Wall Street credit traders specializing in bankruptcy claims are offering customers of bankrupt crypto firms some of their money back.
But there’s a catch: creditors must relinquish rights to their crypto on bankrupt platforms and accept as little as 25 cents on the dollar.
Customers of Celsius and Voyager Digital that recently declared bankruptcy are now unsecured creditors with no inkling of when they might receive their funds.
Voyager Digital filed for bankruptcy on July 6, 2022, partly due to its exposure to defunct Singaporean hedge fund Three Arrows Capital. It had lent customer funds to the hedge fund that could not repay its debts. Its filing came despite a $400 million loan from FTX.
Celsius Network Ltd. filed for bankruptcy about a week after Voyager, following talks with prospective financiers. It didn’t request authority to permit customer withdrawals, saying that payouts would be handled by the bankruptcy process.
While the largest U.S. crypto exchange Coinbase is still solvent, it scared customers when it made a new disclosure that customers’ crypto holdings could be in danger should the company become insolvent.
Hedge funds stand ready to mop up
But some overlooked Wall Street pros standing to benefit from firms’ insolvencies are licking their chops in the aftermath of the crypto bloodbath that claimed companies like Voyager and Celsius.
Bankruptcy claims traders offer an option to customers of embattled firms needing funds at short notice. A manager at Cherokee Acquisition, a firm brokering bankruptcy claims, believes that customers have been shaken by the collapse of crypto companies and, in the absence of insight into their account balances or when they could withdraw their money, are looking for other ways to access their funds. Companies like Cherokee Acquisition act as intermediaries between creditors and claims traders, the latter of which are often hedge funds.
Cherokee has thus far processed four Celsius claims ranging from $10,000 to $1 million, while another company Xclaim, received 500 registrations from Celsius and Voyager clients to date. Xclaim offers between 10 and 90% on the dollar, depending on the recipient of the credit line and what type of credit was extended.
Long bankruptcy proceedings create uncertainty
Cases like Voyager and Celsius are unusual in that the customer bases of each are quite large. Celsius had 300,000 customers as of July 2022, while Voyager boasted 3.5 million. Matthew Sedigh, Xclaim’s CEO, concurred on the uniqueness of these cases. There is an unclear timeline for an unclear recovery, he said, and now creditors are offered a degree of certainty. Sedigh and fifty institutional investors stand to buy the rights to crypto holdings.
The reason creditors are turning to bankruptcy traders is that bankruptcy proceedings have historically been long-winded. Folks that lost money when Mt. Gox collapsed in 2014 have yet to receive reimbursement.