Crypto bankruptcies: pressure builds on US courts to investigate circumstances of blow-ups

Celsius Networks said late on Wednesday that it was filing for bankruptcy in part so it could get the legal protections to keep operating in the “normal course” of business. Normal is a relative term.

While the company wants the ability to keep functioning and paying employees, there is one important area where things are not business as usual. Its account holders for weeks have not been able to get their money out, a key reason why the company needed to run to the bankruptcy court. It has listed liabilities of between $1bn and $10bn.

The Celsius bankruptcy comes on the heels of a Chapter 11 filing by Voyager Digital. It is another crypto lender that succumbed to the same problem as Celsius: taking crypto deposits from ordinary customers, lending out those deposits as investments which have now soured causing an effective bank run. Celsius may have as much as a $2bn hole in its balance sheet.

All sorts of interesting questions now arise from these failures. The first one may be to ask if any impropriety occurred prior to bankruptcy. The FT has reported that Celsius had poor internal controls and systems and that top management had even been selling Celsius coins back to the company before their value collapsed.

Voyager and Celsius are both advised by the law firm of Kirkland & Ellis, a specialist in corporate bankruptcy. Voyager had quickly assembled a loose restructuring plan that would see account holders get a recovery in the form of crypto tokens, coins, litigation proceeds against a crypto hedge fund that went bankrupt and equity in a new Voyager. How much such a package is worth remains to be seen.

Companies that seek to restructure in Chapter 11 often try to move quickly in order to lower costs and business disruptions. However in advance of any restructuring, there should be pressure on the bankruptcy court and creditors’ committees to spend time understanding precisely how crypto lenders went bust. Nothing is normal about these situations yet.