CASE SUMMARY: Celsius Network Joins List of Crypto Chapter 11s; Intends to Use Bankruptcy to ‘Stabilize’ Business and Reorganize Through Asset Sale, 3rd-Party Investment; Will Use Internal Mining Ops to ‘Address Current Cryptocurrency Deficit’

Relevant Documents:
Voluntary Petition
Press Release
Mashinsky Declaration
Campagna Declaration

Summary
Celsius Network enters chapter 11 without a plan or restructuring agreement and says it will engage with the customer base, including through an official committee of unsecured creditors, to build “consensus” around a reorganization.
The debtors say a potential reorganization could involve asset sales or third-party investments and detail the potential for their bitcoin mining operations to produce bitcoins and balance out current crypto asset liabilities.
Celsius reports that it was able to wind down substantially all of its decentralized finance, or DeFi, operations and obtain the return of the related collateral.
The first day papers reveal connections to other cryptocurrency firms. Celsius discloses a $40.6 million claim against defunct cryptocurrency hedge fund Three Arrows Capital, which is currently in insolvency proceedings. Alameda Ventures Ltd., Sam Bankman-Fried’s cryptocurrency fund, is one of Celsius’ largest unsecured creditors.

Celsius Network, a Hoboken, N.J.-based cryptocurrency finance platform and lender that claims over 1.7 million users worldwide, and several affiliates filed petitions on Wednesday, July 13, to “stabilize their business” and “consummate a comprehensive restructuring transaction.” The debtors filed without an RSA and, according to a press release, intend to fund postpetition operations using “$167 million” (other first day papers state the amount of cash is $130 million) of cash on hand, which “will provide ample liquidity to support certain operations during the restructuring process.” Continue reading for more information on Celsius Networks chapter 11 filing and restructuring plans, or request a trial to access all of Reorg's content. 

The company explains in its press release that it paused customer account withdrawals on June 12 because “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.”

According to the press release that accompanied the filing, the company is not requesting authority to allow customer withdrawals at this time. Celsius maintains that under its user agreements, assets deposited by customers are its property and not customer property. “Customer claims will be addressed through the Chapter 11 process,” the press release indicates.

The first day declaration of CEO and co-founder Alex Mashinsky says the company intends to use the chapter 11 filing to “stabilize its business” and “consummate a comprehensive restructuring transaction” that will allow it to “emerge from chapter 11 positioned for success in the cryptocurrency industry.” Mashinsky says that as a result of the company’s asset-preservation strategies, it holds approximately $4.3 billion in assets and $780 million in “non-user liabilities” as of the petition date.

Mashinsky explains that through the bankruptcy process, the debtors intend to engage with all constituencies, “including the official committee of unsecured creditors,” which Mashinsky anticipates “will likely include mostly users,” with the hope of “building consensus” around a potential chapter 11 plan. “One way the Debtors intend to achieve this goal,” Mashinsky continues, is by “using the Bitcoin ‘minted’ by” debtor Celsius Mining “to address its current cryptocurrency deficit.”

The debtors intend that a chapter 11 plan “will provide users with choices” and enable “a return to normal operations” for the company. Mashinsky adds that to fund plan recoveries, the debtors “may sell one or more of [their] assets and/or consider an investment from third-party strategic or financial investors in exchange for equity in a ‘reorganized’ Celsius.”

Mashinsky adds that the company holds a $40.6 million claim against defunct cryptocurrency hedge fund Three Arrows Capital, or 3AC, which he says is “significantly less” than claims held by other companies in the industry, including fellow chapter 11 debtor Voyager Digital. The declaration states that 3AC’s collapse “directly impacted” Celsius and other crypto companies, explaining that Celsius had extended two loans to 3AC totaling $75 million. When 3AC failed to meet a margin call, Celsius “liquidated the collateral that 3AC had pledged,” says the declaration.

The cases have been assigned to Judge Martin Glenn (case No. 22-10964). According to the court’s calendar, the first day hearing has been scheduled for Monday, July 18, at 2 p.m. ET.

The petition lists $1 billion to $10 billion in both assets and liabilities. The debtors disclose book value assets of $4.32 billion and total book value liabilities of $5.5 billion as of yesterday, Wednesday, July 13.

The debtors do not report any long-term or funded debt and report $130 million in cash on hand as of the petition date. The corporate structure is shown below:

Celsius Network Inc. wholly owns the equity in Celsius Networks Lending LLC and 60% of the ordinary B shares in Celsius Network Ltd., which directly or indirectly owns each of the other debtor and nondebtor entities. The remaining 40% of the equity in Celsius Network Ltd. is in the form of Class A preferred shares, Class A1 preferred shares, Class B preferred shares and ordinary shares that are owned by institutional investors, including WestCap Group LLC, Caisse de dépôt et placement du Québec (one of Canada’s largest pension funds), Tether International Ltd., BNK to the Future, and certain individuals.

The common stock and stock options of Celsius Network Inc. are owned by the founders, Alex Mashinsky and Daniel Leon, as well as certain other employees as part of an employee stock option plan.

The debtors provide the following balance sheet as of July 13:

Celsius describes the majority of its liabilities as relating to user accounts and says it has approximately 1.7 million registered users, including approximately 300,000 active users with account balances greater than $100.

The first day declaration lists Symbolic Capital Partners Ltd. as the only secured creditor, holding a $23.1 million contingent claim collateralized by “Ethereum pursuant to the Master Loan Agreement dated October 21, 2021 with Celsius Network Limited.”

The debtors are represented by Kirkland & Ellis as counsel and Latham & Watkins as regulatory counsel, Alvarez & Marsal North America as restructuring advisor and Centerview Partners as investment banker. Stretto will serve as the debtors’ claims and noticing agent. The company has appointed new directors David Barse (founder and CEO of XOUT Capital and DMB Holdings, a private family office) and Alan Carr of Drivetrain LLC, as previously reported.

Kirkland is also debtors’ counsel in cryptocurrency firm Voyager Digital Holdings’ chapter 11 cases.

Events Leading to the Bankruptcy Filing

Mashinsky explains that after “early success,” the “amount of digital assets on the Company’s platform grew faster than the Company was prepared to deploy.” This caused the company to make “what, in hindsight, proved to be certain poor asset deployment decisions,” some of which Mashinsky says “took time to unwind” and “left the Company with disproportional liabilities when measured against the unprecedented market declines.” Despite the company’s efforts to unwind these asset deployments, “unfortunately, the damage was done,” says Mashinsky.

The declaration describes “other unanticipated losses,” including a private lender’s inability to return the company’s collateral when Celsius attempted to repay a loan in July 2021. According to the declaration, this resulted in the company holding an uncollateralized claim against its lender in the amount of about $509 million after setting off its own loan obligations. This lender has been making regular principal payments to the company since September 2021 in an amount “in excess of $5 million per month,” says Mashinsky, adding that the aggregate remaining principal balance is “approximately $439 million, consisting of $361 million in USD and 3,765 BTC, the latter worth approximately $78 million,” the declaration continues.

The company took other steps in 2021 and 2022 to address its losses, including by reducing user rewards rates, imposing new user fees and borrowing “stablecoins to fund purchases of crypto to align the magnitude of crypto assets with crypto liabilities.” The right-sizing efforts, which Mashinsky says put the company on a “trajectory” to stabilizing the business, were interrupted by “unanticipated global events,” including the “lingering effects” of the Covid-19 pandemic, inflation and the war in Ukraine, which Mashinsky says led to “extreme” crypto market volatility “particularly in the last three months.”

The “implosion” of the Terra LUNA coin and the related TerraUST “stablecoin” “accelerated the onset of a ‘crypto winter’ and an industry-wide sell-off in 2022,” says the declaration. Although Celsius “was able to avoid losing a significant amount of its assets in the Luna collapse” because it “immediately withdrew all deployed UST” and as a result “suffered only a relatively minor loss of $15.8 million on all activity related to Luna or UST,” the Luna collapse nevertheless had a “domino effect” on the cryptocurrency industry, says Mashinsky.

The crypto crisis “led to growing industry-wide reluctance to do business” with cryptocurrency firms such as Celsius, Mashinsky continues, adding that “users began withdrawing crypto from Celsius’ platform in large amounts and at a rapid pace.” Mashinsky explains that the Luna fallout and “false and misleading” negative media attention caused Celsius users to withdraw over $1 billion from the platform over five days in May 2022, “at a time when distrust of cryptocurrency was at an all-time high.”

Celsius became unable to meet user withdrawals, says the declaration, because its business model depends on deploying digital assets to produce income, which “lock” up such assets. For instance, says Mashinsky, “some” of the company’s crypto assets have been “tied up in long term and illiquid crypto deployment activities,” loaned to third parties, pledged as collateral or sold to generate cash to fund the company’s bitcoin mining operations and the “GK8 storage business.”

The company purchased nondebtor Israeli company GK8 Ltd. for $115 million in October 2021 and is “exploring both a marketing and sale process of the GK8 business and a complete integration and utilization of the GK8 business into Celsius’ own platform.”

As a result, says Mashinsky, the company was unable to meet user withdrawals while also providing additional collateral to support its decentralized finance, or DeFi, loan obligations. In May and June 2022, the declaration continues, the company made the “difficult decision” to forgo providing additional collateral to one of its lenders, Tether, issuer of stablecoin USDT, and agreed to an “orderly liquidation” of its outstanding $841 million USDT loan after Tether issued a margin call. Celsius agreed to liquidate its Tether loan to “preserve the remaining collateral in excess of the value of the loan,” says Mashinsky, which resulted in a loss of approximately $97 million.

All of this led to an “unexpected and rapid ‘run on the bank,’” says the declaration, which caused the company’s June 12 “pause” on all withdrawals, swaps and transfers on its platform. Mashinsky says the company imposed the pause to “protect its users” by preventing “those [users] who were the first to act” from being paid in full while “leaving other users behind to wait for Celsius to harvest value from illiquid or longer-term asset deployment activities.”

Concurrently with the “pause,” the company decided to “limit its engagement in asset deployment” to “conserve its remaining assets” and to hire restructuring advisors. Mashinsky states that the company has “unwound nearly all of its outstanding” DeFi loans “and other counterparty loans to bring its collateral back under its control.”

Initial discussions with potential third-party investors “suggested that an in-court process would be necessary to yield the most value-maximizing path forward and to allow Celsius to return value to users in a fair and transparent manner,” says the declaration.

On or around June 19, the debtors formed a special committee, and on June 30 installed disinterested directors Alan Carr and David Michael Barse. The special committee is vested with authority to evaluate, negotiate and approve any “possible transactions.”

Mashinsky additionally describes a July 7 New York state lawsuit commenced by KeyFi Inc. against debtors Celsius Network Ltd. and Celsius KeyFi LLC, alleging “breach of contract, negligent misrepresentation, and fraud claims and demanding an accounting.” KeyFi asserts that Celsius lacked accounting controls, manipulated cryptocurrency markets and operated as a Ponzi scheme.

The complaint was filed “in response to an ongoing dispute with KeyFi and its chief executive officer and is one example of the way in which others are attempting to generate distrust among the Company’s users and the general public,” says the declaration, adding that the company “strongly disagrees with the allegations raised in the KeyFi Complaint and intends to vigorously defend itself.”

Background

Founded in 2018, Celsius’ business consists of cryptocurrency-related financial services through which retail and institutional investors can earn rewards on cryptocurrency transferred to Celsius, send, receive and store cryptocurrency, and borrow in “fiat” currency using cryptocurrency as collateral. Celsius also operates one of the largest crypto-mining enterprises in the United States.

As of the petition date, Celsius employs about 370 employees and independent contractors across about 14 countries, with roughly 285 in the United States. In July, Celsius had approximately 1.7 million registered users on its platform and $6 billion in assets. Celsius closed Series B equity funding with a capital raise of approximately $600 million from various investors at an implied enterprise value of $3 billion in 2021, and by May 2022 it raised approximately $690 million from Series B financing.

Celsius engages in cryptocurrency mining through Celsius Mining LLC and was preparing a public offering of its mining business in July. Currently, the debtors have 80,500 owned rigs, 43,632 of which are in operation. Operations are generating “approximately 14.2 Bitcoins per day for the past seven days, a total of 3,114 Bitcoin was mined during 2021 and operations are projected to generate 10,118 Bitcoin in 2022,” according to the declaration. Celsius has an investment plan to bring up its number of rigs to 110,000, which if on line, will generate approximately 15,000 bitcoin per year. As detailed in the critical vendors motion, Celsius is seeking authority to pay certain trade vendors the amounts necessary to complete its Texas mining center “in the coming weeks.”

The financial services side of the business includes several service segments. Customers could buy crypto assets and earn interest and rewards stored on Celsius’ system. The “Earn” program includes more than 600,000 users “who had transferred approximately 2 billion in digital assets, in the aggregate, with a market value of approximately $4.2 billion as of July 10, 2022, to Celsius.” Beginning in April, the debtors ceased allowing U.S. non-accredited users to participate in the program and, as of the petition date, no longer offers rewards on digital assets “transferred to Celsius through the Earn program.”

The customer rewards are sometimes issued in Celsius’ propriety token, CEL, under a loyalty program “similar to retail or airline loyalty programs.” As of July 12, CEL’s price was “approximately $0.71 with a market cap of approximately $170.3 million.”

The first day declaration explains that the terms of use contract between Celsius and its users “explicitly state[s] that in exchange for the opportunity to earn rewards on assets, users transfer ‘all right and title’ of their crypto assets to Celsius including ‘ownership rights’ and the right to ‘pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use’ any amount of such crypto, whether ‘separately or together with other property’, ‘for any period of time,’ and ‘without retaining in Celsius’ possession and/or control a like amount of [crypto] or any other monies or assets, and to use or invest such [crypto] in Celsius’ full discretion’” (emphasis added).

The borrowing services segment includes both retail and institutional lending to Celsius’ users. The retail loans are overcollateralized with loan to value ratios from 25% to 70% and are conducted only in “fiat or stablecoins.” The declaration underscores that “[s]imilar to Earn, title to any digital assets posted with Lending for retail loans is transferred to Celsius and Celsius is entitled to rehypothecate such assets.” As of Wednesday, July 13, the debtors’ retail lending program had “approximately 23,000 outstanding loans to retail borrowers in the aggregate amount of approximately $411 million backed by collateral with a market value of approximately $765.5 million in digital assets.”

On the institutional lending side, Celsius “engages in bespoke lending and borrowing relationships with institutional clients, such as hedge funds and market-makers.” Unlike retail lending, the terms of the loans are arranged on an “over the counter” basis under master loan agreements with term sheets specific to each transaction. Institutional loans can be either secured or unsecured and are “typically in the form of cryptocurrency coins, but can sometimes be loans of U.S. dollars or stablecoins.” As of Monday, July 11, the institutional lending program consisted of “approximately 47 institutional borrowers, with approximately $93 million of aggregate outstanding performing loans and the Company held collateral, with a market value of approximately $98.5 million in digital assets to cover such loans.”

In April this year, Celsius began to offer “Custody Service,” which “serves as the central hub of their digital asset account” and allows customers to transfer crypto assets across Celsius’ products, such as the Earn program. The declaration underscores “for clarity” that “crypto assets held solely in ‘Custody Service’ do not earn rewards from the Earn program as crypto assets held in custody shall ‘at all times remain with the [user].’” Celsius’ terms of use goes on to state that “‘Celsius will not transfer, sell, loan or otherwise rehypothecate’ digital assets in custody unless ‘specifically instructed by [users], except as required by valid court order, competent regulatory agency, government agency or applicable law.’”

As of the petition date, the custody service had 58,000 users “with digital assets worth a market value of approximately $180 million, as of July 10, 2022, held by Celsius.”

The declaration explains that “in addition to its lending services and revenue generated by [m]ining, Celsius engages in other asset deployment activities to generate a ‘sufficient yield.’” These activities include the deployment of digital assets into automated market maker or lending protocols for a fee and the borrowing of U.S. dollars as stablecoins from DeFi protocols collateralized by digital assets. These “DeFi loans” are governed by “smart contracts” that are self-executing on the blockchain and are typically overcollateralized. If the value of posted digital collateral securing the debtors’ borrowings falls below a certain threshold (and the LTV ratio of the loan passes a certain set percentage), the DeFi protocol will automatically liquidate the collateral and close out the loan.

As of June 27, Celsius discloses $648 million in “DeFi borrows,” or borrowings by the debtors, collateralized by approximately $1.61 billion in digital assets. Celsius indicates that it used these DeFi loans to finance its operations. These DeFi loans were held on four different DeFi protocols:

• Maker (MKR) ($225 million loan collateralized by $499 million in digital assets);


• AAVE ($263 million loan collateralized by $708 million in digital assets);


• Compound ($157 million loan collateralized by $409 million in digital assets); and


• Notional Finance ($3.2 million loan collateralized by $6.6 million in digital assets).

However, as of the petition date, substantially all of these DeFi loans were repaid by the company, and the collateral was returned. On a separate cryptocurrency exchange, FTX, the company had an additional $108 million loan collateralized by $403 million in digital assets, which it also indicates has been repaid. As of the petition date, the only DeFi loan remaining was in an amount of approximately $3.2 million collateralized by $6.6 million in digital assets.

The debtors also generate yield through “staking,” a way to earn passive interest on cryptocurrency by “staking” cryptocurrency on the blockchain for a fixed period of time during which such crypto cannot be withdrawn. The deposited crypto assets are then used to verify transactions on the blockchain through a “proof of stake” protocol. Any “staked” cryptocurrency used in successfully verifying a transaction and creating a new block is rewarded with newly created in-kind cryptocurrency.

Utilizing the Lido Finance DeFi protocol, Celsius “staked” its digital assets in ETH on the Ethereum 2.0 Beacon Chain. In exchange for staking its ETH on the Beacon Chain, Lido Finance provided Celsius with staked ETH, or “stETH.” This stETH generates a 5% annual yield. However, it is not redeemable until a technology change on the Ethereum network occurs. This change has been delayed multiple times but is currently scheduled for August 2022.

As of July 10, Celsius holds stETH 410,421; as a result, approximately $467 million of the company’s ETH, based on the market value of ETH as of Sunday, July 10, is illiquid.

Celsius describes five other “exchange deployments that were overall intended to be market neutral:”

• Cash and Carry, where Celsius leveraged demand in the futures markets to benefit from the funding costs that long futures holders were willing to pay short holders;


• Market Making, where Celsius held both long and short futures positions in a manner that allowed it to benefit from “inefficiencies in the futures market”;


• Swing Trading, where Celsius held both long and short futures positions, but with “an imbalance between the amount of long and short options Celsius held.” This allowed Celsius to benefit from its experience being an active participant in the futures market. Since this trading activity was not market neutral, Celsius had set narrow risk limits on such activity which were also accompanied by strict stop-loss mechanisms;


• Funding, where Celsius used the funding markets that exist in several exchanges, allowing users of such exchanges to borrow different digital assets from Celsius’ account on such exchange, to be used for trading on the same exchange, paying Celsius a financing fee; and


• Spot Trading, where Celsius kept a portion of the assets on exchanges to be ready for immediate spot transactions between one digital asset and another, where this was needed to balance its assets versus liabilities, to prevent cross-currency exposure. This was a hedging strategy rather than an income-generating activity.

Celsius notes that it maintains limited exchange deployments in certain futures but does not intend to engage in any exchange deployments in the near term.

The debtors’ list of 50 largest unsecured creditors is led by Pharos USD Fund SP with an $81.1 million loan claim and also includes Sam Bankman-Fried’s firm, Alameda Ventures Ltd. Bloomberg reported earlier today that Pharos may be affiliated with Alameda and Sam Bankman-Fried.

In addition to the top 10 named creditors listed in the chart below, the debtors’ list of largest unsecured creditors includes 40 unnamed creditors with customer or loan party claims ranging from $5.6 million to $40.6 million.

The debtors' largest unsecured creditors are listed below: