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Telling the story of three key Chapter 11 crypto cases

01:35, 19 August 2022

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Chapter 11 road sign
Several firms are going through ‘reorganization’ bankruptcy in the cryptosphere – Photo: Shutterstock

As the crypto boom turns to bust a number of high profile digital asset firms have entered the Chapter 11 bankruptcy process.

Here are the three key cases to watch.

What’s Chapter 11

Chapter 11 is known as a form of bankruptcy involving 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 platform for decentralized finance (DeFi), has a $1.2b hole in its balance sheet, according to a recent court filing from the crypto lender’s advisory partner Kirkland & Ellis.

The crypto lender filed for Chapter 11 in the US citing ‘extreme’ market conditions, leaving its 1.7 million customers unable to redeem their assets, to stabilize the business, its CEO Alex Mashinsky said in a statement.

As a result the network’s native token CEL saw a series of wild price gyrations as investors confidence ebbed and waned.

The token has soared in valuation by over 4,100% in the last two months, reaching around $3.93 over the weekend compared to its mid-June bottom of $0.093.

CEL to US dollar

Two factors that put the crypto lender in a sticky situation, despite making loan repayments: the use of on-chain leverage and stETH (staked ether).

Celsius accesses leverage through permissionless on-chain DeFi money markets like MakerDAO by taking BTC and ETH user deposits and depositing them to borrow DAI to provide users with a low borrowing rate.

Maker works $1.50 of volatile collateral (ETH for example) deposited to borrow the DAI stablecoin.

If the value of the collateral falls below a threshold, it is liquidated to repay the loan and prevent bad debt. In short, liquidate your customers’ loans to repay your own. 

DAI to US dollar

Celsius offered robust yields on ETH of 8% using a derivative ETH known as staked ETh (stETH). stETH, brainchild of LidoFinance, does not actually exist yet.

In simple terms, stETH is a token which will only vest once The Merge is complete, which according to analysts Capital.com spoke to recently it could “happen next year at best”.

XRP/USD

0.48 Price
-5.370% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 0.00600

SHIB/USD

0.00 Price
+0.180% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 0.00000035

BTC/USD

19,152.45 Price
+1.090% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 66.00

ETH/USD

1,328.87 Price
+2.510% 1D Chg, %
Long position overnight fee -0.0500%
Short position overnight fee 0.0140%
Overnight fee time 21:00 (UTC)
Spread 5.50

The crypto lender disclosed on Monday that it was running low on money and said it has gotten several proposals to inject cash into the company, and won approval from a US judge to sell BTC that it mines.

Celsius lawyer Josh Sussberg disclosed the receipt of cash-injection offers during a bankruptcy hearing yesterday.

Voyager Digital

Voyager Digital attributed its troubles largely to Three Arrows Capital’s financial problems, which prompted Voyager to file for Chapter 11 in the US.

It served Three Arrows a notice of default in June seeking to recover a $650m debt from the crypto hedge fund operator.

Sam Bankman-Fried helped Voyager financially by providing it with revolving loans valued at $200m in cash and USDC, and 15,000 BTC. But Voyager still filed for bankruptcy.

Bankruptcy proceedings could spell longer waits for Voyager customers seeking access to assets held by the company with the 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 held a significant position in LUNA when the Terra blockchain collapsed, worth roughly $560m at its peak.

The founders ran and defaulted on loans after the crypto hedge fund went bust from making a series of large directional trades (GBTC, LUNA, stETH) and borrowing from more than 20 institutions.

Legal proceedings then moved forward as the founders went MIA. They recently broke their silence, saying they will be moving 3AC to Dubai to see whether the firm has a future.

SOL to US dollar

3AC owes over $3bn and Genesis is its biggest creditor with $2.3bn loaned. 3AC’s default on debts also contributed to the insolvency of Celsius Network and Voyager Digital.

A leaked court document showed co-founder Zhu Su made luxury purchases with borrowed money which was likely used to indicate 3AC’s creditworthiness.

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