Celsius users with crypto collateral stuck turn to bankruptcy process


Alan Knitowski has an MBA, has worked in technology and finance for over 25 years and is the CEO of a mobile software company that trades on the Nasdaq. That didn’t stop him from being duped by a crypto company.

Knitowski borrowed $375,000 from cryptocurrency lender Celsius over several years and cashed in $1.5 million bitcoin as collateral. He didn’t want to sell his bitcoin because he liked it as an investment and thought the price would rise.

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That was the Celsius model. Cryptocurrency investors could essentially store their holdings with the company in exchange for a dollar loan that they could use. Knitowski would get the bitcoin back if he paid back the loan.

But that’s not what happened, as Celsius, which managed $12 billion in assets earlier this year, went bankrupt in July after a plunge in crypto prices sparked an industry-wide liquidity crisis. Knitowski and thousands of other loan holders had more than $812 million in collateral on the platform, and bankruptcy records show that Celsius did not return collateral to borrowers even after they paid back their loans.

“Every aspect of what they did was wrong,” called Knitowski, who runs an Austin, Texas-based company Phunware, said in an interview. “If my CFO or I actually did anything like this, we would be sued immediately.”

Creditors are now in the bankruptcy process to try to recover at least some of their money. They got some optimism on Friday, after Celsius announced the sale of its asset custody platform dubbed GK8 to Galaxy Digital.

David Adler, a bankruptcy attorney at McCarter & English who represents Celsius’s creditors, said the money from the transaction should be used to pay legal fees. In addition, money can be left over for former customers.

“The big question is, who is entitled to the money they get from GK8?” Adler told CNBC. Adler said he represents a group of 75 borrowers who have about $100 million in digital assets on the Celsius platform.

More relief could come later this month if a bid opens for Celsius’ credit portfolio. If another company buys the loans, customers will likely have a chance to pay them back and then their collateral will be released.

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Knitowski told CNBC that he chose to take out his loans at a 25% loan-to-value rate. That means if he took out a $25,000 loan, he would put up four times that amount as collateral, or $100,000.

The more collateral a borrower is willing to deposit, the lower the interest rate on the loan. If the borrower fails to repay the loan, the lender can seize the collateral and sell it to recoup the costs. It is like a home mortgage, where the borrower uses the home as collateral. In the crypto world, a borrower can apply for a loan and pledge bitcoin as collateral.

Earlier this year, as the price of bitcoin fell, Knitowski paid off one of his Celsius loans to avoid a margin call and the need to raise his collateral. But after that, the company did not return the bitcoin that served as collateral for that loan. Instead, the assets were deposited into an account called “Earn”. Under the company’s terms and conditions, the assets in those accounts belong to Celsius, not customers.

“Imagine paying off your car, but someone keeps it,” Knitowski said. “You pay off your house, but someone keeps it. In this case, it would be like paying off the loan. And instead you don’t get back your collateral even though it’s paid off.”

Not disclosing it

That wasn’t the only problem. According to former employees and an email sent to customers on July 4, the crypto platform also failed to provide borrowers with a full federal Truth in Lending Act (TILA) disclosure. , such as the annual percentage rate (APR), the term of the loan and the total cost to the borrower.

The email to borrowers stated, “the disclosures required to be provided to you under the federal Truth in Lending Act do not include one or more of the following,” and then went on to list more than a dozen possible missing disclosures.

A former Celsius employee, who wished to remain anonymous, told CNBC that the company was retroactively trying to come to terms with TILA.

“You can’t say, ‘Oh, oops, we forgot about 25 items in the Truth in Lending Act and as a result we’re just going to do them again and pray,'” Knitowski said.

Jefferson Nunn, an editor and contributor for Crypto.news, took out a loan from Celsius and placed more than $8,000 worth of bitcoin as collateral. He knows that those assets are now unavailable to him even if he pays back his loan.

Nunn, who lives in Dallas, said he got the loan to invest in more bitcoin after seeing a promotion for the platform. He said he heard about Celsius after doing a podcast with co-founder Nuke Goldstein. On the show, Goldstein said, “your money is safe,” Nunn said. Former Celsius CEO Alex Mashinsky made similar comments shortly before stopping filming.

Alex Mashinsky, CEO of Celsius on stage in Lisbon for Web Summit 2021

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“It’s basically a mess and my money is still locked up there,” Nunn said.

That theme has surfaced repeatedly in crypto, most recently with the failure of FTX last month. Sam Bankman-Fried, the founder and CEO of the exchange, told his followers on Twitter that the company’s assets were fine. A day later, he was looking for a rescue package in the midst of a liquidity crisis.

While Celsius’s implosion isn’t the size of FTX, which was recently valued at $32 billion, the company’s management has faced criticism. According to a lawsuit in October, top executives withdrew millions of dollars in assets before the company stopped taking money from customers.

A former employee, who declined to be named, said a lack of financial oversight led to significant holes in the company’s balance sheet. One of the biggest problems was that Celsius had a synthetic short, which occurs when a company’s assets and liabilities don’t match.

The former employee told CNBC that when customers deposited crypto assets with Celsius, it was supposed to make sure those funds were available when a customer wanted to withdraw them. However, Celsius took deposits from customers and then lent to high-risk platforms, so it didn’t have the liquidity to pay back money on demand.

As a result, when customers wanted to withdraw money, Celsius rushed to buy assets on the open market, often at a premium, the person said.

“It was a huge lapse of judgment and operational control that really put a dent in the balance sheet of the organization,” said the former employee.

He also said that Celsius was collecting cryptocurrency tokens that had no collateral value. On his platform, Celsius touted that customers could “earn curated crypto rewards on BTC, ETH, and more than 40 other cryptocurrencies.” But according to the former employee, the teams responsible for deploying those coins had nowhere to go with many of the more obscure tokens.

The ex-employee said he left Celsius after discovering that the company was not careful with customer money and was making risky bets to keep generating the high returns it promised depositors.

“Many people took all their money out of traditional banking systems and put their full trust in Alex Mashinsky,” the person said. “And now those individuals are unable to pay medical bills, pay weddings, mortgages, retirements, and that continues to weigh very heavily on me and my colleagues who have left the organization.”

Celsius did not respond to multiple requests for comment. Mashinsky, who resigned from Celsius in September, declined to comment.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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