Celsius Network, the crypto lender based in New Jersey, has filed its bankruptcy status recently. The move came as a response to the $1.19 billion hole or deficit in its balance sheet. The company filed for U.S. Chapter 11 Bankruptcy on Thursday, July 13, 2022. The firm had earlier put a standstill to any withdrawals on its platform last month. The reason they cited for this act was the “extreme” unfavorable market conditions. This act swiped away individual investors’ access to crypto funds and even largely affected the crypto market due to the shortage of investments and funds. However, the Celsius bankruptcy filing update has worsened the situation for its customers.
The crypto lending firm mentioned that one of the reasons for it going bankrupt and not having the required amount of liquidity is attributed to a $40 million claim against Three Arrow Capital. The latter could not repay the debt as it went bankrupt towards the end of last month. This shows how interconnected the crypto domain is, one suffers and tremors are felt all over.
The Celsius bankruptcy filing data shows that as of July 13, 2022, the organization had approximately 23,000 outstanding loans to the retail crypto borrowers which totaled $411 billion. These lendings had a collateral backing of $765.5 million in the form of various digital assets and currencies.
The situation totally reversed from that of the Covid-19 pandemic when the crypto lenders saw immense growth. The recent bearish trends of the crypto market were one of the main reasons such crypto lenders were highlighted for scrutiny. As a result, the downturn was inevitable.
Daniel Gwen, New York-based law firm Ropes & Gray’s business restructuring associate, quoted by Coindesk shed light upon the plight of Celsius Network’s customers and individual investors situation saying:
“Celsius has set the stage for conflict between its customers and its sophisticated institutional creditors,” Daniel Gwen, a business restructuring associate at New York-based law firm Ropes & Gray, told CoinDesk.In particular, Celsius has pointed out in its pleadings that customers transferred ownership of crypto assets to Celsius, making those customers unsecured creditors. This detail may undercut customer expectations, who thought they were depositing their assets into a construct similar to a traditional bank.”
The firm also faced major implications of the implosion of Terra (LUNA) and its TerraUSD (UST) stablecoin. It lost millions as LUNA crashed by over 99% and was valued at a few cents in the month of May this year.
To make the situation worse, other crypto lenders have also gone bankrupt due to liquidity crises. Voyager Digital limited, a relatively small lender, went bankrupt earlier this month after freezing customer withdrawals in the current month. These negative developments in the sector, including the Voyager Digital bankruptcy update, indicate that in the future even other crypto participants might have to follow in the footsteps of the Celsius bankruptcy filing. Moreover, the red trends in the crypto space have led to a decline in liquidity availability for such lenders.