Crypto lender Celsius mulls possible restructuring amid financial woes

[o_e_l_e_o]

Is it even possible for the court to force customers who withdrew on the last 90 days before the bankruptcy to return the funds to the platform?

Possible? Absolutely. Whether or not they actually do is another question.

Are there legal consequences, especially for foreigner investors?

For US citizens, then they send debt collectors after you, along with all the usual bullshit that entails. For international users, I'm not entirely sure, but I suspect Celsius would probably have to bring a court case against every individual they wanted to pursue in their own country of residence, which is highly unlikely to happen unless someone withdrew several million dollars worth of crypto within the 90 days.

[1714306524]

1714306524

[PrimeNumber7]

Have you seen any financial disclosures or court filings that suggest that Celsius has a lot of secured creditors?

No, and as far as I am aware, neither a list of secured creditors or a statement that there are none has been made/filed. I'm basing these assumptions on the court documents they filed previous during the bankruptcy proceedings here: https://www.theblock.co/post/157647/celsius-bankruptcy-documents-claim-1-2-billion-balance-sheet-gap. With "Loans" of almost 1 billion dollars, on top of a $1.2 billion hole in their balance sheet, then there is not going to be much left to give back to the users.

I'd be happy to be proven wrong, but I think Celsius users shouldn't be holding their breath for a good outcome here.

If you were to create a company, and that company were to lend me 1BTC, your company would have an asset, a loan worth 1BTC.

Celsius was in the business of making loans to customers. The $930 million in "loans" on the financial statement you cited are the loans they have made to their various customers. There is also a $310 million counter asset to account for loans that Celsius does not believe are going to be repaid, so the net amount they believe they will be repaid is $620 million.

The financial statement you cited also has "custody liabilities" and "other liabilities" being at $180 million and $390 million respectively. If you assume that both of these classes of liabilities will be repaid in full before all other liabilities, both the assets and liabilities would fall by a total of $570 million. This would put assets at $3,740 million and liabilities at $4,930 million. I believe that some have questioned the "CEL tokens" listed on the assets portion of the cited financial statement, and if you were to remove both the CEL liabilities and assets, the net assets falls to $3,140 million, and the liabilities total $4,720 million. This implies a recovery of about $0.66 on the dollar.

Granted, the net loans cited above likely has offsetting amounts in assets under "user liabilities", in the form of collateral for the various loans Celsius has made. These borrowers will likely seek to have their collateral offset on a 1-1 basis for the amounts they owe Celsius. I don't know if this is something the bankruptcy court would allow, but if they did allow it, both assets and liabilities would fall by $620 million, bringing assets to $2,520 and liabilities to $4,100, which implies a recovery of about $0.61 on the dollar.

Based on the above, I think it is reasonable to expect for some customers to receive at least approximatley $0.60 on the dollar on their deposits, while others may be made whole. The accuracy of this prediction is obviously predicated on the accuracy of the financial statement cited, and the crypto market, among other factors.

[o_e_l_e_o]

Ahh good point. I've misread the statements.

Taking your figure of $0.60 on the dollar, I think there are other things which still need to be factored in. It is unclear if the custody and withhold assets that uneng discussed above are included in these statements. If they are, and are similarly removed, then the number of $0.60 drops further. We also have to consider Celsius's ongoing costs. They have a number of employees who are still on their payroll, and they will have extensive legal fees, lawyer fees, etc., during the bankruptcy proceedings. The longer this goes on, the less money there is to give back to users.

[bbc.reporter]

I might have forgotten, however, has it been mentioned that Celsius' head of lending is also a pornstar? Her name is Jessica Khater and it appears much of her pictures and videos were removed from the internet. They have become very rare, someone should recreate them into NFTs hehehehe.

https://lumendatabase.org/notices/25216054#

[goldrushed2]

Sounds like a FFF fest.

[o_e_l_e_o]

Here is a link to the most recent court documents: https://cases.stretto.com/public/x191/11749/PLEADINGS/1174909072280000000015.pdf

I would draw attention to Paragraph 10. A. a. and b. (emphasis mine throughtout):

On June 7, 2022, Celsius published a blog post stating: “Celsius has the reserves (and more than enough ETH) to meet obligations, as dictated by our comprehensive liquidity risk management framework.” Preliminary internal financial records provided by Celsius to members of the multistate regulator group show that Celsius had a deeply negative net worth on June 7, 2022, lacked sufficient assets to repay its obligations to depositors and other creditors, and had ETH-denominated liabilities in excess of its ETH-denominated assets.

On May 11, 2022, CEO Alex Mashinsky tweeted:

Notwithstanding the extreme market volatility, Celsius has not experienced any significant losses and all funds are safe.

Preliminary internal financial records provided by Celsius to members of the multistate regulator group show that Celsius experienced unrealized losses of approximately $454,074,042 between May 2 and May 12, 2022. The company was insolvent and depositor funds were not safe.

Paragraph 12:

Celsius also admitted at the 341 meeting that the company had never earned enough revenue to support the yields being paid to investors. This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.

And also Paragraph 16:

By increasing its Net Position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements. Excluding the Company’s Net Position in CEL, liabilities would have exceeded its assets since at least February 28, 2019.

This is bad for Celsius. Outright lying to their users, in the red for three years before declaring insolvency, actively running a Ponzi scheme. Mashinsky should go to jail for this.

In other news, Mashinsky's wife has started selling these T-shirts on her business's web shop: https://usastrong.io/products/unbankrupt-yourself-t-shirt-black.

[PrimeNumber7]

Ahh good point. I've misread the statements.

Taking your figure of $0.60 on the dollar, I think there are other things which still need to be factored in. It is unclear if the custody and withhold assets that uneng discussed above are included in these statements. If they are, and are similarly removed, then the number of $0.60 drops further. We also have to consider Celsius's ongoing costs. They have a number of employees who are still on their payroll, and they will have extensive legal fees, lawyer fees, etc., during the bankruptcy proceedings. The longer this goes on, the less money there is to give back to users.

Yup, the Custody assets, and liabilities are both listed as $180m.

Here is a link to the most recent court documents: https://cases.stretto.com/public/x191/11749/PLEADINGS/1174909072280000000015.pdf

I would draw attention to Paragraph 10. A. a. and b. (emphasis mine throughtout):

I think this snippet is particularly interesting to me:

11. During the 341 meeting, Celsius admitted, through its CFO Chris Ferraro, that the
company’s insolvency started with financial losses in 2020 and through 2021,

I would speculate that Celsius was insolvent, but was able to meet customer withdrawal requests until confidence in the crypto market declined due to Terra/TerraUSD imploding. Years ago, I had some money in Celsius, and if I remember correctly, they had strange incentives for people to keep your coin on their platform, for example, I remember that interest had to be withdrawn "last" and that you don't get "interest" on the interest payments you receive. So if you deposited $100, earned $10 in interest payments, and withdrew $50, you would only be earning interest on $50, even though you had $60 in your account. I believe they may have also had daily withdrawal limitations, but I am less certain about this.

So they basically were able to get enough people to be willing to keep money on their platform for them to (hope to) be able to "earn" their way out of insolvency. Although this was going to be especially difficult considering your quote about Celsius not being profitable on an operational basis (I would presume Celcius management was trying to correct this).

[o_e_l_e_o]

I think this snippet is particularly interesting to me:

Consider that statement alongside the statement in Paragraph 12 that Celsius had never earned enough revenue to cover all the interest and yields they were paying out. It seems to me that they were only able to meet customer withdrawals by either running a large fractional reserve and hoping most users didn't withdraw (hence their incentives for keeping your coins with them), or simply through an outright Ponzi, and this this was the case for several years. I don't know what their exit strategy was here? Hope that they gambled on the right shitcoin with their users' money to make up for their huge deficit? And then when they gambled on the wrong one (Terra), the whole house of cards collapsed.

It's also quite amazing that they made enough losses through 2020 and 2021 to end up insolvent, when that period saw a massive bull market with bitcoin going from $5k to over $60k. You really have to wonder just how irresponsible they were being.

[DaveF]

So they basically were able to get enough people to be willing to keep money on their platform for them to (hope to) be able to "earn" their way out of insolvency. Although this was going to be especially difficult considering your quote about Celsius not being profitable on an operational basis (I would presume Celcius management was trying to correct this).

Snark but...why would you think they were trying to correct it? What they had made the operators a lot of money. Going through the link that o_e_l_e_o posted it looked to be a scam / ponzi from almost the beginning.

If I was running it and seeing all the exit scams that happened with no repercussions to the owner / operators I would keep running it that way.

Difficult to withdraw, bonus for keeping funds in, odd rules, etc. It just screams non legitimate.

-Dave

[PrimeNumber7]

I think this snippet is particularly interesting to me:

Consider that statement alongside the statement in Paragraph 12 that Celsius had never earned enough revenue to cover all the interest and yields they were paying out. It seems to me that they were only able to meet customer withdrawals by either running a large fractional reserve and hoping most users didn't withdraw (hence their incentives for keeping your coins with them), or simply through an outright Ponzi, and this this was the case for several years. I don't know what their exit strategy was here? Hope that they gambled on the right shitcoin with their users' money to make up for their huge deficit? And then when they gambled on the wrong one (Terra), the whole house of cards collapsed.

It's also quite amazing that they made enough losses through 2020 and 2021 to end up insolvent, when that period saw a massive bull market with bitcoin going from $5k to over $60k. You really have to wonder just how irresponsible they were being.

It is the business model of Celsius (and with mainstream banks) to operate as a fractional reserve, however, to also operate as a solvent enterprise (that is that their net assets exceed their net liabilities). So celsius might have 0.1BTC in their reserves for every 1BTC they have in customer deposits, but they also have 0.9x+BTC in other assets, such as BTC that is owed to them (that is net of any loans that are unlikely to be repaid). As long as the bank properly manages risk in making their loans (and pricing their loans and deposit interest rates), there is little risk of loss to their deposit holders.

According to the filing you cited, Celsius had financial setbacks in 2020 and 2021, which caused them to become insolvent. Piggybacking on my previous example, Celsius might have had 0.1BTC and less than 0.9BTC in other assets for every 1BTC they owed to deposit holders. It is not clear what these setbacks were, or how large they were.

The root cause of Celsius' unprofitability could have been caused by three things:
1 - Celsius may pay more in interest to deposit holders than it receives in interest payments from loans they make, even though the interest rate they charge borrowers is greater than the interest they pay to deposit holders. This can be solved by increasing the volume of loans they make, or reducing the interest they pay to deposit holders.
2 - Celsius may collect more in interest from borrowers than it pays out to deposit holders, but this net interest income may not be enough to cover the operating expenses (such as employee salaries, office rent, marketing, etc) of running their business.
3 - Celsius collects less in interest than it pays out to deposit holders after accounting for loan losses.

1 and 2 are very similar. Both can be solved by increasing loan volume and/or reducing interest paid to depositholders. Both would mean that Celsius had mispriced their interest rates. I think it is most likely that the market for crypto loans is not particularly big, and the market for crypto deposits is especially big, so the most likely solution would be to reduce interest rates paid to deposit holders. Lowering interest rates means that some deposit holders would withdraw, and if Celsius was insolvent, this is not a desired outcome. 3 would mean that Celsius has poor risk management with regards to making loans, and this would need to be improved.

I think either 1 or 2 is probably most likely. If you look at the financial statement you previously posted, you will see $720 million in mining assets. I think I remember reading about Celsius lending itself (the loan may have been to a related entity) money in order to buy mining equipment. I suspect that this was an effort to increase lending volumes.

So they basically were able to get enough people to be willing to keep money on their platform for them to (hope to) be able to "earn" their way out of insolvency. Although this was going to be especially difficult considering your quote about Celsius not being profitable on an operational basis (I would presume Celcius management was trying to correct this).

Snark but...why would you think they were trying to correct it? What they had made the operators a lot of money. Going through the link that o_e_l_e_o posted it looked to be a scam / ponzi from almost the beginning.

If I was running it and seeing all the exit scams that happened with no repercussions to the owner / operators I would keep running it that way.

Difficult to withdraw, bonus for keeping funds in, odd rules, etc. It just screams non legitimate.

-Dave

The owners of Celsius are well known and are subject to the jurisdiction of American courts. This is often not the case with other crypto scams. To my knowledge, the operators were not being paid exorbitant amounts of money. The business model of Celsius, if priced correctly, is something that should be profitable for its operators if run correctly. Celsius was in fact making loans.

[DaveF]

The owners of Celsius are well known and are subject to the jurisdiction of American courts. This is often not the case with other crypto scams. To my knowledge, the operators were not being paid exorbitant amounts of money. The business model of Celsius, if priced correctly, is something that should be profitable for its operators if run correctly. Celsius was in fact making loans.

A lot of people involved in financial scams are wall known.....and in jail in the US.
So instead of stock fraud or bank fraud it's just crypto fraud.

Once again from paragraph 12:

Celsius also admitted at the 341 meeting that the company had never earned enough revenue to support the yields being paid to investors. This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.

If you are paying old people with money from new people you are a ponzi.
They could have stopped payments, they could have cut them to the bone, but they kept paying out AND TAKING MORE IN.

If you are making up numbers to put in spreadsheets to make your business look better then it is, you are scamming.

https://www.youtube.com/watch?v=OWwzQyXAvXI

Does not matter the industry or what is being traded, crypto, cash, gold, it's all the same scam in the end.

-Dave

[o_e_l_e_o]

It is the business model of Celsius (and with mainstream banks) to operate as a fractional reserve, however, to also operate as a solvent enterprise (that is that their net assets exceed their net liabilities).

Sorry, I should have been more clear when I mentioned fractional reserve. It was always clear from Celsius' terms of use, where they explicitly stated they would lend out users' assets without any requirement to hold collateral of equal or even partial value, that they were running a fractional reserve. Recently, however, the fraction they were holding in reserve was obviously significant smaller than it had been in the past, until it reached the point that they had to suspend withdrawals entirely.

1 and 2 are very similar. Both can be solved by increasing loan volume and/or reducing interest paid to depositholders.

Celsius did start to reduce the interest/reward rates they offered to users in the weeks leading up to them freezing everything. Perhaps that very action of trying to slow the inevitable prompted too many people to withdraw their coins and actually sped things up.

To my knowledge, the operators were not being paid exorbitant amounts of money.

As we discussed earlier in this thread, reports are that Mashinsky offloaded about $45 million in CEL tokens he had given himself prior to the collapse of Celsius. This would be bad enough on its own, but taken alongside Paragraph 16 from the document above becomes outright scam territory:

By increasing its Net Position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements

They used users' assets to pump CEL, and then the company owner (plus very likely other high up employees) dumped their personal holdings.

[PrimeNumber7]

The owners of Celsius are well known and are subject to the jurisdiction of American courts. This is often not the case with other crypto scams. To my knowledge, the operators were not being paid exorbitant amounts of money. The business model of Celsius, if priced correctly, is something that should be profitable for its operators if run correctly. Celsius was in fact making loans.

A lot of people involved in financial scams are wall known.....and in jail in the US.
So instead of stock fraud or bank fraud it's just crypto fraud.

Once again from paragraph 12:

Celsius also admitted at the 341 meeting that the company had never earned enough revenue to support the yields being paid to investors. This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.

If you are paying old people with money from new people you are a ponzi.
They could have stopped payments, they could have cut them to the bone, but they kept paying out AND TAKING MORE IN.

There are some banks, even those that pay interest to deposit holders that are not profitable for a variety of reasons. Being unprofitable does not mean that a company is a scam/ponzi. Most startups are not profitable in their early years.

It is the business model of Celsius (and with mainstream banks) to operate as a fractional reserve, however, to also operate as a solvent enterprise (that is that their net assets exceed their net liabilities).

Sorry, I should have been more clear when I mentioned fractional reserve. It was always clear from Celsius' terms of use, where they explicitly stated they would lend out users' assets without any requirement to hold collateral of equal or even partial value, that they were running a fractional reserve. Recently, however, the fraction they were holding in reserve was obviously significant smaller than it had been in the past, until it reached the point that they had to suspend withdrawals entirely.

Even without collateral, a loan is still a valuable asset. It was also likely that it was very unusual for Celsius to make loans collateralized by the same token/coin the loan is denominated in (for example a BTC loan may be secured by USDT).

1 and 2 are very similar. Both can be solved by increasing loan volume and/or reducing interest paid to depositholders.

Celsius did start to reduce the interest/reward rates they offered to users in the weeks leading up to them freezing everything. Perhaps that very action of trying to slow the inevitable prompted too many people to withdraw their coins and actually sped things up.

That is possible, but I think it is more likely that their customers wanted to withdraw their various stablecoins in order to liquidate them/exchange them for bitcoin. At the time of Celsius' implosion, there was a lack of confidence in ~all stablecoins, and many stablecoin issuers were facing massive redemption requests.

To my knowledge, the operators were not being paid exorbitant amounts of money.

As we discussed earlier in this thread, reports are that Mashinsky offloaded about $45 million in CEL tokens he had given himself prior to the collapse of Celsius.

https://assets.website-files.com/6296255d9030be506dc09bb7/62c85dacbd454a181c369259_Arkham%20Report%20on%20the%20Celsius%20Network%20(FINAL).pdf
https://dirtybubblemedia.substack.com/p/are-the-mashinskys-celling-out

I would not consider either of the above sources to be especially credible, however, it appears that Mashinsky may have sold CEL tokens over a period of several months. There were also some purchases of CEL tokens, and it is not clear if the amounts cited are net sales, or gross sales.

To me, this looks like it could be something closer to insider trading, rather than the operator of a ponzi enriching himself from new investor money. These sales would have been possible if Celsius was operationally profitable.

This would be bad enough on its own, but taken alongside Paragraph 16 from the document above becomes outright scam territory:

By increasing its Net Position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements

They used users' assets to pump CEL, and then the company owner (plus very likely other high up employees) dumped their personal holdings.

The specific allegation is that CEL tokens were purchased by the company in a way such that the value of the CEL tokens on Celsius' balance sheet were inflated, making them look like they had more assets than might have been realistic. I don't think there is an allegation that Celsius dumped any CEL tokens at inflated prices (although their employees may have).

As noted above, the sales by Mashinsky may have amounted to insider trading, and the CEL purchases may have violated other securities laws. I still believe that it was the intent of Celsius to operate profitably on a long-term basis, even if they were not profitable in the past.
As someone who may consider investing in a company similar to Celsius, the CEL token concept is something that would turn me off, and I think is a generally bad idea. But I don't think in the case of Celsius, that it makes them a ponzi/scam.

[bbc.reporter]

This will be another one of the biggest comedy shows of the cryptospace if cryptocoin owners deposit and hold their coins in Celsius. It is very head shaking why regulators have not banned them from doing any type of business. However, if the comedy show begins, I wish the pornstar returns as head of lending hehehe.



Celsius Network CEO Plans Revival after Crypto Crash

CEO Alex Mashinsky spoke with the Celsius Network employees in a meeting on Sept. 8. He outlined a plan for the firm’s revival, according to a recording of the event shared with the New York Times. In the meeting, he and Oren Blonstein, another Celsius executive, said they hoped to rebuild the company with a focus on custody — storing people’s cryptocurrencies for them, and then charging fees on certain types of transactions.

Source https://watcher.guru/news/celsius-network-ceo-plans-revival-after-crypto-crash

[o_e_l_e_o]

I would not consider either of the above sources to be especially credible, however, it appears that Mashinsky may have sold CEL tokens over a period of several months.

Agreed, but I'm certain more credible information will come out in the course of these bankruptcy proceedings.

As noted above, the sales by Mashinsky may have amounted to insider trading

I don't see how they could be anything else. He not only used insider knowledge of when CEL would pump, but he owned and operated the company which was actively pumping CEL using depositors' coins.

As someone who may consider investing in a company similar to Celsius, the CEL token concept is something that would turn me off, and I think is a generally bad idea.

I am of the same opinion of any coin/token a centralized platform releases. CEL, BNB, FTX Token, KuCoin Token, etc. They all offer incentives like lower trading fees on that platform or more interest if you hold x amount, but the underlying purpose is singular - encourage users to leave their money in the hands of third parties. They should not be trusted.

[Pmalek]

In the meeting, he and Oren Blonstein, another Celsius executive, said they hoped to rebuild the company with a focus on custody — storing people’s cryptocurrencies for them, and then charging fees on certain types of transactions.

Imagine the nerve of this person! After everything they have done and the problems they have caused to individual users and the crypto market as a whole, he is considering running a custodial service and being what? Some sort of crypto vault for other people? Worst thing of all, with the right marketing, they will succeed in attracting millions of dollars worth of holdings in no time.   

[bbc.reporter]

@Pmalek. It was a custodial service and something similar to a bank where depositors store their coins as deposits in exchange for interest. However, the difference is the depositors' coins are being lent out to the corrupt people of the cryptospace or deposited to ponzi scheme platforms like Anchor hehehe.

[uneng]

What a joke, now Mashinsky wants to sell 23$ million in stablecoin assets from depositors to pay for the daily operations of the company. In other words, to pay his own wage and the wage of his 300 lackeys (why so many employees?). In fact, this guy should have his patrimony seized and put for sale in order to compensate the losses he caused to hundreds of thousands of people.

Mashinsky's goal is clear. He doesn't want to save or rebuild the company, he simply wants to gain more time to escape jail, while profiting from investors' remaining funds. I don't understand why the justice system is so slow on this matter and at same time why Celsius doesn't remove this scammer from the leadership of the company and replace him by someone else who could at least try to recover their reputation, working side by side with honest professionals who put the interests of the company and customers above their own personal interests.

https://www.coindesk.com/business/2022/09/16/crypto-lending-compmany-celsius-files-for-permission-to-sell-its-stablecoin-holdings/

[o_e_l_e_o]

After everything they have done and the problems they have caused to individual users and the crypto market as a whole, he is considering running a custodial service and being what?

Anyone who trusts Mashinsky with a single satoshi going forward is a moron. But given that even after multiple centralized lending platforms collapsing there are still plenty of people using other such platforms like BlockFi, I'm sure Celsius v2 will have a steady stream of morons willing to lose their money.

why Celsius doesn't remove this scammer from the leadership of the company and replace him by someone else who could at least try to recover their reputation

Because he is doing exactly what the big players want him to do. He's screwing over all the individual users and funnelling their money to Celsius' directors, executives, large shareholders, etc. This is what happens when you are an unsecured creditor in a bankruptcy case. You are literally bottom of the list to get back anything at all.

[uneng]

why Celsius doesn't remove this scammer from the leadership of the company and replace him by someone else who could at least try to recover their reputation

Because he is doing exactly what the big players want him to do. He's screwing over all the individual users and funnelling their money to Celsius' directors, executives, large shareholders, etc. This is what happens when you are an unsecured creditor in a bankruptcy case. You are literally bottom of the list to get back anything at all.

So sad. I thought that by having an identified individual forward the business it would be a guarantee to investors, as he couldn't simply run away with everyone's money like it has happened in crypto world with the usual anonymous ponzi schemes so far. Unfortunatelly that is what is happening, and worse, under the legal process.

I also thought the authorities would act more strictly and energetically towards slippery scammers in a country like US, even though each state has its own methodology.

After all the bankruptcy happened because Mashinsky lied and promised a result to customers he couldn't deliver, gambled with investors' money doing daily trading, lent money without enough collateral. It was like he premeditated it since the beginning, especially when taking his 'terms and conditions' in consideration and how they were written to not give depositors any protection or right over their own funds.