Celsius Network CEO Alex Mashinsky (seen here in a file photo) says rumors accelerated withdrawals and sped up Celsius’s downfall.
Photo: Bruno de Carvalho/Zuma Press
Celsius Network LLC has a roughly $1.2 billion hole in its balance sheet, with the majority of its liabilities owed to the cryptocurrency lender’s users, according to a Thursday filing by Chief Executive
Of Celsius’s $5.5 billion in total liabilities, more than $4.7 billion is owed to Celsius’s users, according to the declaration Mr. Mashinsky submitted to bankruptcy court.
Users deposited their cryptocurrencies on the platform in exchange for high yields, and Celsius lent out and invested user deposits. Celsius stopped all customer withdrawals a month before it filed for bankruptcy, finding that as the value of cryptocurrencies collapsed, it would be detrimental to the business to allow the withdrawals to continue as normal, according to Mr. Mashinsky.
Mr. Mashinsky said the basis of the contract between Celsius and its users explicitly stated that the company has ownership rights over customer deposits, as well as the right to lend, sell, transfer or use them for any period of time.
Meanwhile, customer deposits into traditional bank accounts are protected by the Federal Deposit Insurance Corp., at least to a certain amount.
Celsius had $4.31 billion of total assets as of July 13, the filing said.
Mr. Mashinsky said Celsius was planning to partly cure the deficit using newly minted bitcoins from its mining facility. Celsius’s mining business was generating about 14.2 bitcoins a day for the past seven days. It generated 3,114 bitcoins last year, according to the filing. If it can mine the same amount as it did last year, that would be roughly $64 million, based on Thursday’s bitcoin price of $20,478.
The company also plans to sell assets and seek third-party investment to fill the gap, according to Mr. Mashinsky.
Celsius is among a number of crypto businesses that have been hit by a liquidity crisis resulting from a plunge in cryptocurrency prices in recent months. The cryptocurrency market has lost more than $2 trillion in value since the market hit its all-time high in November. Crypto hedge fund Three Arrows Capital Ltd. and brokerage platform
Voyager Digital Ltd.
also filed for bankruptcy in New York in the past two weeks.
In May, a pair of linked cryptocurrencies, Luna and TerraUSD, collapsed, wiping out $40 billion in value. After the collapse, Mr. Mashinsky said that Celsius’s users pulled out their money because of rumors on social-media posts that Celsius had lost hundreds of millions of dollars. He said the rumors led users to withdraw $1 billion over five days in May.
Celsius’s asset value has plunged to $4.3 billion, according to the filing, from about $25 billion in October, according to a company press release.
The filing also revealed that Celsius had extended two loans totaling $75 million to beleaguered hedge fund Three Arrows Capital. When Three Arrows failed to meet a margin call, Celsius liquidated the collateral that it had pledged, Celsius said. The company’s claim against Three Arrows now totals $40.6 million, the filing said.
Mr. Mashinsky said a number of Celsius’s assets were tied up in illiquid assets, such as its crypto mining business and a decentralized finance project, that would only generate profits over a long period.
Celsius has closed out all of its outstanding counterparty loans and DeFi loans in order to get back its $1.6 billion in collateral, the filing said.
Celsius, founded in 2017 by Mr. Mashinsky, S. Daniel Leon and Nuke Goldstein, allowed users to earn interest payments on cryptocurrency deposits and take out loans using those cryptocurrencies as collateral.
The company pitched itself as a safe alternative to traditional banks and promised users high interest rates. It was valued at about $3 billion after raising $690 million in a Series B financing round in May, according to the bankruptcy filing.
—Alexander Gladstone contributed to this article.
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