Bankrupt Celsius Says Restart Is Crypto Customers’ Best Option

Jonathan Randles, Bloomberg News

The Celsius Network logo on a laptop computer arranged in Denver, Colorado, US, on Thursday, Dec. 8, 2022. A US bankruptcy judge ordered Celsius Network LLC to return cryptocurrency that never touched the lender's interest-bearing accounts to its customers. Photographer: David Williams/Bloomberg , Bloomberg

(Bloomberg) -- Failed crypto lender Celsius Network kicked-off a bankruptcy trial over its plan to restart as a user-owned Bitcoin miner, telling a judge it wants to repay customers whose funds have been frozen on the platform since June 2022 a portion of what they’re owed by year’s end.

Celsius lawyer Christopher S. Koenig said Monday during a New York bankruptcy hearing that the new company slated to emerge from Chapter 11 will be seeded with $450 million in capital and financial backing from a group of companies picked to manage the mining business, a consortium named Fahrenheit LLC that’s led by investment firm Arrington Capital.

“Fahrenheit believes in the business,” Koenig said. “They are putting their money where their mouth is.”

Judge Martin Glenn is considering whether to approve Celsius’s plan, which is being challenged by some customers whose funds have been locked on the platform. An affiliate of Lantern Ventures that says its owed about $82 million also opposes the plan, arguing Celsius’s advisers have overvalued the new business. The new venture must also be cleared by securities regulators.

But if Celsius’s plan is approved, it would mark the first time a failed crypto platform would be reborn in Chapter 11 after a string of insolvencies rocked the industry last year. The business could liquidate if the new company fails, an outcome that likely would result in Celsius customers getting repaid less, according to court documents.

The hearing on Celsius’s Chapter 11 plan is scheduled to continue Tuesday.

Celsius expects to partially repay its creditors by distributing roughly $2 billion in Ethereum and Bitcoin as well as with stock in the new company. Customers would get a stake in litigation against co-founder and former Chief Executive Officer Alex Mashinsky and other former executives whom federal prosecutors have charged with fraud. Mashinsky has pleaded not guilty to criminal charges.

Celsius paused customer withdrawals in June last year amid a downturn in crypto prices and filed Chapter 11 the following month. The company was one of several crypto platforms that tumbled into bankruptcy along with failed crypto hedge fund Three Arrows Capital, lender BlockFi Inc. and Sam Bankman-Fried’s FTX.

Federal prosecutors in July charged Mashinsky with wire fraud and other crimes, alleging the Celsius co-founder and former CEO made misleading statements to get customers to lend to the platform. Mashinsky was also accused of manipulating CEL prices and made about $42 million selling Celsius’ native token. Mashinsky resigned after the company filed bankruptcy.

Mashinsky has attributed Celsius’ failure to market forces outside of his control, including the May 2022 crash of so-called stablecoins Luna and TerraUSD, and unexpected mass withdrawals by Celsius customers. An independent examiner who reviewed the circumstances around Celsius’ collapse said the firm’s problems date back to 2020 when the business started using customer assets to fund its operational expenses.

Celsius Interim CEO Chris Ferraro is scheduled to testify in support of the bankruptcy plan on Tuesday.

The bankruptcy is Celsius Network LLC, 22-10964, US Bankruptcy Court for the Southern District of New York (Manhattan).

--With assistance from Amelia Pollard.