Law professor says Celsius bankruptcy is almost inevitable

The bankruptcy of the crypto-lending platform Celsius, which has fallen on hard times, is likely inevitable. This view was voiced by Georgetown University law professor Adam Levitin.

Here’s what’s going to happen with Celsius’s customers in a Celsius bankruptcy. (I’ll explain later why it’s very likely to end up there.) 2/

— Adam Levitin (@AdamLevitin) June 15, 2022

On June 13 Celsius suspended withdrawals, trading and transfers between accounts due to extreme market conditions.

Analysts, however, suggested that the real reason for the events was a liquidity crisis, due to which the company cannot make payouts to customers.

Earlier analysts noted that Celsius is bolstering its debt positions in three main areas. In MakerDAO, by increasing the collateral, the platform pushed the vault’s liquidation price to $14,000 per wBTC. Celsius also increased the ETH collateral of its stETH tokenized assets in the Aave protocol and repaid a debt of $2.4 million USDC.

Levitin noted that Celsius’s management decided to place a bet on a “gamble on resurrection.” The lawyer called this standard practice among insolvent companies.

Now Celsius seems to have decided to “gamble on resurrection” (standard insolvent company play). Instead of just closing out its Maker DAO position by repaying the loan, Celsius instead topped up more collateral. 25/

— Adam Levitin (@AdamLevitin) June 15, 2022

According to Levitin, repaying the loan in MakerDAO for Celsius was more expensive than increasing collateral.

He believes that sooner or later the platform’s management will have to decide to sell liquid assets to reimburse users’ funds. The bankruptcy, which the lawyer called nearly inevitable, would allow that process to be orderly and set the stage for subsequent litigation.

At the same time, almost all Celsius customers are expected to become unsecured creditors of the platform, Levitin says. This means that payouts to them will come from funds remaining after the secured loans are repaid, and after all administrative costs are covered.

The Wall Street Journal reported on June 15 that Celsius hired lawyers from Akin Gump Strauss Hauer & Feld for possible financial restructuring.

Journalists noted that the platform’s initial goal is to attract capital from investors.

According to The Block, to solve this task the company turned to the financial conglomerate Citigroup.