Cryptocurrency firm Celsius files for bankruptcy, still won’t allow withdrawals
The cryptocurrency world has skyrocketed throughout 2021, with benchmark crypto Bitcoin reaching a value of over $60,000. However, the past few months have erased all of these gains and more. The market shift has brought down several major crypto firms, and we can add another to the list. After freezing transactions several weeks ago, popular cryptocurrency lending platform Celsius said it had filed for bankruptcy.
Cryptocurrency operates in a financial gray area. Although originally presented as digital money, the US government considers cryptocurrency to be commodities in the same class as metals, energy, and agricultural commodities. Unlike a bank that accepts deposits in fiat currency, companies offering cryptocurrency financial services are largely unregulated. This means that wild market swings are common, as are the deleterious effects of those swings.
The problems for Celsius started in May 2022 when a popular stablecoin called Terra crashed. Many companies held Terra, which was pegged to the US dollar, as a way to earn high returns on their assets – Terra promised annual returns of 20%, which in hindsight seems extremely suspicious. Crypto prices have been plummeting ever since, with Bitcoin hovering around $20,000. Initially, Celsius was defiant, downplaying its exposure to Terra’s collapse and falling prices. That changed in June when the company abruptly halted all transactions in the name of “customer protection.”
Celsius claims to have over 1.7 million active users, many of whom have moved all of their assets to Celsius. Users were even penalized for not honoring loan agreements by Celsius when they were unable to access their funds to make up shortfalls. The company was slow to respond, and now we know why. Celsius, headquartered in New Jersey, has filed for chapter 11 bankruptcy. This means that it will try to reorganize itself and continue to function.
In its filing, Celsius claims to have assets valued between $1 billion and $10 billion, as well as liabilities between $1 billion and $10 billion. It also has $167 million in cash to continue operations during bankruptcy, but it won’t be unfreezing any accounts anytime soon. Those who have invested their savings through Celsius are out of luck so far. They may end up getting their funds back, but they may also only be offered a fraction. There is no guarantor behind cryptocurrencies like there is for a “fiat” currency like the US dollar. If you put money in a traditional bank, the FDIC will guarantee it up to $250,000 per depositor.
Celsius is the third major crypto firm to file for bankruptcy since the crash. Crypto hedge fund Three Arrows Capital ceased operations earlier this month (and is being liquidated), followed by lender Voyager Digital a few days later. While Celsius may have enough funds to emerge from Chapter 11 as a functioning company, it will never have the same level of confidence. In an unregulated market like cryptocurrency, trust is paramount.
Image via stock catalog, Wikipedia