As Celsius Network LLC nears the end of its bankruptcy, it may find the US Securities and Exchange Commission eyeing a key business element of its restructuring plan similar to those the regulator has targeted at other companies.
Celsius recently secured court approval to emerge from Chapter 11 as Fahrenheit LLC, a public crypto mining company that would include a crypto “staking” division. But before it can implement the plan, it needs a green light from the SEC as well. Without the regulator’s blessing, Celsius says it may be forced to liquidate, which would hurt creditors’ recoveries.
In crypto staking, holders of cryptocurrency give their assets to a company to hold, which in turn pays them some reward on the holding. The SEC has previously raised issues with staking-as-a-service businesses at Coinbase and Kraken. Celsius says the Fahrenheit entity intends to operate a self-staking business.
Though the staking issue could prove problematic for the SEC down the road, multiple lawyers said they expected the agency to allow Celsius to emerge from bankruptcy.
The full nature of Fahrenheit’s staking operation may emerge over time, Yuliya Guseva, a professor at Rutgers Law School, said.
“As every lawyer knows by now, crypto asset classifications are a thorny issue,” she said in an email. “To conclude, the successor company will need to tread very carefully because we may expect additional and considerable regulatory scrutiny, particularly from the SEC.”
Celsius’ successful restructuring would be a major development in the crypto landscape, which cascaded into chaos late last year with a series of bankruptcies and criminal proceedings. BlockFi Inc. and Voyager Digital Holdings both liquidated, while FTX remains in Chapter 11 as its co-founder Sam Bankman-Fried faces life in prison for fraud.
The SEC’s pending decision on Celsius comes as it seeks to get a hold on a young and complicated industry. The agency has said some staking operations function as unregistered securities exchanges. It also has a contentious past with Celsius itself, having accused its founder of fraud and settling related allegations against the company.
Mining & Staking
Fahrenheit’s business will consist of two main parts, one of which raises more securities issues than the other.
The company said it will invest in growing its existing mining business, which will be operated by US Bitcoin Corp. Publicly traded crypto mining companies like Riot Platforms Inc. and Marathon Digital Holdings Inc. have previously received SEC clearance.
The bigger issue for Fahrenheit will be its staking business. The SEC will likely scrutinize whether the company is offering unregistered tokens as part of the staking business, said Keith Blackman, a Bracewell LLP partner who advises clients on crypto and blockchain.
The SEC has “made it clear that it considers all cryptocurrency to be securities,” he said.
Judge Martin Glenn of the US Bankruptcy Court for the Southern District of New York declined to weigh in on whether certain tokens were securities when he approved the Celsius plan on Nov. 9.
“If the SEC approves the proposed cryptocurrency mining operation but rejects the staking business, will that be sufficient to keep the new company afloat?” Blackman said in an email.
Still, he said, it’s “likely the SEC will approve Celsius’s plan in some form.”
The SEC will also consider whether token sales create a conflict of interest with the mining business, Blackman said. In examining that question, the regulator’s actions against Celsius will likely be relevant, he said.
“Given the SEC’s ongoing enforcement action against Celsius’s former CEO (and settled action against Celsius itself), it’s unlikely to give Celsius the benefit of the doubt,” Blackman said.
The SEC said in a September filing that it was concerned Celsius’ plan raises similar issues to those it settled with the firm previously, namely that it was acting as an unregistered broker. Celsius in a later filing appeared to address the SEC’s concern and said it had “met frequently” with the SEC and other regulators.
Future Intervention
If the SEC clears the way for Celsius to emerge from bankruptcy, it could still intervene later on.
Celsius’ plan limits the options for the SEC to step in now, said Stephen Rutenberg of Polsinelli PC, who focuses on crypto and blockchain. That’s because the plan issues common stock under an exemption in the bankruptcy code that allows it to “get around the SEC at least for the initial issuance,” he said.
“I do think it’s possible there will be points for the SEC to be involved, but I don’t expect that prior to emergence” from bankruptcy, he said.
The SEC may yet intervene on the staking business, based on its prior actions involving other companies. The regulator has accused Kraken and Coinbase of failing to register their staking business as required by securities law.
Some of the issues related to staking will likely clear up as the new company begins operating, Guseva, who co-authored a textbook on crypto regulation, said. If Fahrenheit invests a significant amount of its crypto through staking, it may have to register with the SEC as an investment company, she said.
‘Under Pressure’
Celsius wouldn’t be the first crypto company to be forced into liquidation following SEC opposition.
Binance.US earlier this year backed out of a deal to purchase Voyager Digital Holdings out of bankruptcy. A judge rejected claims by the SEC that part of the proposed sale violated securities laws. The SEC eventually reached an agreement with Voyager and dropped its opposition, but Binance.US canceled the deal days later.
“The hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community,” Binance.US said at the time.
The Voyager case could be relevant in guiding the SEC’s actions on Celsius, Yesha Yadav, a securities regulation researcher at Vanderbilt University Law School, said.
“This is something that happened before,” Yadav said. “This is something that could happen again.”
Both Celsius and Voyager said their proposed restructuring plans would provide creditors with greater recovery than liquidation. The Celsius plan, which would pay customers through a combination of crypto and stock in the new company, says it provides creditors recoveries from 67% to 85.6%, depending on the type of claim they hold.
If the SEC topples Celsius’ plan, it could be the second time it has caused creditors to accept lower recoveries, and that “could make the SEC look bad ultimately in the public’s eye,” Yadav said.
“The SEC is under pressure here,” Yadav said.
The case is Celsius Network LLC, Bankr. S.D.N.Y., No. 22-10964, 11/9/23.