Celsius Defends Decision to Halt Withdrawals at Debut Bankruptcy Hearing
The cryptocurrency lender said the move was necessary to safeguard customers’ financial interests as users fled and crypto assets sold off
Celsius Network LLC tried to ease customers’ anger over its freeze on account withdrawals, but indicated it doesn’t intend to quickly release their funds as the cryptocurrency lender aims to weather the downturn in digital currencies and craft a repayment plan.
Celsius lawyers used the company’s debut appearance in bankruptcy court Monday to defend its decision to halt withdrawals last month, saying that was necessary to safeguard customers’ financial interests as users fled and crypto assets sold off.
“The reality is the pause was necessary in order to preserve the assets that the company has so they can be…equitably distributed to all of the platform’s customers,” Celsius lawyer Patrick Nash Jr. said.
The company intends to use the breathing spell of chapter 11 to help it withstand the crypto downturn and come up with a repayment plan for its users, Mr. Nash said.
Judge Martin Glenn of the U.S. Bankruptcy Court in New York expressed concerns that continued volatility in cryptocurrencies could affect the company’s restructuring. The judge also raised questions about customer funds held in custody accounts, which represent about 4% of Celsius’s deposits, worth about $180 million, on behalf of roughly 58,000 users, court papers show.
It is an open legal question whether those funds are “truly a custodial account, truly in-trust,” Mr. Nash said. Custodial funds are isolated and will continue to be held in an identifiable account until the legal issue is decided in bankruptcy court, Mr. Nash said.
“I can certainly understand $180 million is a lot of money,” Judge Glenn said. “I can certainly understand the frustration if people believe they signed documentation that this was a custody account, and if it’s held in trust they want to be able to access it.”
Monday’s hearing was intended to ease Celsius’s entry into chapter 11, where customers are the key creditor constituency. Celsius has no funded debt, court papers show.
A government lawyer with the Justice Department’s bankruptcy division said it is working to assemble an official committee that would represent customers’ interests during the chapter 11 case, paid for by Celsius.
During Monday’s hearing, Celsius lawyers said the company is facing customer blowback over its decision last month to pause withdrawals. It faced a run on the bank, meaning customers who left funds on the platform would have been left “holding the bag” had withdrawals continued, Mr. Nash said.
Some Celsius employees received death threats and hate mail, lawyers said, adding that outrage was partly fueled by the company’s relative silence in the weeks leading up to the bankruptcy.
In court papers last week, Chief Executive Alex Mashinsky disclosed a roughly $1.2 billion hole in the company’s balance sheet. Celsius also has said it owes users more than $4.7 billion, which represents most of the crypto lender’s $5.5 billion in total liabilities.
Celsius said in court on Monday that the value of its assets have fallen by about $17.8 billion since March 30, to $4.3 billion from roughly $22.1 billion.
One avenue to repay customers is through the expansion of an existing bitcoin-mining business that makes money at current prices and would become more valuable if the cryptocurrency market improves, according to the company.
Founded in 2017 by Mr. Mashinsky, S. Daniel Leon and Nuke Goldstein, Celsius allowed users to earn interest payments on cryptocurrency deposits and take out loans using those cryptocurrencies as collateral.
On Monday, Mr. Nash said no new customer accounts are being opened. Celsius also said it is no longer issuing margin calls or liquidating collateral to satisfy loans, according to court documents.
The company pitched itself as a safe alternative to traditional banks and promised users high interest rates. It was valued at about $3 billion after raising $690 million in a Series B financing round in May, according to the bankruptcy filing.
Celsius is scheduled to appear in bankruptcy court again next month.