According to the examiner’s report, the problems facing crypto lender Celsius Network were certainly not new, as it had been facing issues since 2020.
The report dictated that the now-bankrupt crypto lender had begun facing serious problems after it had started to fund its rewards and operational expenses via customer assets.
The examiner report
The final examiner’s report on the bankruptcy proceedings of Celsius paints a thorough account of the actions and finances of the crypto lender in the events that led to its insolvency.
In July 2022, Celsius filed for bankruptcy after freezing customer withdrawals and swaps a month earlier because of the ‘extreme market conditions’ that were caused by the collapse of the Terra ecosystem.
However, the examiner’s report states that the company’s balance sheet had massive holes as early as 2020, as it had lost money during the ‘up only’ cycle of the crypto market.
The report reveals that Celsius had actually never been profitable. As a matter of fact, the company was in the red by almost $600 million by the time it started tracking its assets and liabilities in May 2021.
The death spiral
When the bull market reached its peak, the stablecoin liabilities of Celsius Network had climbed to almost $2 billion.
By May 2022, these had been replaced rather abruptly by a hefty deficit of Bitcoin and Ethereum.
According to the report, Celsius began using its clients’ Bitcoin and Ethereum deposits as collateral for borrowing stablecoins.
The company did so for funding its investments and operations and offering customer rewards at a time when crypto prices were high.
The report further said that Jason Perman, the former vice president of Treasury at Celsius, said that it was a ‘cardinal sin’ to sell customer assets for covering liabilities on the balance sheet.
He also said that Celsius had not engaged in this practice during his tenure. Nonetheless, employees used loans for covering shortfalls, which they collateralized via customer assets.
More details
During 2020 and 2021, Celsius used the Bitcoin and Ethereum deposited by its customers for taking out a number of loans.
The report also disclosed that Celsius had discovered in 2021 that it would not be able to recover the Bitcoin and Ethereum it had used as collateral for taking out two loans.
These loans were obtained in 2019 and 2020 from Equities First, the institutional investment firm, and Celsius ultimately had to suffer losses worth $288 million on a loan valued at $129 million.
As the collateral used in this case belonged to customers, the crypto lender had to use stablecoins for buying Bitcoin and Ethereum.
These stablecoins had been borrowed at high prices in order to make up for the shortfall. This put Celsius in a great deal of trouble in 2022.
The crypto market had begun to decline by then, so the company had to expand Bitcoin and Ethereum for unwinding DeFi positions and repaying outstanding stablecoin loans.
It had to do so for obtaining more Bitcoin and Ethereum that its customers were withdrawing.
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