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Description

Celsius Network LLC is a bankrupt cryptocurrency lending company. Headquartered in Hoboken, New Jersey, Celsius maintains offices in four countries and operates globally. Users could deposit a range of cryptocurrency digital assets, including bitcoin and Ethereum, into a Celsius wallet to earn a percentage yield, and could establish loans by pledging their cryptocurrencies as security. As of May 2022, the company had lent out $8 billion to clients and had almost $12 billion in assets under management.

In June 2022, the company gained notoriety when they indefinitely paused all transfers and withdrawals due to "extreme market conditions", resulting in steep declines in the price of bitcoin and other cryptocurrencies. On July 13, 2022, Celsius filed for Chapter 11 bankruptcy.

Business model

The company facilitated lending and borrowing for its users. Depositors earned interest by depositing qualifying cryptocurrencies, with the rate of interest dependent upon the cryptocurrency deposited (e.g., up to 6.2% interest on bitcoin). The company paid the interest in cryptocurrencies, including in its own CEL token. Borrowers paid between zero and 8.95% on bitcoin-backed loans, depending on the loan-to-value ratio. Some of the money that Celsius used to fund the loans came from hedge funds that were looking for higher yields than banks pay.

Celsius generated revenue from token sales, lending, bitcoin mining, and discretionary trading of cryptocurrencies. Celsius claimed that up to 80% of its revenue was returned to its user community through interest payments on deposits made through its platform. The company did not charge any fees to its users.

On July 7, 2022, former investment manager Jason Stone sued Celsius, alleging that the company ran a Ponzi scheme.

History

Celsius was founded in 2017 by Alex Mashinsky, Daniel Leon, and Nuke Goldstein.

Growth

In March 2018, Celsius raised $50 million in its initial coin offering (ICO) of the CEL digital currency. In April 2018, the CEL cryptocurrency began trading on cryptocurrency exchanges. In advance of the ICO, Celsius listed its currency as a security. In June 2018, Celsius launched its mobile app. In 2019, Celsius completed a $24 million equity round at $140 million valuation.

In August 2020, Celsius raised $20 million via an equity crowdfunding to support its operations. In the fall of 2020, the price of Celsius's currency climbed more than 230% in less than a month.

In November 2020, Celsius said it had plans to open an office in Australia and to expand its office in Israel.

In December 2020, Celsius had $3.31 billion in assets under management. In January 2021, Celsius had more than $4.5 billion in assets.

In October 2021, Celsius raised $400 million in new equity from investors. The funding round was led by WestCap, the fund led by former Airbnb executive Laurence Tosi, and CDPQ, Canada's second largest pension fund. The funding round valued Celsius at $3 billion. At this time, Celsius's office in Israel employed 100 people.

In November 2021, Celsius acquired the Israeli cybersecurity company GK8 for $115 million.

Controversies and regulatory scrutiny

On April 16, 2021, Celsius confirmed that a security breach had occurred in its systems; a third-party server with customer data had been compromised, resulting in a portion of the company's customer list being exfiltrated and a phishing email being sent to Celsius customers.

In September 2021, authorities in a number of US states said that Celsius's interest-bearing cryptocurrency accounts constitute an unregistered securities offering. The attorney general of New Jersey ordered Celsius to stop issuing interest-bearing cryptocurrency products via a cease-and-desist order. Texas state regulators filed a notice seeking a hearing in February 2022 to determine whether to take similar action. Kentucky's securities regulator told Celsius to cease and desist from offering its interest-paying accounts in the state. Celsius CEO Alex Mashinsky said he was "very confident" that none of Celsius's products in the United States were securities. Celsius said it was working with US states in order to provide clarity about its business operations.

On October 18, 2021, Celsius received a request for more information from New York Attorney General, Letitia James. Earlier that month, Celsius had US$400 million in new equity funding from investors.

On November 26, 2021, Celsius announced that one of its senior employees was the focus of an Israeli police probe associated with prior employment activities; the employee was later suspended.

Decline and bankruptcy

Celsius had been using the crypto custodian Prime Trust to store some customer assets since March 2020. This relationship ended in June 2021, when Prime Trust's risk team expressed concern about Celsius's strategy of "endlessly re-hypothecating assets … lending the same assets over and over and over again to juice yields". Prime Trust founder Scott Purcell suggested that re-hypothecating "would be destined for failure as any sharp market movement in either direction would be catastrophic to such a ridiculously leveraged business model".

CNBC described Celsius as "one of the largest players in the crypto lending space" in the second quarter of 2022. The company had issued loans totaling more than $8 billion, and as of May, it had almost $12 billion in assets under management. In June 2022, Celsius said it had 1.7 million customers and that it offered yields as high as 17% per year.

On June 7, in a blog post entitled "Damn the Torpedoes, Full Speed Ahead," Celsius addressed rumors that the company had lost client funds by making poor investments and that it was facing a liquidity crisis. The company dismissed these rumors as the actions of "vocal actors … spreading misinformation". The blog post denied claims that Celsius sustained significant losses as a result of the collapse of Luna in the preceding month.

On June 10, during his weekly "Ask Mashinsky Anything" session on YouTube, the CEO denied that Celsius was having problems with clients' access to their funds and he suggested that its critics were being paid by competitors. Mashinsky said on the live stream, "Celsius has billions in liquidity, right, and we provide immediate access to everybody". Around this time, Mashinsky was questioning skeptical commenters on Twitter, accusing them of spreading fear, uncertainty, and doubt about Celsius.

On June 13, the company paused all customer withdrawals "in order to stabilize liquidity and operations", citing "extreme market conditions." After this announcement, the prices of bitcoin and Ethereum decreased by 12% and 14% respectively from the previous day. Celsius's own CEL token, which had been trading for almost $7 a year prior, was down by one-third after the withdrawal pause announcement, falling to $0.21. The total market value of all cryptocurrencies fell to $983 billion, marking the first time since January 2021 that the cryptocurrency market was collectively worth less than $1 trillion. The news also caused a 10% decline in the share price of Celsius Holdings, an unrelated beverage company, on June 13, due to investor confusion between the two companies' names. The beverage company's shares increased by about 5% the following day.

Rod Bolger, who joined Celsius as CFO in January 2022, resigned on June 30. Celsius appointed Chris Ferraro, its head of financial planning, analysis, and investor relations, to succeed Bolger. Celsius Network laid off 150 employees, a quarter of its workforce, in early July.

Celsius filed for Chapter 11 bankruptcy on July 13, one month after pausing withdrawals. In a declaration filed the following day, Mashinsky reported a $1.2 billion deficit in its balance sheet. Mashinsky said that the company had "made what, in hindsight, proved to be certain poor asset deployment decisions". According to the bankruptcy filing, the company had $167 million in cash on hand, which it said would provide "ample liquidity" to support its operations during its bankruptcy. An estimated $600 million of the company's assets were in the form of its own CEL token, which is primarily issued in connection with the company’s own loyalty and rewards program. Mashinsky's July 14 declaration also stated that the company had borrowed approximately $648 million using DeFi protocols, and that Celsius uses DeFi loans to finance its operations. Of Celsius's $5.5 billion in total liabilities at the time of its bankruptcy filing, the company owed $4.7 billion to its users, who were listed as unsecured creditors. Celsius's choice of Chapter 11 bankruptcy would prioritize repayments to secured creditors first, then unsecured creditors, then equity holders.

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