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Celsius reveals $1.2 billion hole and floats bitcoin mining fix during first day of bankruptcy trial

Embattled crypto lender Celsius Network played up the value of its bitcoin mining business in a first day hearing for its bankruptcy proceedings in a New York court on Monday.

Celsius revealed in a presentation ahead of the hearing the company owes $4.7 billion to hundreds of thousands of customers, with its assets currently $1.2 billion short of its liabilities.

The company's assets as of July 14 stood at $4.3 billion with outstanding liabilities at $5.5 billion. Since March 30, the firm said the value of crypto assets on its balance sheet had declined from $14.6 billion to $1.75 billion as of July 14.

How the firm ultimately chooses to try and reimburse customers is expected to have a lasting impact on whether a large swath of crypto investors can trust industry firms.

LISBON, PORTUGAL - 2021/11/04: Alex Mashinsky, Founder and CEO at Celsius, addresses the audience during the last day of the Web Summit 2021 in Lisbon. (Photo by Bruno de Carvalho/SOPA Images/LightRocket via Getty Images)
Alex Mashinsky, Founder and CEO at Celsius, addresses the audience during the last day of the Web Summit 2021 in Lisbon. (Photo by Bruno de Carvalho/SOPA Images/LightRocket via Getty Images)

On Monday, U.S. Bankruptcy Court judge Martin Glenn granted a number of relief motions to the firm, including allowing the company to spend $5.2 million in construction and import costs for its bitcoin mining business.

"We definitely expect that the vast majority of our customers are going to be interested in riding out what you've heard referred to as this crypto winter, remaining long crypto [and] having the opportunity to realize their recovery through an appreciation in the macro crypto market," Patrick Nash, a lawyer representing Celsius told the court.

Nash, a partner with bankruptcy law giant Kirkland and Ellis, kicked off the hearing by reiterating the company's argument through court filings that much of its $17.8 billion in lost value was due to forces outside Celsius' control.

Celsius asset change between March 30 and bankruptcy filing
Celsius' asset change between March 30 and its bankruptcy filing. (Source: Celsius)

Noting the "general macro environment" as well as some "very high profile collapses" — including algorithmic stablecoin TerraUSD and crypto hedge fund Three Arrows Capital — Nash argued the majority of the value lost by Celsius came from the general decline of crypto assets.

Sell-offs coupled with investor panic enabled a bank run, resulting in the firm's decision to freeze some 300,000 active customer accounts on June 12, triggering its move to bankruptcy.

Nash suggested, however, that Celsius could sell parts of its bitcoin mining business or even repay customers from bitcoin earned through its operations. "The mining business... we think is interesting and in a world where the crypto market rebounds, we think it has the potential to be quite valuable," Nash said.

According to the company's slide deck, Celsius operates 43,000 bitcoin mining computers in Texas with expectations of mining 10,100 bitcoin — worth about $223 million as of Tuesday morning — this year. With its continued payments granted by the court, the company projects to more than double its number of mining rigs to 112,000 by the second quarter of next year.

'Making new law'

Rulings for the bankruptcy cases of both Celsius Network and crypto lender Voyager Digital are likely to "make new law," according to Jason DiBattista, head of legal analysis with Levfin Insights.

In both cases, how creditors will accept a payout depends on the legal negotiation between the bankrupt firms and their yet-to-be appointed committee of creditors, according to Jesse Austin, a 36-year bankruptcy attorney formerly with law firm King and Spalding who now works in legal consulting.

Furthermore, Austin pointed out that each judge will need to rule on matters of open legal question surrounding how far a customer's rights should extend with crypto assets based on how they used each platform.

Whether ownership of assets from either Celsius' Earn product or custody service will be contested remains unresolved until a committee of creditors organizes to make their case.

The committee should form "promptly," the case's appointed U.S. Trustee representative told the court Monday, citing how its solicitation for committee members must be submitted by Wednesday.

Judge Glenn Martin has set the "second day" hearing for the bankruptcy case of Celsius Network for August 10 at 11 a.m. New York time.

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