CRYPTO CLASS – CRYPTO LENDER BANKRUPTCY
US bankruptcy courts are about to create a new area of law – crypto lender bankruptcy. Crypto lenders Voyager and Celsius filed for Chapter 11 bankruptcy in July and both companies have billions in assets and liabilities.
Chapter 11 bankruptcy allows a company to stay in business while its obligations are restructured. The company may propose a reorganization plan. Both Voyager and Celsius are going this route. Alternatively, creditors may propose their own plans.
Which creditors get paid back, how much do they receive, and in what order are they paid? Answering these question won't be easy.
Celsius customers fall into two groups. The "earned customers" loaned funds to Celsius and received a yield as high as 18%. "Custodial customers" simply held their crypto in an account.
This is analogous to depositing money in a traditional bank and receiving interest ("earned customers") versus putting cash into a bank safety deposit box ("custodial customer"). If the bank became insolvent and went into bankruptcy, the safety deposit customer would get back all their money. The earned customers would be treated as creditors.
The bankruptcy court will scrutinize the terms of service and will give priority to the the custodial wallet customers.
But the problem is that Celsius and Voyager commingled the earned customer funds with the custodial funds.
Also, before assets are dispersed to Celsius and Voyager customers, the bankruptcy administrators and lawyers will be paid first.
Law firm Kirkland & Ellis is representing Celsius and Voyager. In just three weeks, it billed Voyager $3 million. The total bankruptcy fees could be $100 million.