Putting the “cry” into cryptocurrency

The red ink and pain for hundreds of thousands of crypto investors continues with potential losses now looking like they could top $US30 billion.

What we are seeing resembles parts of the GFC when banks, building societies, brokers and other financial and quasi financial groups collapsed at an increasing rate, leaving huge losses and a lot of pain and financial agony behind them.

The crypto groups now collapsing or on their last legs resemble over leveraged, undercapitalised GFC failures like Northern Rock, the UK building society cum bank; Bear Stearns and Lehman Brothers, the two big failures among US investment banks and AIG, an American insurance giant which invested or bought almost every type of failed investment and was bailed out to the tune of more than $US180 billion.

So far the losses are smaller than we saw in the GFC but the lessons from those collapses (and the way regulators tightened capital, accounting and other rules as a reaction to the debacle) have not been heeded by the crypto nuts and their shills among fintechs and other claimed innovations of the one of the oldest businesses in history – money lending and investment in all their forms.

Too little capital, products too complex to fully understand, full of techno babble of the worst kind, related party transactions, front running, pumping and dumping – they are just some of the things that we have seen happen in crypto that have been relegated to the very naughty list in conventional finance.

The cryptonuts recreated mainstream finance in their little world – investors, investment funds (a multitude of tokens/currencies and other financial whizzbangery) hedge funds, lenders, consultants, analysts, spruikers, shills, advisors – all without the backstops of regular finance.

The best thing of all, no regulation, no compliance and no accounting rules (like banks and other financials have to follow). No mark to market valuations, impairments, but plenty of hot air in valuations.

And along with all that, little sign of any shame or apologies for the flops and failures.

Like the ’smartest people in the room’ at Enron, and the Masters of the Universe in the 80s and 90s and all the clever clogs in subprime mortgages in the naughties, the crypt mob all thought they knew better than everyone else and those now paying a terrible price for that hubris are the hundreds of thousands of small investors who wanted to play in the bright new world of bitcoin and stablecoins and all those other things.

The list of casualties from the crypto collapses of the last three months shows no sign of easing with Celsius, an early crypto group to get into trouble, filing for bankruptcy protection on Wednesday in New York.

The filing came a month after Celsius freeze customer withdrawals when it ran out of money.

The move came as at least six US state regulators launched investigations into Celsius with the Vermont regulator claiming that Celsius “is deeply insolvent.”

Analysts say a rough estimate of the losses from the escalating crypto failures so far could more than $US30 billion, with hundreds of thousands of small investors unlikely to get much, if any return on their investments.

In a statement, Celsius said it had initiated voluntary Chapter 11 proceedings, which will allow it to keep operating while restructuring its financial obligations.

Celsius said it has $US167 million in cash on hand to support operations in the meantime.

Celsius’s failure will leave venture capital backers nursing large losses. In late 2021, it raised $US750 million from WestCap and Quebec pension fund Caisse de dépôt et placement du Québec at a valuation of more than $US3 billion.

A second filing on Thursday in New York from Celsius’ financial advisers, Kirkland & Ellis revealed that the crypto lender has a $US1.3 billion hole in its balance sheet,

The filing in the US Bankruptcy Court of the Southern District of New York, shows that Celsius holds $US4.3 billion of assets and $US5.5 billion of liabilities.

But the black hole could be more because in its list of assets, Celsius claimed it has about $600 million in its CEL token. However, the company noted in the filing the total market value for CEL as of July 12 was roughly $170.3 million. That’s a $US400 million difference.

Celsius’ filing follows the bankruptcy filing by US crypto lender Voyager Digital, the crash of the Terra cryptocurrency, the liquidation of Singapore-based cryptocurrency hedge fund Three Arrows Capital (3AC) and crypto exchange BlockFi which halted some dealings.

BlockFi agreed to a rescue deal with crypto trading exchange FTX on July 1 that valued the lender at up to $US240 million, far below an earlier valuation of $US4 billion.

Three Arrows losses could be as much as $US10 billion, Celsius, up to $US1.7 billion or more, over $US5 billion in Voyager and hundreds of millions of more potential losses on other companies that have failed, quietly closed their doors or scaled back and are trying to survive.

BlockFi and Coinbase, another crypto exchange, have laid off hundreds of staff as well. A judge in New York bankruptcy court froze Three Arrows Capital’s remaining assets this week and is now in the process of being liquidated.

Digital Currency Group’s market maker and lending firm Genesis Trading is reportedly facing losses in the hundreds of millions of dollars according to reports in late June and early July.

The losses relate in part to the company’s exposure to 3AC and the crypto lender Babel Finance.

Digital Currency Group has reportedly assumed some of the liability owed by 3AC in order to ensure Genesis has adequate capital to continue its operations.

Celsius’ bankruptcy filing followed its decision on June 12 to pause withdrawals, swaps and transfers on its platform, which it said was necessary to stabilise its business and protect its customers.

Celsius said on Wednesday the Chapter 11 proceedings would provide it with the opportunity to stabilise its business and “consummate a comprehensive restructuring transaction that maximises value for all stakeholders”.

“This is the right decision for our community and company,” Celsius co-founder and chief executive officer Alex Mashinsky said. Mashinsky has been one of the more outspoken crypto executives about banks and old style fiat currency based finance. Now the irony is that he has turned to old fashioned financial restructuring – Chapter 11 bankruptcy – to try and save his failed company.

CNBC had earlier reported that the company’s lawyers was warning state regulators across the US of the impending Chapter 11 move.

“Unfortunately, this was expected. It was anticipated. It does not, however, stop our investigations. We will continue investigating the company and working to protect its clients, even through its insolvency,” Joseph Rotunda, director of enforcement at the Texas State Securities Board, said of the Celsius bankruptcy filing.

Six US state regulators have launched probes of Celsius, Vermont being the latest.

In a statement the Vermont Department of Financial Regulation said Celsius “deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities.”

“Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,” the regulator said in a statement. “The company’s assets and investments are probably inadequate to cover its outstanding obligations.”

Celsius has more than 100,000 creditors, which could include both customers and lending counterparties, according to the bankruptcy filing.

Celsius said it had 1.7 million customers as of June and was competing with its interest-bearing accounts and yields as high as 17%.

Finally, a warning that many crypto creditors will be lucky to see any returns.

Adam Levitin, Georgetown law professor and principal at Gordian Crypto Advisors, told CNBC this week that Celsius customers may have to wait years to see their money again and may only be entitled to pennies on the dollar.

Customers that took part in Celsius’s high-yield deposit program could be seen as unsecured creditors in the eyes of the court.

“The treatment here seems to be that the customer’s crypto is actually the company’s property, and as an unsecured creditor, you don’t get your bitcoins back,” Levitin told CNBC, adding that he doesn’t think Celsius is the last of the crypto bankruptcies. “The tide is still going out; we’re just waiting to see how far it goes.”

The Financial Times reported extensively this week on what was happening inside Celsius. The paper also pointed out that Alvarez & Marsal, a consultancy best known for unwinding failed investment bank Lehman Brothers after the 2008 financial crisis, is Celsius’s restructuring adviser.

That points to some tough decisions and outcomes for creditors, depositors, staff and investors.