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What Happens If a Crypto Platform Such as Coinbase or Celsius Goes Bankrupt? | WSJ - YouTube
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- [Narrator] "Banks are not your friends."
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That's Alex Mashinsky in the shirt,
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founder and CEO of Celsius,
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one of the largest
crypto lending platforms.
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And on June 12th,
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his company surprised customers
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when it unexpectedly announced
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it was pausing all withdrawals,
swaps, and transfers
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between accounts
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due to extreme market conditions.
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For reference,
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this year, Bitcoin has lost
more than half of its value
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and another popular cryptocurrency Ether
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has fallen around 70%.
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- Celsius decision to
freeze customer accounts
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has rippled across the
cryptocurrency industry.
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Shortly after its announcement,
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another Asia-based crypto
lender called Babel Finance
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announced that it is also
suspending withdrawals.
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- [Narrator] Unlike banks,
which are FDIC insured,
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crypto lenders like Celsius
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lack the legal protections
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that are built into the
traditional financial system.
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And as the crypto market
continues to tumble,
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many users of Celsius
and the exchange Coinbase
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are beginning to wonder,
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"If these crypto platforms go bankrupt,
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what happens to my assets?"
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Celsius is one of dozens
of unregulated lenders
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and lending platforms
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that have emerged in recent years,
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cutting high returns to investors
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who are willing to lend
their digital assets.
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- Celsius promised customers
annual percentage yields
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as high as 18.6%.
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That's a lot more than customers can get
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from regular bank accounts today.
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- [Narrator] Here's how that works.
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Customers deposit their
cryptocurrency in the Celsius system
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in exchange for a yield.
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This is essentially an unsecured loan.
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And in order to earn a return,
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the company lends out
assets to other users
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and puts customer deposits
in often high yield,
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high risk decentralized
finance investments.
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When the system is working correctly,
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Celsius says that customers
can expect approval
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for their withdrawals within 24 hours.
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But as cryptocurrency
prices continued to fall,
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customers started to withdraw
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at a rate Celsius couldn't keep up with.
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- Celsius does not have enough liquidity,
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meaning readily spendable
cryptocurrency on hand
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to hand back to the customers.
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- [Narrator] The company has since
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hired restructuring lawyers
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to advise on possible solutions
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for its mounting financial problems.
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- One of the financing options
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included a financial restructuring,
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meaning that the company
could potentially file
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for bankruptcy.
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- [Narrator] And if that happens,
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users could face big losses.
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According to Celsius's terms of use,
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users that deposit assets
in the earn service
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grant the company "all right and title
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to such eligible digital assets,
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including ownership rights."
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That document also calls
out bankruptcy explicitly,
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saying, "In the event that
Celsius becomes bankrupt,
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enters liquidation,
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or is otherwise unable
to repay its obligations,
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any eligible digital assets
used in the earn service
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or as collateral under the borrow service
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may not be recoverable."
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You will likely not see a line like this
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in a user agreement for a bank,
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since most banks are FDIC insured.
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So what does that mean for users?
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- Based on Celsius' terms of use,
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in the event of a bankruptcy,
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customer who deposited cryptocurrencies
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into Celsius accounts
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may not be able to get their money back
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because they would be considered
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essentially unsecured creditors
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and even if they were to file
for lawsuits against Celsius,
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they might not have a great chance
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of winning that legal action.
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- [Narrator] Similarly,
the exchange Coinbase
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addressed bankruptcy in
its quarterly filings,
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adding a disclosure based
on SEC accounting guidelines
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released in March.
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- Coinbase made the disclosure
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that in the event of a bankruptcy,
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the digital assets that
Coinbase holds for its customers
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may not really belong to the customers.
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- [Narrator] Coinbase
noted that the new language
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in its financial report
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could lead customers to view its service
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as "more risky and less attractive."
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- Coinbase CEO Brian
Armstrong has come out
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and said that the likelihood
of the company going bankrupt
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is extremely low
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and the company is in very
good financial conditions,
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but he made the disclosure
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just for the purpose of transparency.
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- [Narrator] Nearly one month
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after the bankruptcy disclosure,
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on June 14th, Coinbase
announced it was laying off
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around 18% of its workforce.
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Armstrong said the decision was made
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to ensure Coinbase's health
during this economic downturn.
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But if a crypto platform
like Celsius or Coinbase
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were to go bankrupt,
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it wouldn't be the first
to go under in that way.
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In 2014, Mt. Gox,
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then the largest crypto
asset platform worldwide,
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filed for bankruptcy
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before ultimately filing for
liquidation later that year.
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- The collapse of crypto
exchange Mt. Gox back in 2014
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also rippled across the industry.
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It caused the price of Bitcoin to plummet
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and brought about, so to speak,
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one of the first crypto
winters in the industry.
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- [Narrator] A rehabilitation plan
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for affected Mt. Gox's users
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was not confirmed until last fall.
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Cryptocurrency as an industry
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still lacks comparable
regulation and protection
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to traditional financial institutions,
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but a recent bill looks to change that.
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- Senators Cynthia Lummis
and Kirsten Gillibrand
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proposed a bipartisan crypto bill
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that the Responsible
Financial Innovation Act,
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which aims to provide a
comprehensive regulatory framework
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for the crypto industry.
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- [Narrator] While the bill was released
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around the same time
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that Coinbase made its
bankruptcy disclosure,
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it is not in direct response
to the platform's announcement.
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The bill is not expected to pass
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and other lawmakers have
not signed on to it.
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As for Celsius,
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the company is under investigation.
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The Texas State Securities Board
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said it has opened an
investigation into Celsius
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over its decision to
freeze customer accounts
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and is working in conjunction
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with New Jersey, Kentucky,
Alabama, and Washington.
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(gentle music)
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