Celsius’s difficulties officially began on 13 June 2022, when the company decided to “temporarily” block both withdrawals and any kind of transfers.
The news was reported by the official Twitter account, which read:
.@CelsiusNetwork is pausing all withdrawals, Swap, and transfers between accounts. Acting in the interest of our community is our top priority. Our operations continue and we will continue to share information with the community. More here: https://t.co/CvjORUICs2
— Celsius (@CelsiusNetwork) June 13, 2022
The main reason for this decision had been blamed on extreme market conditions.
A month earlier had begun what we can call the second phase of the current bear market, due to the implosion of the Terra ecosystem.
The month after the freeze on withdrawals, Celsius officially declared itself insolvent, thus initiating Chapter 11 proceedings.
As is becoming clear, the crypto market’s difficulties had already begun months before FTX’s collapse.
During the very same period, problems had also begun for BlockFi, so much so that news of a 20% staff cut had been made public on 14 June.
The platform has failed to resolve these problems over the past few months. Indeed, they have been amplified to the current panic situation generated by young Sam Bankman Fried and his partner in crime Caroline Ellison.
As a result, they went to meet their fate, recently declaring bankruptcy.
Apparently, Genesis appears to be next, although the company continues to deny it.
Were FTX and Celsius financially connected?
Recently, an investigation carried out by Dirty Bubble Media, behind the leadership of Mike Burgersburg, unveiled links between FTX and Celsius. These very ties may be among the causes of Celsius’ bankruptcy.
According to the investigation, the Celsius company used the FTX trading platform to buy its token (CEL) in 2021. The purchases, it seems, were around 40 million CEL.
Moreover, the same coincided with a $750 million fundraising round. In fact, after the freeze on withdrawals, the Celsius company, through the FTX exchange, was able to liquidate millions of dollars in customer assets.
Not only that, it also appears that FTX, the company created by Sam Bankman Fried, was a creditor of Celsius through a $104 million loan.
Here is what happened to crypto platform Celsius before it declared bankruptcy
Inevitably, Celsius’ bankruptcy filing brought to light the exchange platform’s serious difficulties following the collapse of FTX.
Apparently, further complicating Celsius’ situation are the testimonies of its equity investors that priority should be given to creditors when dividing up the platform’s remaining assets.
Celsius has a deficit of $1.2 billion, consisting largely of user deposits. Who, it is assumed, will never be repaid their investment. However, the puzzling figure revolves around the value of the assets.
In fact, the value of the assets in crypto appears to be $1.75 billion, even though the entire market cap of the CEL token is around only $300 million.
To reassure investors about the situation, the former CEO of Celsius, Alex Mashinsky, had said that the company would be able to sell mined Bitcoin so that it would be able to repay at least part of its loans and provide future revenue for the company.
However, raising even more suspicions about the shady activities of Alex Mashinsky and his company Celsius was the withdrawal of $10 million, made days before the bankruptcy filing.
The fact that it was Mashinsky himself who made this withdrawal led most to believe that the hen CEO already knew about the freezing of client funds and the bankruptcy filing, which, in fact, took place shortly thereafter.
In this regard, it was Mashinksy’s lawyer who spoke out, stating:
“In the nine months leading up to that withdrawal, Mashinsky consistently deposited cryptocurrencies equal to the amount he withdrew in May. Mashinsky and his family still had $44 million of cryptocurrencies frozen on the platform.”
Celsius’s other mistake: insufficient controls in handling client funds
In this bankruptcy situation, all the loose ends are emerging for Celsius. In fact, recently, through more in-depth audits, the independent examiner of the Celsius case had declared that the platform had insufficient accounting and operational controls.
According to sources, as of 11 June, Celsius’ digital assets in its customers’ Custody Wallet account officially became underfunded.
Specifically, on 19 November, in an interim report, examiner Shoba Pillay made a number of strong observations as part of her court-mandated investigation into the bankrupt lending platform.
One of the main revelations in Pillay’s report concerns Celsius’ Custody program, about which it states:
“Launched without sufficient accounting and operational controls or technical infrastructure, thus allowing shortfalls in Custody wallets to be funded with other holdings. No effort has been made to separate or distinctly identify the assets associated with the Withhold accounts, which have been commingled into the main wallets.”
Launched on 15 April, Celsius’ Custody program allowed users to transfer, exchange and use coins as collateral for a loan. It was introduced following an order from New Jersey security authorities, which required the company to create a tool that differed from the Earn product, which is characterized by receiving rewards.
According to Pillay, this mixing of wallets led to a situation where it is unclear what assets belonged to the customer at the time of the bankruptcy filing, the report states:
“As a result, clients are now faced with uncertainty as to which assets, if any, belonged to them at the time of filing for bankruptcy.”
In addition, the interim report also shed light on what forced the lending platform to stop withdrawals on 12 June.