Published in: Blog

Celsius Network’s Epic Blunder – And The Ultimate Dilemma: Can They Rise Again?

Author Duy

Published on: August 2, 2023

Table of Contents

The Rise and Fall of Celsius Network: A Crypto Lending Platform That Promised Too Much

Celsius Network was a crypto lending platform that offered high-interest rates and low-cost loans to its users. Founded in 2017 by Alex Mashinsky, Daniel Leon, and Nuke Goldstein, the company claimed to disrupt the traditional banking system and create a new way of financial inclusion.

Celsius Network had its own utility token called CEL, which could be used to access higher rewards, lower loan interest, and other benefits within the platform. Celsius Network also had a mobile app, a website, and a mining business. At its peak, the company had over 1.7 million users and managed over $17 billion in assets.

However, in June 2022, Celsius Network announced that it had halted all withdrawals, swaps, and transfers on its platform due to “extreme market conditions”, resulting in steep declines in the price of Bitcoin and other cryptocurrencies. Many users were left in limbo, wondering if they would ever get their money back.

A month later, Celsius Network filed for Chapter 11 bankruptcy protection in the US, revealing that it had lost over $200 million in a series of bad loans to other crypto entities and had a nearly $1.2 billion shortfall for what it owed customers.

The founder and former CEO of Celsius, Alex Mashinsky, withdrew $10 million in May 2022 before the freeze, which he said was used to pay taxes.

What went wrong with Celsius Network?

How did it go from being one of the leading platforms in the crypto lending space to being one of the largest and most complex bankruptcies in the crypto industry? Here are some of the possible reasons:

Overexposure to risky loans

Celsius Network lent out its users’ deposits to hedge funds, exchanges, and other crypto entities that were looking for higher yields than banks pay. However, some of these borrowers defaulted on their loans or became insolvent when the crypto market crashed in May 2022.

For example, Celsius Network had lent out $150 million to Alameda Research, a crypto trading firm that was behind the TerraUSD stablecoin collapse. Celsius Network also had exposure to FTX, Bitfinex, Binance, and other exchanges that faced regulatory scrutiny and liquidity issues.

Lack of transparency and regulation

Celsius Network operated in a largely unregulated space, without proper oversight or disclosure of its financial situation. The company did not provide audited financial statements or independent verification of its reserves or insurance policy.

The company also lied about its interest rates and rewards, which were not based on market conditions but on its own token price manipulation. The company also faced allegations of fraud and market manipulation by its former executives, who were accused of duping consumers into transferring cryptocurrency onto the platform by falsely promising that deposits would be safe and always available.

Poor risk management and governance

Celsius Network did not have adequate risk management or governance practices to ensure the safety and security of its users’ funds. The company did not have sufficient liquidity or capital buffers to withstand market volatility or customer withdrawals.

The company also did not have proper internal controls or checks and balances to prevent fraud or misuse of funds by its executives or employees. The company also did not have a clear contingency plan or exit strategy in case of a crisis or bankruptcy.

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Efforts to recover.

Celsius Network has done the following things to try to recover or compensate the victims:

It has reached two settlements that may allow the return of assets to customers and end its bankruptcy proceedings. The settlements cover unsecured claims worth $78.2 billion and will be reviewed by a judge on August 10.
One of the settlements increases customers’ reimbursements by 5% to satisfy claims regarding allegations of fraud and misrepresentation by Celsius management.
The other settlement allows customers who have money in Celsius’ interest-bearing Earn program to receive compensation in the form of shares of the new company that emerges from the bankruptcy proceedings along with a percentage of their funds in cryptocurrency assets. Customers who borrowed cryptocurrency funds will be eligible to receive compensation in the form of shares of the new company and a percentage of their funds in cryptocurrency assets.
The new company, dubbed NewCo, will be fully owned by Earn creditors and will house Celsius’ illiquid assets, mining business, and existing loan portfolio. The company will also have plans to develop crypto-oriented services and will be run by experienced asset managers from NovaWulf Digital Management, an investment advisory firm that has been chosen as the sponsor for Celsius’ restructuring plan.
It has agreed to a judgment of $4.7 billion, which will be suspended to permit Celsius to return its remaining assets to consumers in bankruptcy proceedings. It has also agreed to a permanent ban from offering, marketing, or promoting any product or service that could be used to deposit, exchange, invest, or withdraw any assets. (According to the FTC)
It has created a litigation trust to pursue claims against its former executives, who have not agreed to a settlement and are facing charges of fraud and market manipulation.

Can Celsius Networks recover?

That is a difficult question to answer, as it depends on many factors, such as market conditions, legal outcomes, customer satisfaction, and the performance of NewCo. However, based on the information I have, I would say that Celsius Network has a slim chance of recovering from its bankruptcy and regaining its former glory. Here are some of the reasons why:

The crypto lending space is very competitive and dynamic, with many new players and innovations emerging every day. Celsius Network will face a lot of challenges to attract and retain customers who may have lost trust in the platform or switched to other alternatives. Celsius Network will also have to deal with regulatory uncertainty and compliance issues, as the crypto industry is still evolving and subject to different rules and standards in different jurisdictions.
The new company, NewCo, will inherit Celsius Network’s illiquid assets, mining business, and existing loan portfolio, which may not be very profitable or valuable in the current market. NewCo will also have to invest in developing new crypto-oriented services and products, which may require a lot of capital and resources. NewCo will also have to compete with other established and emerging platforms that may offer better features, rates, and rewards to customers.
The creditor settlement may not satisfy all customers, who may feel that they are not getting enough compensation for their losses or that they are being forced to accept shares of an unknown company. Some customers may also prefer to receive their funds in cash rather than in crypto or equity. Some customers may also pursue legal action against Celsius Network or NewCo, seeking damages for breach of contract, negligence, or fraud.

Therefore, Celsius Network has a very low probability of recovering from its bankruptcy and becoming a successful crypto-lending platform again. However, this is just an opinion based on the current information. You may have a different perspective or opinion on this matter.

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The Aftermath of Celsius Network’s Collapse

The fall of Celsius Network has left many crypto investors and borrowers in a difficult situation, as they have lost access to their funds and have no recourse to recover them. Some of them have joined class-action lawsuits against the company, but the chances of getting their money back are slim.

The collapse of Celsius Network has also raised questions about the viability and sustainability of similar platforms that operate in the crypto lending space. Some of these platforms include BlockFi, Nexo, Crypto.com, and Aave.

These platforms claim to offer better security, transparency, and compliance than Celsius Network, but they also face similar risks and challenges, such as regulatory uncertainty, hacking attacks, market volatility, and liquidity issues.

Therefore, it is hard to predict whether these platforms will survive or thrive in the long term, or whether they will follow the fate of Celsius Network. Some experts believe that crypto lending is a promising and innovative industry that can provide financial inclusion and empowerment to millions of people around the world.

Others argue that crypto lending is a risky and speculative activity that exposes users to high levels of fraud, manipulation, and loss.

Ultimately, the impact of Celsius Network’s failure will depend on how the crypto community and the regulators respond to this event. If they can learn from the mistakes and improve the standards and practices of the industry, then crypto lending might have a bright future ahead.

If they ignore or repeat the errors and fail to protect the interests and rights of the users, then crypto lending might face more troubles and difficulties in the future.