Crypto lending platform Celsius confirmed on Wednesday that it has initiated Chapter 11 bankruptcy proceedings in the Southern District Court of New York.
The announcement was shared on the company’s Twitter and shared with account holders via email on Wednesday, with a vow to “emerge from Chapter 11 positioned for success in the cryptocurrency industry.”
According to Investopedia, a Chapter 11 bankruptcy allows a company to stay in business and restructure its obligations. Companies that have successfully reorganized under Chapter 11 include American Airlines, Delta, General Motors, Hertz and Marvel, according to an updated FAQ by Celsius.
Danny Talwar, head of tax at crypto accounting software firm Koinly, shared his concerns with Cointelegraph that the proceedings could mean investors and customers of Celsius may not see their funds returned for the “foreseeable future,” similar to the fallout from the Mt. Gox hack in 2014 which is still ongoing:
“This could be Mt. Gox 2.0. Court proceedings may drag out the process of Celsius customers receiving any of their deposits back well into the future.”
“For context, Mt. Gox was the largest exchange for Bitcoin from 2010 until its collapse in 2014, losing over 850,000 BTC in deposits,” explained Talwar. “Customers are still awaiting the release of funds from the exchange now (in 2022), with court proceedings in multiple jurisdictions globally and in Japan.”
Celsius, in a statement on Wednesday, said it aims to use $167 million in cash-on-hand to continue “certain operations” during the restructuring process and said it intends to eventually “restore activity across the platform” and “return value to customers.”
However, customer withdrawals are set to remain paused “at this time.”
Members of the Celsius board said the move to bankruptcy follows a “difficult but necessary” decision last month to pause withdrawals, swaps and transfers on the platform.
Celsius co-founder and CEO Alex Mashinsky added in a statement that it is the “right decision for our community and company.”
“We have a strong and experienced team in place to lead Celsius through this process. I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”
Moments ago, @CelsiusNetwork filed voluntary petitions for Chapter 11 protection and announced that the company initiated a financial restructuring. https://t.co/vf5wsT6TMp
— Celsius (@CelsiusNetwork) July 14, 2022
Through “first day” motions, the company said it intends to pay employees and continue their benefits. The company says it will also continue to service existing loans with maturity dates, margin calls and interest payments to continue as they have in the past.
Celsius has also appointed a new director to guide it through the restructuring process, including David Barse, a “pioneer” in distressed investing who is the founder and CEO of index company XOUT Capital.
Related: Vermont becomes the sixth US state to launch investigation against Celsius
Though some in the community have taken the news as a negative for Celsius, Talwar argues that crypto investors should not panic, as a Chapter 11 bankruptcy filing will mean Celsius will commit to making their investors whole “and not just disappear:”
“Chapter 11 bankruptcy allows Celsius to restructure their debts and assets through the court system […] Crypto-investors should not panic as filing for chapter 11 bankruptcy provides some certainty for the market.”
Earlier in the day, Celsius closed off the last of its decentralized finance (DeFi) debts owed to Compound, Aave, and Maker, reducing its initial debt of $820 million to just $0.013 over the course of a month.
Talwar said repayment of its debts just ahead of filing for bankruptcy may have been required in order for “all remaining customer funds and collateral to be taken stock of.”