Tells the story of three key Chapter 11 encryption cases
As the crypto boom turns to bust, a number of high-profile digital asset firms have entered Chapter 11 bankruptcy proceedings.
Here are the three key things to watch.
What is Chapter 11
Chapter 11 is known as a form of bankruptcy that involves the reorganization of a debtor’s business affairs, debts and assets, and for that it is known as “reorganization” bankruptcy.
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Celsius network
Celsius, a peer-to-peer decentralized finance (DeFi) platform, has a $1.2 billion hole in its balance sheet, according to a recent lawsuit from the crypto lender’s advisory partner Kirkland & Ellis.
The crypto lender filed for Chapter 11 in the US citing “extreme” market conditions, which have left 1.7 million customers unable to redeem their assets, to stabilize the business, CEO Alex Mashinsky said in a statement.
As a result, the network’s native token CEL saw a series of wild price swings as investor confidence ebbed and flowed.
The token has risen in value by over 4,100% in the past two months, reaching around $3.93 over the weekend compared to its mid-June low of $0.093.
CEL to US Dollar
Two factors that put the crypto-lender in a difficult situation, despite the repayment of loans: the use of chain leverage and stETH (staked ether).
Celsius accesses leverage through permissionless DeFi money markets like MakerDAO by taking BTC and ETH user deposits and depositing them to borrow DAI to give users a low borrowing rate.
Maker uses $1.50 of volatile collateral (ETH for example) deposited to borrow DAI stablecoin.
If the value of the collateral falls below a threshold, it is liquidated to repay the loan and prevent loss of debt. In short, liquidate your customers’ loans to pay back your own.
DAI to US Dollar
Celsius provided robust returns on ETH of 8% using a derivative ETH known as staked ETh (stETH). stETH, brain child of Lido Financedoesn’t actually exist yet.
Simply put, stETH is a token that will only be earned once the merger is complete, which according to analysts Capital.com recently spoke with could “happen next year at best.”
The crypto lender revealed on Monday that it was short on cash, saying it has received several proposals to inject cash into the company, and has won approval from a US judge to sell the BTC it mines.
Celsius attorney Josh Sussberg disclosed receipt of the cash injection offer during a bankruptcy hearing yesterday.
Voyager Digital
Voyager Digital attributed the problems largely to Three Arrows Capital’s financial problems, prompting Voyager to file for Chapter 11 in the United States.
It served Three Arrows with a notice of default in June seeking to collect a $650 million debt from the crypto hedge fund operator.
Sam Bankman-Fried helped Voyager financially by providing it with revolving loans worth $200 million in cash and USDC, and 15,000 BTC. But Voyager still filed for bankruptcy.
Bankruptcy proceedings may mean longer wait times for Voyager customers seeking access to company-owned assets with frozen trades, withdrawals and loyalty rewards.
VGX to US Dollar
Three Arrows Capital (3AC)
3AC, a Singapore-based crypto hedge fund, which invested in tokens such as ETH and SOL, suffered terrible losses because it had a significant position in LUNA when the Terra blockchain collapsed, worth approximately $560 million at its peak.
The founders ran and defaulted on loans after the crypto hedge fund went bust after making a series of large directional trades (GBTC, LUNA, stETH) and borrowing from more than 20 institutions.
Legal proceedings then proceeded as the founders went MIA. They recently broke their silence and said they will move 3AC to Dubai to see if the firm has a future.
SOL to US Dollar
3AC owes over $3 billion and Genesis is the largest creditor with $2.3 billion lent. 3AC’s debt defaults also contributed to Celsius Network and Voyager Digital’s insolvency.
A leaked court document showed co-founder Zhu Su made luxury purchases with borrowed money that was likely used to indicate 3AC’s creditworthiness.
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