From the risk of bankruptcy to bankruptcy. The Celsius Networks cryptocurrency investment platform announced on Wednesday that it was placed in Chapter 11 bankruptcy in the United States, a month after freezing its withdrawals in the midst of the collapse of crypto-asset prices. Recourse to Chapter 11 allows a company to continue its operations sheltered from its creditors while finding a way out of the crisis.
The platform specifies, in its press release, that its objective is to restructure to “to maximize” value to stakeholders and specifies having a cash flow of $167 million to meet urgent needs. In the case filed Wednesday in the bankruptcy court for the Southern District of New York, Celsius also estimates its balance sheet between one and … 10 billion dollars and the number of its creditors at more than 100,000. “This is the right decision for our community and our business”assured Alex Mashinsky, the co-founder and boss of Celsius.
Celsius Networks is therefore the second major platform to file for bankruptcy, following Voyager Digital’s Chapter 11 filing last week. Other platforms have also suspended withdrawals due to insufficient liquidity, such as CoinFlex. It should also be noted that the famous investment company Three Arrows Capital, based in Singapore, is in liquidation.
A challenged model
All these platforms have taken advantage of the surge in cryptocurrency prices since 2020 to engage in a risky activity, in principle reserved for banks, that of lending money and remunerating deposits. All in cryptocurrencies, which allowed them to slip through the meshes of the supervisor. The promises of return for the lenders could make you dream, more than 18%! As for the borrowers, they were content to pay 0.1% interest. But in finance, the miracle quickly turns into a nightmare.
At the end of April, Celsius Networks claimed some 1.7 million depositors for nearly $12 billion under assets under management, making this platform one of the largest players in the decentralized finance sector. Part of his investments were based on the Terra blockchain.
As a result, Celsius is the main victim of the collapse of Terra, and its stablecoin Luna, one of the main counterparties for crypto asset managers. The vertiginous fall in the prices of cryptoassets, hit hard by the rise in interest rates – when in theory the cryptocurrency market should be protected from fluctuations in the financial markets – did the rest. The price of bitcoin has thus lost more than half of its value since the beginning of the year, to around 20,000 dollars (against 69,000 dollars at its peak in November 2021).
This drop in prices caused a wave of panic among crypto-asset investors, often young inexperienced people who had never experienced a crash. Hence the decision to freeze withdrawals and transfers to avoid seeing deposits evaporate and making it impossible for the platform, which is often poorly capitalized, to ensure liquidity. More seriously, given the deep interconnection between the platforms, the risk of a contagion effect of bankruptcies is high. Thus, another giant of the sector, BlockFi, is also in difficulty.
For many observers, this purge on the crypto market, with three years of crazy growth, to promote better regulation and above all concentration. The FTX platform, often referred to as the savior of cryptos, thus offered a purchase option on BlockFi and tried to save Voyager Digital.
In fact, solvent platforms are few in number and could embark on low-cost acquisitions. This is the case of the Nexo platform, also a crypto lender, which wishes to buy the Vaud platform. In fact, the vast majority of crypto lenders have embarked on this once lucrative activity without having the necessary capital, due to a lack of regulation.
It is clear that beyond the consolidation in progress, it is the regulators who will enter the dance to bring some order. Decentralized finance, of libertarian inspiration, is thus destined to become very concentrated, around a few large platforms, and probably very supervised by regulators. Like a dream that smashes against the wall of reality.
(With AFP and Reuters agencies)