Tether’s recovery of $840 million loan scrutinized in Celsius bust – Financial Times | Vette Leader

Stablecoin issuer Tether is being sued over an $840 million loan reclaimed by Celsius Network

Celsius filed for bankruptcy protection in the US this month, becoming the latest victim of the recent crypto price crash and causing hundreds of thousands of its clients to lose on their investments.

Tether, whose $66 billion stablecoin known as USDT, plays a key role in crypto markets, repaid an $840 million loan to Celsius prior to bankruptcy by selling the Bitcoin Celsius it had pledged as collateral.

The question now is whether Celsius could reclaim the value that Tether received in the loan liquidation. The answer would clarify an uncertain area of ​​bankruptcy law and, worst-case scenario, would hit the reserves underpinning USDT for Tether.

“Can recover Celsius . . . Loan liquidations completed in the 90 days prior to filing?” Celsius’s law firm, Kirkland & Ellis, said in a presentation to the New York bankruptcy court last week. The question was one of the “legal questions decisive for the outcome of the case”.

Tether, Celsius, and Kirkland did not respond to requests for comment.

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Resolving the issues surrounding the lending of Tether and other crypto-secured lending will involve intricate questions about how secured lending rules apply in the digital asset market. In secured lending, the borrower pledges assets to the lender as collateral.

“We are in an area where the law is quite uncertain and quite contrary to broad market expectations,” said Brandon Hammer, bankruptcy attorney at Cleary Gottlieb.

Many in the crypto markets have mistakenly assumed that simply taking possession of cryptos pledged as collateral would protect their position as a secured lender under bankruptcy law, Hammer said.

In fact, they could still be forced to return the assets, leaving them with only an unsecured claim equal to the loan value.

Tether had an outstanding loan of $840 million in USDT stablecoin tokens to Celsius in May. This month, Celsius said it had pledged 130 percent of the loan’s value in bitcoin as collateral.

During May and June, when Bitcoin prices fell, Celsius was unable to post more collateral to maintain the loan in response to a margin call from Tether, Celsius CEO Alex Mashinsky said in a court filing.

Tether then sold Celsius’s pledged bitcoin to repay the loan and returned the remaining collateral. The amicable liquidation resulted in a $100 million loss for Celsius, Mashinsky said.

Tether, whose USDT token has regained its $1 price target over the past few days after two months of trading at a slight but persistent discount, said it has not suffered any losses on its loan to Celsius this month.

The stablecoin issuer added that its “risk culture demonstrates an understanding of both the lending business and consideration of the regulatory landscape to meet and sustain its business goals.”

Alex Mashinsky, founder and CEO of Celsius, addresses the audience on the final day of Web Summit 2021
Celsius boss Alex Mashinsky © Bruno de Carvalho/SOPA Images via Reuters

The liquidation is likely to be reviewed by Celsius and the committee formed in the bankruptcy proceedings to represent unsecured creditors, bankruptcy attorneys said.

“One of the things being investigated is whether or not Tether was fully secured. Has Tether properly perfected its security in its collateral?” said Tad Davidson, co-head of bankruptcy practice at Hunton Andrews Kurth.

Lenders who have failed to properly prove their entitlement to certain assets — a process known as “perfecting” — can find themselves at the bottom of the stack in the mass of unsecured bankrupt creditors, potentially suffering huge losses. In the event of a dispute about the realization of the security, a settlement can be agreed or, in the worst case, the debtor can sue the creditor.

“The way you perfect bitcoin security hasn’t been tested in any litigation,” said Jonathan Cho, bankruptcy attorney at Allen & Overy.

Uncertainty was compounded when El Salvador declared Bitcoin legal tender last year. The Uniform Commercial Code, rules followed by almost every US state, designates mediums of exchange recognized by foreign governments as physical money whose security can only be perfected by physical possession – a problem for digital currencies.

“It’s crazy that El Salvador’s actions should dictate the outcome of US law, but that’s how it is,” said Adam Levitin, Georgetown law professor and director at Gordian Crypto Advisors.

The UCC was updated this month to include specific crypto security rules focused on asset control. But the rules are not yet law and do not apply retrospectively. Current best practice in crypto markets includes issuing public documents known as UCC filings declaring a security interest in intangible assets, or applying fixed asset rules where a third-party custodian takes control of the asset, lawyers said.

It is unclear whether Tether took either approach. There is no UCC filing for Tether’s security interest in New Jersey, where Celsius is based. There may be UCC filings for Tether’s interest elsewhere. Tether’s public statement of the credit liquidation process made no reference to a third-party custodian.

In bankruptcy proceedings, even the tiniest flaws in security perfection can be exploited by aggressive creditors to improve their position. Celsius says it has $5.5 billion in liabilities but only $4.3 billion in assets.

Robert Gayda, a partner at Seward & Kissel, said, “If you have someone who isn’t going to fully recover, you’re going to have a motivated creditorship looking to look at this Tether transaction.”

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