by U.S. Data Mining Group, Inc. Those expecting a payout following the approval of the plan will reportedly receive an email in the coming weeks.
Judge Glenn approved the transition, confirming that the switch to MiningCo fits within the terms of Celsius’ confirmed reorganization plan. Creditors will now see increased payouts compared to the original proposal.
Celsius touted the superior terms offered by US Bitcoin, including $225 million in funding to expand mining operations. Bitcoin’s price has more than doubled since May. Therefore, Celsius’ lawyers argue, the mining plan offers creditors a more valuable recovery than originally thought.
