They lost crypto in the crash; now they’re trying to get it back
DAVID Little was starting to lose hope. Like thousands of other investors, he had lost a large chunk of his cryptocurrency savings — a sum that once accounted for more than half his net worth — when experimental crypto bank Celsius Network filed for bankruptcy this summer.
Then he had an idea. In July, Little, a 35-year-old engineer in Houston, wrote a letter to the US Bankruptcy Court for the Southern District of New York, arguing that he and others who had deposited their digital currencies in a special type of Celsius account should be able to withdraw the funds. Soon, he started getting calls from fellow depositors — a man who was struggling to pay rent, a woman who had lost her retirement savings.
Little started a group chat that grew to include hundreds of Celsius customers. Within days, they raised US$100,000 to hire law firm Togut, Segal & Segal to press their case in court.
“If I do become part of the cautionary tale in crypto, I’ll know I didn’t just sit by and do nothing,” Little said.
The company’s implosion was one of the most damaging episodes of this summer’s crypto crash, a moment of reckoning that exposed the industry’s risky practices and ruined thousands of investors. Celsius customers alone lost US$5 billion, and the firm’s collapse sent tremors across the digital currencies market, tanking the price of Bitcoin and Ether.
Now the crash has entered a crucial new phase: a frenzied rush to recover lost funds. The effort stretches beyond Celsius as the amateur traders who bet on a range of failed crypto projects seek compensation, file lawsuits and mobilize online. At the same time, some of the industry’s most powerful firms are examining what is left of the distressed companies in a hunt for potential deals.
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The stakes are highest for the ordinary investors who lost everything. Celsius depositors are scrambling to salvage even a portion of their savings, congregating in online forums to debate legal strategy and offer emotional support. For weeks, they have flooded the bankruptcy court with hundreds of impassioned letters detailing their losses and proposing ideas to maximize recoveries. Apart from Little’s group, at least one other customer coalition has hired a lawyer to recover a share of Celsius’ remaining assets, an unusual show of grassroots activism for a bankruptcy case.
“I’m astounded by how fast and furious some of the creditor bodies are forming,” said Thomas Braziel, a partner at the investment firm 507 Capital, which specialises in bankruptcy. “Usually in bankruptcies with really small claimants, they get absolutely hosed by big law firms and the debtor.”
The recovery efforts have gained steam as the cryptocurrency market has gradually stabilized. The price of Bitcoin rose to about US$25,000 this week from a low of US$18,000 in June, although it remains more than 60 per cent off its peak of roughly US$68,000 in November.
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Whether the grassroots organising and backroom dealmaking will lead to substantial payouts for people who lost money remains uncertain. The Celsius case is complex, and historically, investors who have lost cryptocurrencies in a corporate collapse have struggled to get them back. The 2014 bankruptcy of Mt Gox, an early exchange, cost investors billions and led to years of legal wrangling.
Customers hope the company’s bankruptcy will be less drawn out. For years, Alex Mashinsky, the crypto bank’s founder, trumpeted an opportunity that seemed too good to pass up: savings accounts where people could deposit cryptocurrencies and receive annual yields as high as 18 per cent. In weekly “ask me anything” videos, he cast Celsius as a populist alternative to traditional banks, which have federally insured deposits that pay much less interest.
Mashinsky’s pitch turned Celsius into a sensation. Last year, the company, which is based in New Jersey, had 1 million customers and managed assets worth US$20 billion.
A crypto enthusiast, Little put most of his Bitcoin into Celsius in early 2021. (He declined to reveal the total value of his deposit.) “This had been such a trustworthy platform,” he said. “It wasn’t anything near what was advertised.”
To generate its 18 per cent returns, Celsius took risks, investing customer deposits in experimental crypto products, according to court papers. (The company did not respond to a request for comment.) In June, the market crash set off the equivalent of a bank run, forcing Celsius to halt withdrawals and eventually file for bankruptcy.
In legal documents, Celsius reported that it had US$4.3 billion in total assets but US$5.5 billion in liabilities, including US$4.7 billion it owed to customers. That gap will make it difficult for Celsius to return its users’ deposits.
The fate of those funds now depends on a complex legal process that will take months to unfold.
In court, lawyers for Celsius have cited the terms of use that customers signed to argue that most depositors transferred ownership of their cryptocurrencies to the company. That assertion has major legal ramifications: If the judge rejects the company’s argument and determines that the company was merely storing its customers’ property, then the firm would have to return what remains of those deposits immediately.
Celsius is pursuing alternate routes to pay back customers and even restart the business. The company has a Bitcoin mining operation, which its lawyers say could help generate funds for depositors.
Celsius is also attracting interest from possible buyers. Last week, crypto company Ripple said it was “interested in learning about Celsius and its assets, and whether any could be relevant to our business.”
An acquisition would present its own complications.
Last month, Sam Bankman-Fried, CEO of crypto exchange FTX, offered to buy crypto from Voyager Digital, a digital-asset company that collapsed at the same time as Celsius, and then transfer an unspecified amount of cash to Voyager’s customers. He framed the proposal as a way to swiftly resolve the process and avoid years of costly court fights. Voyager rejected the plan, calling it a “lowball bid dressed up as a white knight rescue.”
Changpeng Zhao, CEO of crypto exchange Binance, said Celsius and Voyager had approached his company to discuss selling some of their assets. “Our team’s engaging in all of those conversations,” he said in an interview.
A resolution in the Celsius case is unlikely anytime soon. Little said he was prepared to wait for the savings he lost.
“It was a very, very long-term hold,” he said. “This was something that was potentially going to go to my daughters.”
In June, he tried moving his funds out of Celsius, but the transfer never went through. Now when he checks his account, the uncertainty is expressed in a single word: “Pending.” NYTIMES
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