Bankruptcy of financially distressed crypto lending platform Celsius is likely inevitable. This opinion was expressed by Adam Levitin, professor of law at Georgetown University.
Here’s what’s going to happen with Celsius’s customers in a Celsius bankruptcy. (I’ll explain later why it’s very likely to end up there.) 2/
— Adam Levitin (@AdamLevitin) June 15, 2022
On June 13, Celsius suspended withdrawals, exchanges, and transfers between accounts “due to extreme market conditions.” However, analysts suggested that the real reason for what happened is a “liquidity crisis,” due to which the company cannot make payments to customers.
Earlier, analysts noted that the Celsius team is strengthening its debt position in three main areas. In the Maker DAO, by increasing the amount of collateral, the platform brought the vault liquidation price to $14,000 per wBTC. Celsius also increased the ETH collateral of its stETH tokenized assets in the Aave protocol and paid off a debt of 2.4 million USDC.
Levitin noted that the Celsius management decided to bet on “adventure with resurrection”. The lawyer called it standard practice for insolvent companies.
Now Celsius seems to have decided to “gamble on resurrection” (standard insolvent company play). Instead of just closing out its Maker DAO position by repaying the loan, Celsius instead topped up more collateral. 25/
— Adam Levitin (@AdamLevitin) June 15, 2022
According to Levitin, it was more expensive for Celsius to liquidate the Maker DAO loan than to increase the collateral.
He believes that sooner or later the management of the platform will have to decide on the sale of liquid assets to reimburse users’ funds. Bankruptcy, which the lawyer called almost inevitable, will streamline this process and subsequent litigation.
At the same time, almost all Celsius clients will be in the role of unsecured creditors of the platform, Levitin believes. This means that payments to them will be made from the funds remaining after the repayment of loans secured by collateral and the payment of all administrative costs.
On June 15, The Wall Street Journal reported that Celsius had hired lawyers from Akin Gump Strauss Hauer & Feld for a possible financial restructuring.
The journalists stressed that the initial purpose of the platform is to raise capital from investors.
According to The Block, to solve this problem, the company turned to the financial conglomerate Citigroup.
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