Centennial clients with collateral stuck on a failed crypto platform are turning to the bankruptcy process for relief
Alan Knitowski has an MBA, has worked in technology and finance for over 25 years and is the CEO of a mobile software company that trades on Nasdaq. This did not prevent him from being scammed by a crypto company.
Knitowski borrowed $375,000 from crypto lender Celsius over several years and scored $1.5 million in bitcoin as collateral. He didn’t want to sell his bitcoin because he liked it as an investment and thought the price would go up.
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This was the percentile model. Cryptocurrency investors can basically store their holdings with the company in exchange for a dollar loan that they can use. Knitowski will get the bitcoin back when he repays the loan.
But that’s not what happened, because Celsius, which had $12 billion in assets under management earlier in the year, spiraled into bankruptcy in July after falling cryptocurrency prices caused an industry-wide liquidity crunch. Knitowski and thousands of other loan holders had more than $812 million in collateral locked on the platform, and bankruptcy records show Celsius failed to return collateral to borrowers even after their loans were paid off.
“Every aspect of what they did was wrong,” contacted Knitowski, who runs a company based in Austin, Texas. Phunwarehe said in an interview. “If the CFO or I really did anything like this, we would be charged immediately.”
Creditors are now working through the bankruptcy process to try to recover at least part of their money. They were provided with a level of optimism on Friday, after Celsius announced the sale of its asset custody platform called GK8 to Galaxy Digital.
David Adler, a bankruptcy attorney for McCarter & English who represents Celsius’s creditors, said the money from the deal should go toward paying legal fees. Moreover, there may be funds left for previous customers.
“The big question is – who is entitled to the money they get from GK8?” Adler told CNBC. Adler said he represents a group of 75 borrowers holding nearly $100 million in digital assets on the Celsius platform.
Later this month, more relief may come as bids will open for the Celsius lending portfolio. If another company purchases the loans, customers will likely have the opportunity to pay them back and then release their collateral.
Knitowski told CNBC that he chooses to get his loans at a 25% loan-to-value rate. This means that if he takes out a $25,000 loan, he will pay back four times that amount as collateral, or $100,000.
The more collateral the borrower is willing to post, the lower the interest rate on the loan. If the borrower fails to repay the loan, the lender can confiscate the collateral and sell it to recover the cost. It’s like a residential mortgage, where the borrower uses the home as collateral. In the cryptocurrency world, a borrower can ask for a loan and pledge Bitcoin as collateral.
Earlier this year, with the price of bitcoin plummeting, Knitowski paid off one of his centenary loans to avoid a margin call and having to increase his collateral. But after doing so, the company did not return the bitcoin that served as collateral for this loan. Instead, the assets were deposited into an account called “Earning”. According to the company’s terms and conditions, the assets in these accounts are the property of Celsius, not the customers.
“Imagine you’re going to pay for your car, but someone keeps it,” Knitowski said. “You pay for your house, but someone keeps it. In that case, it would be like paying off the loan. Instead, you don’t get your collateral back even though it’s been paid off.”
This was not the only problem. The crypto platform also failed to provide borrowers with a full federal Truth in Lending Act (TILA) disclosure, according to former employees and an email to customers July 4. , such as the annual percentage rate (APR), the term of the loan, and the total costs to the borrower.
The email to the borrowers said, “The disclosures required to be made to you under the Federal Truth in Lending Act did not include one or more of the following,” and then went on to list a dozen possible missing disclosures.
A former Celsius employee, who requested anonymity, told CNBC that the company was retroactively trying to comply with TILA.
“You can’t say, ‘Oh, oops, we forgot 25 elements of the Truth in Lending Act, and as a result, we’re going to turn those elements back and pray,'” Knitowski said.
Jefferson Nunn, editor and contributor to Crypto.news, took out a loan from Celsius and posted more than $8,000 in bitcoin as collateral. He knows that these assets are not available to him now even if he pays off his loan.
Noon, who lives in Dallas, said he got a loan to invest in more bitcoin after seeing a promotion for the platform. He said he heard about Celsius after doing a podcast with co-founder Nuke Goldstein. Goldstein said on the show, “Your money is safe,” Nunn said. Alex Mashinsky, former CEO of Celsius, made similar comments shortly before halting withdrawals.
Alex Machinsky, CEO of Celsius on stage in Lisbon for the 2021 Web Summit
Piaras Ó Midheach | math file | Getty Images
“It’s basically a mess and my money is still stuck in there,” Nunn said.
This topic has come up again and again in cryptocurrencies, most recently with the FTX failure last month. Sam Bankman Fried, founder and CEO of the exchange, told his Twitter followers that the company’s assets are good. A day later, he was seeking a bailout package amid a liquidity crisis.
While Celsius’ implosion doesn’t hold up to the size of FTX, which was recently estimated to be worth $32 billion, the company’s management has faced its share of criticism. According to an October court filing, senior executives withdrew millions of dollars in assets before the company stopped withdrawing client funds.
A former employee, who asked not to be named, said there was a lack of financial oversight that left large holes in the company’s balance sheet. One of the biggest problems was that the percentile had an artificial inertia, which occurs when a company’s assets and liabilities don’t align.
The former employee told CNBC that when customers deposit crypto assets with Celsius, it was supposed to ensure that those funds were available any time customers wanted to withdraw them. However, Celsius was taking customer deposits and lending to risky platforms, so it didn’t have the liquidity to return funds on demand.
As a result, when customers wanted to withdraw funds, Celsius would scramble to buy assets on the open market, often at a higher price, the person said.
“It was a huge error of operational judgment and control that really took a toll on the organization’s balance sheet,” said the former employee.
He also said that Celsius was collecting cryptocurrency tokens that had no value as collateral. On its platform, Celsius describes that customers can “earn crypto rewards compounded on BTC, ETH, and over 40 other cryptocurrencies.” But according to the former employee, the teams responsible for publishing those coins had nowhere to go with many of the more obscure tokens.
The former employee said he left Celsius after discovering that the company was unwise with client funds, and that it was making risky bets to continue generating the high returns it promised depositors.
“A lot of people have taken all their money out of the traditional banking systems and put their full faith in Alex Machinsky,” the person said. “Now that these individuals are unable to pay medical bills, pay for weddings, mortgages, and retirement, that still weighs heavily on me and my colleagues who left the organization.”
Celsius did not respond to multiple requests for comment. Machinsky, who resigned from Celsius in September, declined to comment.
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