Yesterday Celsius Network paid off its final DeFi loan which would have seemed to have been a really promising sign for the struggling crypto lender however just a few hours after news of this broke it was reported that they had followed this up with filing for Chapter 11 bankruptcy protection. Reading through Twitter and people's comments it seems that people are confused/upset that they paid off this loan freeing up millions in wBTC and then turned around and declared bankruptcy. I feel a lot of this outrage is due to the complex nature of bankruptcies in the US as there are several different kinds. To really understand what they did and why they did it requires that we understand the DeFi lending part of Celsius, Chapter 11, and what the company hopes to accomplish with this announcement.

DeFi Lending's Role

As we have seen over the last few weeks Celsius has been working to pay off the loans it took out of different coins they put up as collateral. For the most part, the collateral seems to have been both wBTC and stETH. While wBTC is well known as wrapped Bitcoin (Bitcoin that is tokenized on the Ethereum Blockchain) it is easier for people to grasp how loans taken out against Bitcoin would be in trouble with the continual fall in price. These loans became increasingly risky, so those who had taken them out had to add in additional Bitcoin to avoid liquidating their loans. For the average person though while wBTC is easy to understand the same cannot be said for stETH.

With the delays that have occurred on the Ethereum blockchain to finally move to Proof of Stake (PoS) tokens that have been tied to those previously staked have suffered. Because of the lockup that would occur when you staked your ETH a protocol came out called Lido, that's goal was to help fix this issue. By using Lido to deposit your ETH you would receive stETH which was tradeable and when the ETH merge occurs the stETH will become redeemable with the staking interest earned. It is critical to the success of stETH that the price remains either exactly or very close to the current price of ETH and when it deviates too far it's safe to say it causes issues. Recently there has been a huge discrepancy between the two, so loans taken out against stETH all of a sudden were in jeopardy due to the stETH loss of value. As I mentioned above with wBTC all of a sudden these loans also faced liquidation issues and Celsius had to add more stETH to prevent this from occurring. 

Since DeFi was a huge way that Celsius made its money (it was supposed to be the guaranteed money generator the company could rely on) when this began to fail and fall apart the company rapidly began to see its finances deteriorate. DeFi for the most part is also not regulated by any government or agency. As a result, when a company with the sheer size and amount of assets begins to falter there really isn't anyone to go to for help or to warn people about what is happening since the company does not have to disclose this. When looking at their legal options the unregulated nature of this causes additional issues since there are no guardrails nor examples of how to handle DeFi-related claims in an asset v. liability court. With this in mind, it makes sense that the company made sure to pay off all DeFi loans and exit the space before they announced or released a plan about what the next move is for Celsius which in this case turned out to be Chapter 11 bankruptcy. 

Chapter 11

Currently, in the United States, there are six different types of bankruptcy. As we have seen in the case of 3AC they used Chapter 15 which is used in foreign cases. Since bankruptcy can mean so many things it is important to separate the two main categories that declaring it can fall into, personal or businesses. For individuals, Chapter 7 and Chapter 13 are the most common type and those mean an individual is either getting liquidated (Chapter 7) or hoping to create a repayment plan (Chapter 13). For businesses though Chapter 11 is a much more common type and is the one that Celsius entered. 

Chapter 11 bankruptcy provides the company bankruptcy protection as it undergoes a large company-wide reorganization. This type of bankruptcy has been used over the years by several large companies that people know of like General Motors, American Airlines, Chrysler, and more! Choosing this option allows the company to make significant changes without being punished for doing so and gives them more time to pay back loans and other sorts of money that they might owe either people or firms. A company can exit this type once they are on sound footing again and continue to operate in the meantime.

Celsius Network Future

Unlike 3AC which is being liquidated, Celsius could end up reentering the market and crypto sphere once it is able to stabilize its finances. Voyager also chose this option but the biggest difference here is that Voyager made a large loan that went bad to 3AC while that does not appear to be the case with Celsius which seems to be more of a victim to the downturn in prices and trading along while also not cutting their rates enough or quick enough. In their email to customers last night Celsius Network gave me the impression that they were hoping to be able to come back and come back sooner rather than later. With how they worded their email I am under the impression that they are trying to get out from some of the loans that were made to them and then restart withdrawals. It also seems that those who made deposits in fiat also will be the first to get their money back most likely followed by stablecoin depositors. 

While nothing is set in stone yet and now that they have entered bankruptcy the courts and thus regulators will have immense influence Celsius has at least tried to put forth some sort of plan. This is going to give the courts and regulators unprecedented access to a crypto company's loans, reward system, etc. and so it will be interesting to see what is said or done by these two groups. One last thing is that Celsius Network is probably going to set sued even more by various parties and this will have to be dealt with as well. Since they have their own token CEL it will be interesting to see how it performs and what role it is given in these proceedings going forward.   

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