What Happens to Celsius Creditors If Crypto Prices Recover?
Let us assume Bitcoin (BTC) price doubles over the coming months. Would the millions of users whose Digital Currency and Assets are frozen within the troubled Crypto lending platform Celsius Network come out ahead, or just break even?
This is in uncharted territory for the U.S. bankruptcy court.
Also Read: A Detailed Guide To The Coinbase Account Recovery
The high volatility of Digital Currencies created the extreme market conditions that saw Cryptocurrency lender Celsius freeze user withdrawals in early June and later confess to a $1.2 billion debt trap in its balance sheet. But a similarly dramatic upturn in Cryptocurrency prices could probably happen before the case is concluded in the U.S. Bankruptcy Court for the Southern District of New York.
The likelihood of a thaw in the cryptocurrency winter was mentioned at the first bankruptcy hearing by Patrick Nash – a partner at Kirkland & Ellis, the law firm representing Celsius – who added that the majority of users are expected to remain “long cryptocurrency.”
The plan of waiting for an eventual change in the Cryptocurrency climate was echoed by Vincent Indelicato, a partner at law firm Proskauer who is focused on bankruptcy and corporate restructurings.
Also Read: How To Unlock A Restricted Coinbase Account?
Indelicato further said in an interview with Coindesk that the Stakeholders might very well want to use the bankruptcy process to wait out the Cryptocurrency Winter and hibernate until it thaws a little bit so that they could then grab the upside of the rebound.
Daniel Besikof, a partner at the law firm Loeb & Loeb said that the choice to take recoveries in cryptocurrencies sounds like it could be a boon for Celsius Network Account holders, but a lot depends on what that means in practice.
Besikof further said that the general thumb of rule in bankruptcy procedures is that creditors have claims, denominated in USD, measured as of the date of the bankruptcy filing. It will be interesting to see how this rule is applied to this unique scenario.
Imagine a hypothetical account user who has $1 million worth of BTC on the bankruptcy petition date of his or her exchange, Besikof suggested. In this example, if Bitcoin (BTC) goes down, recoveries on the claim will also probably go down. But if BTC doubles, would that creditor have a claim on what is now BTC worth $2 million? Could he or she recover more than $1 million?
Also Read: Binance Fined $3.4 Million By Dutch Central Bank
The courts will have to choose, Besikof said.
Besikof said that the court will have to decide. He further added that he sees exchanges arguing that the account user is recovery is capped at $1 million, even if the said exchange is full of cash and Cryptocurrency Assets from the price increase. That debate would create a likely windfall for the shareholders but would be highly disadvantageous to account users. This concern could be alleviated if the strategy provided for the return of some or all of the user’s Cryptocurrency.
The scenario is somewhat similar to certain oil and gas firms that filed at the bottom of that market, only to become flush with cash later on in the case if oil prices rise, Besikof said. “However, in those scenarios, creditors were actually paid in full – the price of what they were owed did not also increase with the price of oil.”
Its worth noting that ongoing legal disputes involving Cryptocurrency platforms, such as customer losses associated with now ill-famed and collapsed exchange Mt. Gox, which filed for bankruptcy proceedings in Japan back in 2014.
A ruling on the legal status of property of the Cryptocurrency Assets – approximately 200,000 BTC held by the Mt. Gox bankruptcy estate that kept escalating in value until it eventually overtook the total legal claim value of all creditors – might have been useful. But the court punted on the issue by switching to civil rehabilitation, a type of proceeding in Japan that bears some similarity to U.S. Chapter 11 restructuring, where a debtor retains the power to continue to manage its business.
That said, Mt. Gox is only really a sign of how things have progressed within the slow-moving jurisdiction of Japan, and does not provide a clear sign of what will happen under the U.S. bankruptcy code, noted Thomas Braziel, the founder of 507 Capital, a firm that has purchased Mt. Gox bankruptcy claims.
“The problem with talking about previous cases is that its not U.S. bankruptcy law, or even U.S. law at all,” Braziel said in an interview. “So, while of course its fascinating, I do not think that the U.S. bankruptcy court is going to consider this non-estate property, and it’s all held in trust.”
As it stands, the dispositive issue of whether the Digital Currency and Assets are custodial (meaning their title and ownership remains the property of the customer) or those assets are now the property of the bankruptcy estate, is determined by the language and tone in the firm’s customer agreements.
The terms attached to Celsius custody wallets, which were purely for storage and did not pay interest, seem to propose that the firm should give that property back to those users, but those assets only make up 4% of the outstanding pie (about $180 million at today is prices). The rest of the assets are locked up in Celsius high-yield Earn program. According to the firm is terms and conditions, users who elect to use this service will “grant Celsius all rights and title to such Digital Assets, for Celsius to use in its sole discretion while using the Earn Service.”
However, those terms of service are not the endpoint in a case like this; they are more like the starting point, noted Braziel. “There are tons of contractual terms that are totally unenforceable in bankruptcy court, let alone any court of law,” he said. “And if the firm was not following the rules within a given jurisdiction where something was offered, then the terms of service aren’t even applicable.”
Also Read: Dubai To Speed Up Metaverse Efforts With 40k New Jobs
Just one of the cans of worms to be unlocked further into the bankruptcy proceedings worries those non-accredited investors (mom-and-pop investors, basically) who were grandfathered into the Earn program by Celsius as the company fielded scrutiny from state regulators, but who would properly belong in the custodial wallet bucket if they were to remain on the Cryptocurrency lending platform.
“There are different pockets that are very interesting,” said Braziel. “Those guys who got grandfathered in should probably form an ad hoc group; basically, a group of people with common interests that like an argument enough to foot the bill themselves.”
Some of these burning questions may well become moot, or at least secondary, if the stakeholders can find the right logical framework for a reorganization plan that works for the users, said Proskauer is Indelicato.
Bankruptcy cases often become a tug of war between groups of stakeholders who may turn out to be the users and the equity shareholders in this case, noted Indelicato. These parties will concentrate on who gets the biggest piece of the pie, and how you measure a piece of that pie, he said.
“If you are an equity shareholder, you may want to assert a view that the Cryptocurrency Assets should be frozen and valued at the time of the filing, not as they appreciate over the life of the case – assuming that we see market appreciation of cryptocurrency.”
A Cryptocurrency Market value appreciation, should it happen while the case rumbles on, will become an important driver for users of Celsius, who already hold conviction in the technology and who may also want to avoid tax and other unintended consequences of cashing out, said Indelicato.
“This is very much uncharted territory, and because of that I think the orthodox toolbox and ruleset really gets thrown out the window,” Indelicato said. “Just take the playbook and rip it up. For those reasons, the Celsius and Voyager Digital cases will require innovation, creativity and people who can think outside the box.”
Leave a Comment