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Ripple eyes acquiring bankrupt crypto lender Celsius: Will it happen?

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San Francisco-based blockchain payments company Ripple Labs Inc is reportedly interested in purchasing assets of the bankrupt cryptocurrency lender Celsius Network.

“We are interested in learning about Celsius and its assets and whether any could be relevant to our business,” the spokesperson said, declining to say if Ripple was interested in acquiring Celsius outright.

“Ripple has continued to grow through the crypto market turmoil and “is actively looking for M&A opportunities to scale the company strategically,” the spokesperson said.

The announcement comes a month after the New Jersey-based Celsius Network filed for Chapter 11 bankruptcy protection in the Southern District of New York. 

What went wrong?

Celsius Network rose to the top as the largest crypto lending platform in recent years. But, you might have a question, how? 

Here’s how Celsius works:

  • Users deposit cryptocurrency into the Celsius app.
  • The digital lending platform then loans that capital to retail and institutional borrowers.
  • As a result, users will receive a weekly payment from the revenue Celsius gains from those loans and other activities. 

The company wanted to offer its customers high returns, which paved the path for bankruptcy. While Celsius managed to offer its customers high returns during a bull market, it collapsed as the crypto market crashed, wiping out $2T. 

The company could only generate a small profit margin by promising an attractive return. As a result, Celsius had no buffer during the crash, eventually filing for bankruptcy. 

$1.2B hole in the balance sheet

The court filing revealed that Celsius has a $1.2B gap in its balance sheet. Moreover, the company had $5.5B in liabilities, of which $4.7B represented customer holdings. 

As a result, Celsius frozen payments to investors before filing bankruptcy. 

“Celsius has set the stage for conflict between its customers and its sophisticated institutional creditors,” Daniel Gwen, a business restructuring associate at New York-based law firm Ropes & Gray, told CoinDesk.

“In particular, Celsius has pointed out in its pleadings that customers transferred ownership of crypto assets to Celsius, making those customers unsecured creditors. This detail may undercut customer expectations, who thought they were depositing their assets into a construct similar to a traditional bank,” Gwen adds.

Former investment manager Jason Stone sued Celsius, accusing them of operating Ponzi Scheme, where it paid early depositors with the money it got from new ones. 

The company invested its fund in other platforms like Anchor, a flagship lending platform that offered similarly sky-high returns, to keep its business model afloat. According to The Block, Celsius invested at least half a billion in Anchor.

“They always have to source yield, so they move the assets around into risky instruments that are impossible to hedge,” said Nik Bhatia, founder of The Bitcoin Layer and adjunct professor of finance at the University of Southern California.

What now?

Ripple Labs, currently in a legal battle with the US Securities and Exchange Commission (SEC), has filed documents allowing them to participate in Celsius’ bankruptcy hearing. The court accepted the filing earlier this week, even though Ripple was not one of Celsius’ major creditors.

The company also listed various reasons like inflation, the war between Russia and Ukraine, and the crypto credit crisis for bearish crypto markets. 

Ripple admitted that, even though there might be some challenges, there are still opportunities in the sector- especially for projects that have utility in the real world. They think that Celsius could be one of those projects if there was a change in management.

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