Embattled crypto lender Celsius Network is resisting a recommendation from its own lawyers to file for Chapter 11 bankruptcy — and seeking a show of support from users to help win the internal argument against the suits.
With the company’s management prevented from making any public pronouncements due to legal advice, Celsius believes many of its retail clients would prefer the firm to avoid bankruptcy, according to people with knowledge of the situation. To that end, users can show their support by engaging “HODL Mode” in their Celsius account, said the people.
Celsius didn’t respond to a request for comment.
Celsius’s move is a last throw of the dice as it teeters on the edge of bankruptcy after being forced to freeze client withdrawals on June 12. The company, which offers retail investors returns on their crypto holdings and held more than $10 billion of client assets, found itself unable to honor its obligations as crypto markets cratered in recent weeks.
Amid the fallout, The Block reported that Celsius has appointed Wall Street giant Citigroup to advise on its financial options and The Wall Street Journal said the lender is working with lawyers from Akin Gump Strauss Hauer & Feld and restructuring-focused management consultants from Alvarez & Marsal.
Celsius describes HODL Mode on its website as a “security feature that gives you the ability to temporarily disable outgoing transactions from your Celsius account.” When activated, clients are unable to withdraw or send funds. After deactivation, users must wait 24 hours before these abilities are reinstated.
As clients are currently blocked from withdrawing or transferring funds anyway, this will have no practical effect on users, but — according to the people — it will help show the lawyers the strength of feeling that exists among users. They added that Celsius is still receiving some client deposits despite the ban on withdrawals.
Being advised to refrain from public statements puts Celsius in a novel situation. The firm’s CEO, Alex Mashinsky, has for years held a regular “ask me anything” event on Fridays to field questions from clients and holders of Celsius’s native CEL token.
Mashinsky is currently in the US and is unable to comment on his firm’s woes due to legal advice, according to the people.
Chapter 11 of the US Bankruptcy Code allows a company to continue operating while it works out its debts. The firm proposes a plan of reorganization for creditors to approve, overseen by a team of lawyers.
If Celsius enters bankruptcy protection, client positions will be sold into US dollars at the current market price and clients will be added to the list of the firm’s creditors — to join the line for whatever value can be salvaged.
Celsius believes that avoiding bankruptcy will result in more value for account holders as it should give the firm move time to unwind trades that are stuck in illiquid positions, according to the people.
Untangling bankruptcy proceedings can prove both painful and time-consuming. After Tokyo-based crypto exchange Mt. Gox was hacked in early 2014, it took nearly eight years for the legal process to conclude.
If Celsius is eventually forced to file for Chapter 11, it’s yet to be decided which legal entity would make the petition, according to one of the people.
Despite the news of potential bankruptcy, Celsius’s CEL token has climbed over the past two weeks. After plunging from about $0.44 to $0.15 as the original news of halted withdrawal broke, the token has since rebounded to $0.74, according to Coingecko data.
© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.