Celsius Network, the embattled crypto lender that filed for bankruptcy protection on July 14, needs a plan to pay back billions of dollars in debt. The company, which was valued at $3.5 billion last November, has a $1.2 billion hole in its balance sheet, most of which is due to the $4.7 billion worth of cryptocurrency the exchange owes to its users.
But Celsius, which entered insolvency when the price of most cryptocurrencies crashed earlier this year, has a plan to make enough money to pay back its creditors and protect its users: It will mine more crypto.
Crypto miners are a necessary part of the Bitcoin and Ethereum ecosystems. Miners validate transactions on the blockchain and, in return, receive some amount of Bitcoin or Ether as a reward. Celsius filings say that the company owns over 80,500 mining rigs—of which just over half are currently in operation—worth about $750 million.
In its bankruptcy filing on July 14, Celsius said it hoped to compensate its creditors, including its hundreds of thousands of users, with cryptocurrency “minted” through mining. The lender defended this plan at its first bankruptcy hearing on Monday where Celsius asked a judge to approve the company spending $5 million to jumpstart the mining operation.
“In a world where the crypto market rebounds, the mining business has the potential to be quite valuable,” Pat Nash, Celsius’ lawyer, said in the hearing.
The judge approved Celsius’s spending request, but U.S. Regulators are not wholly convinced the plan will work. Shara Cornell, an attorney from U.S. Trustee Program, a bankruptcy watchdog, told the hearing she was unconvinced that the mining plans was the “best avenue for the debtor at this time.”
Cornell suggested Celsius cut its losses and liquidate its mining operations. (Speculation that Celsius would offload its mining operation helped send the price of mining rigs to a two-year low last week.)
Celsius’s insolvency is uncharted territory in bankruptcy law, which has few guidelines on how to treat crypto deposits. The New Jersey–based company pitched itself as a high-interest holding account for cryptocurrency, offering up to 18% interest on user accounts. However, slumping crypto prices and the collapse of crypto projects like Three Arrows Capital, a crypto hedge fund, forced the lender to freeze withdrawals on June 12 before finally declaring insolvency last week.
In its terms of use, Celsius warns that user deposits could be subject to bankruptcy proceedings, with results that are “impossible to predict reliably,” and could include the “total loss of any and all Digital Assets.” That means Celsius users could lose all the crypto they stored on the company’s platform during the ongoing bankruptcy proceedings.
Celsius did not immediately respond to a request for comment.
Users hoping to be fully compensated by Celsius’s mining plans may need to wait a while. At current prices—$21,700 as of 3:00 pm Hong Kong time—Celsius would need to mine 55,300 Bitcoin to plug the $1.2 billion hole in its balance sheet.
Nash said on Monday that Celsius was currently minting 14.2 Bitcoin a day and predicted that the operation would mine 10,100 bitcoins in 2022.
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