Crypto Lender’s Sham Merger: Impact on Creditors and Lessons for the Blockchain Future

Gloomy courtroom with tense atmosphere, defunct crypto lender in spotlight, two entities merging but with indistinguishable characteristics, confused everyday investors, skeptical Series B investors, shadowy asset migration, insufficient documentation, distressed creditors, recovering funds in the balance, revealing potential risks & future lessons for crypto market.

Defunct crypto lender Celsius Network is in the spotlight as it attempts to merge its United Kingdom and United States entities, with recent court filings alleging that the distinction between the two was essentially a “sham.” This issue originates from a decision made by the crypto lender in June 2021, when Celsius Network Limited (CNL) received a warning from the UK’s Financial Conduct Authority to cease operations. To avoid complications, CNL established a Limited Liability Company, Celsius Network LLC, in Delaware, and initiated a transfer of its assets to the new organization.

However, this asset transfer has been rife with controversy, as the court filing of the now-bankrupt crypto firm highlighted an “intercompany chaos” as a result of the migration. The formal documentation of the relationship between the two entities took months to complete, and when it was finalized, it lacked clarity regarding which transactions the agreements pertained to. For everyday investors, this transfer proved too confusing to comprehend. Meanwhile, more “sophisticated” Series B investors seemed to grasp the implications of such ambiguous record keeping.

The crux of the argument lies in the belief that the two entities should be treated as one during the subsequent bankruptcy proceedings. This would prioritize smaller creditors, avoiding a situation where they are disregarded in favor of Series B investors in the recovery and return of lost funds. The Celsius Official Committee of Unsecured Creditors (UCC) believes the asset migration was a “sham” and potentially fraudulent in its execution.

Simon Dixon, who is said to have lost over $8.8 million worth of Bitcoin due to the collapse of Celsius, addressed the UCC filing on Twitter. He asserted that “Celsius acted as if the migration never occurred,” leaving “poor documentation” and “no clear distinctions” between the two entities.

A recent memorandum opinion from Chief US Bankruptcy Judge Martin Glenn found that customers only possessed claims against Celsius’ Delaware-based LLC. Consequently, Series B investors might have a higher likelihood of receiving recompensation. The auction for the remaining Celsius assets is set to proceed soon, with major firms such as Coinbase and Gemini competing for possession.

NovaWulf Digital Management has put forth a proposal including a direct cash contribution between $45 million to $55 million. If accepted, customers could potentially recover up to 70% of their funds. This auction represents a crucial milestone for Celsius customers seeking to recoup their losses after the company filed for Chapter 11 bankruptcy protection in July 2022.

Despite the challenges and skepticism surrounding the situation, the auction may offer customers an opportunity to recover some of their investments. However, the allegations of fraudulent activity and lack of transparency surrounding the companies’ asset transfers raise concerns. It remains imperative to monitor the developments around this case and evaluate the impact on the broader crypto market, while also learning from the potential pitfalls and risks associated with such endeavors.

Source: Cointelegraph

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