Celsius Network LLC – Texas Regulators Object to Debtors’ Motion to Sell Stablecoin

Register, or to view the article

September 29, 2022 – The Texas State Securities Board (the “SSB”) and the Texas Department of Banking (the “DOB,” and, together with the SSB, “Texas”) have objected to the Debtors’ motion to sell stablecoin [Docket No. 922] arguing that the Debtors' are seeking authority for "troublingly broad permission to sell assets insufficiently defined for purposes that are also insufficiently defined," the general lack of clarity as to the Debtors' intentions amplified by Texas's clear lack of confidence in the Debtors themselves. 

The objection notes: "Texas’s concern is heightened by the fact that the Debtors’ ‘prepetition practice’ involves admittedly problematic decisions, using the mined Bitcoin to repay intercompany loans, potential mismanagement, and a continued failure to comply with state regulatory requirements….Despite conducting business in Texas, the Debtors are not currently registered with the SSB. Accordingly, the Debtors have been ordered cease their investment activities until such registration has been approved."

As discussed further below, on September 15th, the Debtors requested authority to sell up to $23.0mn of stablecoin with the proceeds to be used "to generate liquidity to help fund the Debtors’ operations."

The Debtors provide: "The Debtors, however, continue to own stablecoins that should be monetized to fund their operations in these chapter 11 cases given their market stability compared to other types of cryptocurrencies. The Debtors, in an exercise of their reasonable business judgment, believe that the sale of their stablecoin consistent with past practice and in the ordinary course of business is an efficient way to generate liquidity to help fund the Debtors’ operations.

A hearing to consider the motion and objection is scheduled for October 6, 2022.

The Texas Objection

The objection [Docket No. 922] states, “The Debtors seek to sell and/or exchange stablecoin before they’ve filed Schedules and Statements, and before this Court has determined whether such assets are even property of the bankruptcy estate. The Debtors fail to disclose in the Motion how much stablecoin will be sold, and how the monetization of the stablecoin ultimately benefits the bankruptcy estate and the many consumer creditors of the Debtors.

Further, the Debtors seek to ‘sell and/or exchange any stablecoin, whether currently held or received in the future, on a postpetition basis consistent with prepetition practices…’ Texas is extremely concerned by the Debtors’ request for an order that allows ambiguously broad authority to sell and/or exchange the assets. Texas’s concern is heightened by the fact that the Debtors’ ‘prepetition practice’ involves admittedly problematic decisions, using the mined Bitcoin to repay intercompany loans, potential mismanagement, and a continued failure to comply with state regulatory requirements.

The Debtors previously sought permission to monetize mined bitcoin, including the ability to not only sell the assets, but permission to hypothecate, assign, invest, use, transfer, or otherwise dispose of mined bitcoin. That request prompted the filing of objections by several parties, and ultimately an agreement limiting the Debtors’ ability to access the mined bitcoin. Debtors now again seek troublingly broad permission to sell assets insufficiently defined for purposes that are also insufficiently defined.

Finally, the United States Trustee (‘U.S. Trustee’) is currently in the process of employing an Examiner to review, inter alia, the cryptocurrency holdings of the Debtors. The request to sell certain of these cryptocurrency assets while this examination is pending is inappropriate.”

The objection continues. “Despite conducting business in Texas, the Debtors are not currently registered with the SSB. Accordingly, the Debtors have been ordered cease their investment activities until such registration has been approved.

The Motion is unclear as to how the Debtors will ‘exchange’ the stablecoin. The Debtors also justify their request with only the explanation that stablecoin is pegged to fiat currency. Indeed, the request to exchange the stablecoin ‘consistent with prepetition practices and in the ordinary course of business’ would indicate that the Debtors’ platform may be restarted despite the inherent risk to creditors and without the oversight of this Court.

To the extent that the Debtors seek to restart an investment platform or undertake activities involving citizens of the State of Texas, Texas objects for so long as the Debtors are acting in violation of Texas law.”

The Stablecoin Motion

On September 15th, the Debtors requested Court approval to sell stablecoin, of which they currently own $23.0mn, to fund their Chapter 11 operations [Docket No. 832].

The motion states, "As described in the Mashinsky Declaration, stablecoins are an important subset of cryptocurrencies because their value is tied (or 'pegged') to another currency — usually 1:1 with fiat currency. Through pegging to fiat currency, such as the U.S. dollar, stablecoins, as the name suggests, offer a stable cryptocurrency option that is not subject to market fluctuations…. 

Celsius currently owns eleven different forms of stablecoin totaling approximately $23 million. The stablecoin is held by Debtor Celsius Network Limited (UK), Debtor Celsius Network LLC (US) and non-Debtor Celsius Network EU UAB (LT).

In the ordinary course of its business, Celsius used stablecoins in its retail and institutional lending services, as further described in the Mashinsky Declaration, and would monetize its stablecoin assets as needed to fund operations. Since the Petition Date the Debtors ceased their active retail lending programs, Earn program and Custody services, among other activities. In addition, pursuant to the Third Interim Cash Management Order, the Debtors agreed that they would not liquidate or exchange any cryptocurrency absent further order of the Court.

The Debtors, however, continue to own stablecoins that should be monetized to fund their operations in these chapter 11 cases given their market stability compared to other types of cryptocurrencies. The Debtors, in an exercise of their reasonable business judgment, believe that the sale of their stablecoin consistent with past practice and in the ordinary course of business is an efficient way to generate liquidity to help fund the Debtors’ operations."

Read more Bankruptcy News