The prospects of Celsius’ creditors recovering their funds from the exchange any time soon are looking slim, with parties advised to brace themselves for an extended tussle in court.
Celsius sent shockwaves through the crypto industry when it halted withdrawals last month, citing unfavorable market conditions. The move was followed by a Chapter 11 bankruptcy filing in New York that revealed a $1.2 billion deficit in its balance sheet and over 100,000 creditors.
Six lawyers specializing in bankruptcy matters revealed that settling the embattled firm’s creditors would be a complicated process that could take years to resolve. Other crypto firms like Voyager and Three Arrows Capital have also filed for Chapter 11 bankruptcy to “reorganize” their business affairs, debts, and assets.
No precedents to follow
Part of the reasons for the anticipated delay in court lies in the absence of prior judicial precedents to follow. James Van Horn, a partner at Barnes & Thornburg told reporters that it is “unknown how the bankruptcy code and courts will be treating cryptocurrency companies.”
While a crypto exchange like Mt. Gox has gone through a difficult bankruptcy process, there is a paucity of cases for a crypto lender like Celsius for the courts to follow. Stephen Gannon from Davis Wright Tremaine likened the peculiarity of the case to playing three-dimensional chess.
“It’s probably going to take, given the complexity, six months, at a minimum, just to develop a plan to come out of bankruptcy,” said Gannon.
Another factor that could lead to an extension of the process is Celsius’ classification of its creditors. There are speculations that clients may be designated as “unsecured creditors” and this class “have no earmarked rights to any funds or anything,” says Van Horn. This could open the floodgates of lawsuits, potentially clogging any hopes for a quick resolution.
Individual investors the lowest priority for Celsius
There are concerns from individual investors that their interests would be at the bottom of the pecking order, while larger creditors will be treated with priority. Martin Jabou, an investor who sunk $45,000 of his assets in Celsius, has been left holding empty bags following the project’s implosion.
“I think we’re going to be last on the list,” he said. “I don’t know how to afford rent or car payments, especially with the other debts that I have.”
The fall of Celsius has drawn significant attention to investor protection in the crypto industry. Deposits in U.S. banks are insured by the Federal Deposit Insurance Corporation for up to $250,000 while brokerage accounts are covered by up to $500,000.
In crypto, such protections are rare, but increasing regulations and the hard lessons from Celsius could turn things around.