Celsius stands by blocking withdrawals at the first bankruptcy hearing

Celsius tried to ease customers’ anger over its freeze on account withdrawals, but indicated it does not intend to release their funds quickly as the cryptocurrency lender aims to weather the downturn in digital currencies and craft a repayment plan.

Celsius lawyers used the company’s debut appearance in bankruptcy court on July 18 to defend its decision to halt withdrawals last month, saying that it was necessary to safeguard customers’ financial interests as users fled and crypto assets sold off.

“The reality is that the pause was necessary in order to preserve the assets that the company has so they can be… equitably distributed to all of the platform’s customers,” Celsius lawyer Patrick Nash Jr said.

The company intends to use the breathing spell of Chapter 11 to help it withstand the crypto downturn and come up with a repayment plan for its users, Nash said.

Judge Martin Glenn of the US Bankruptcy Court in New York expressed concerns that continued volatility in cryptocurrencies could affect the company’s restructuring. The judge also raised questions about customer funds held in custody accounts, which represent about 4% of Celsius’s deposits, worth about $180m, on behalf of roughly 58,000 users, court papers show.

It is an open legal question whether those funds are “truly a custodial account, truly in-trust”, Nash said. Custodial funds are isolated and will continue to be held in an identifiable account until the legal issue is decided in bankruptcy court, Nash said.

“I can certainly understand $180m is a lot of money,” Judge Glenn said. “I can certainly understand the frustration if people believe they signed documentation that this was a custody account, and if it’s held in trust they want to be able to access it.”

READ Celsius’ crypto faithful have a plan to avoid bankruptcy

The 18 July hearing was intended to ease Celsius’ entry into Chapter 11, where customers are the key creditor constituency. Celsius has no funded debt, court papers show.

A government lawyer with the Justice Department’s bankruptcy division said it is working to assemble an official committee that would represent customers’ interests during the Chapter 11 case, paid for by Celsius.

During the hearing, Celsius lawyers said the company is facing customer blowback over its decision last month to pause withdrawals. It faced a run on the bank, meaning customers who left funds on the platform would have been left “holding the bag” had withdrawals continued, Nash said.

Some Celsius employees received death threats and hate mail, lawyers said, adding that outrage was partly fueled by the company’s relative silence in the weeks leading up to the bankruptcy.

In court papers last week, chief executive Alex Mashinsky disclosed a roughly $1.2bn hole in the company’s balance sheet. Celsius also said it owes users more than $4.7bn, which represents most of the crypto lender’s $5.5bn in total liabilities.

Celsius said in court on July 18 that the value of its assets have fallen by about $17.8bn since March 30, to $4.3bn from roughly $22.1bn.

One avenue to repay customers is through the expansion of an existing bitcoin-mining business that makes money at current prices and would become more valuable if the cryptocurrency market improves, according to the company.

Founded in 2017 by Mashinsky, S. Daniel Leon and Nuke Goldstein, Celsius allowed users to earn interest payments on cryptocurrency deposits and take out loans using those cryptocurrencies as collateral.

On July 18, Nash said no new customer accounts are being opened. Celsius also said it is no longer issuing margin calls or liquidating collateral to satisfy loans, according to court documents.

The company pitched itself as a safe alternative to traditional banks and promised users high interest rates. It was valued at about $3bn after raising $690m in a Series B financing round in May, according to the bankruptcy filing.

Celsius is scheduled to appear in bankruptcy court again next month.

Write it Jonathan Randles at Jonathan.Randles@wsj.com

This article was published by Dow Jones Newswires, a fellow Dow Jones Group service


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