As Celsius Network LLC transitions towards the end of its bankruptcy, the key business elements it plans to focus on, notably, its restructuring plan, could face significant scrutiny from the US Securities and Exchange Commission (SEC), mirroring the regulator’s approach towards other similar companies.
Following court approval, Celsius intents to evolve from Chapter 11 into Fahrenheit LLC, a proposed public crypto mining company fortified with a crypto “staking” division. However, this change of business direction requires the go-ahead from the SEC. Without the official blessing from this regulator, Celsius claims that liquidation may be its only avenue forward, naturally causing a detrimental knock-on effect for its creditors’ recoveries.
“Crypto staking” is the act of cryptocurrency holders entrusting their assets to a company, which in turn rewards them based on the assets held. This business model has been met with criticism before from the SEC, as evident in its responses to both Coinbase and Kraken. Fahrenheit, under Celsius, plans to operate a self-staking business, which may necessarily invite similar attention from the regulatory body.
While this staking agenda could potentially invite headaches from the SEC in the future, an array of lawyers predict that the SEC will grant Celsius permission to emerge from bankruptcy. The exact nature of Fahrenheit’s staking operations may gradually become clear as the business begins to operate, observes Yuliya Guseva, a professor at Rutgers Law School. She further advises that the successor company should be cautious in anticipation of additional regulatory scrutiny, particularly from the SEC.
The SEC’s ruling on Celsius will occur against the backdrop of a burgeoning and complex industry, where the regulators continue to grapple with nascent challenges. It has even gone as far as to compare some operations to unlicensed securities exchanges, while strengthening Celsius’ own fraught relationship with the SEC. The latter has once accused the company’s founder of fraud, and settled associated claims against the company.
Fahrenheit’s future business will comprise of two primary arms; the company intends to expand its already existent mining business, managed by US Bitcoin Corp. The SEC already has a history of approving publicly traded crypto mining entities like Riot Platforms Inc. and Marathon Digital Holdings Inc.
The greater challenge to Fahrenheit is likely its staking venture. The SEC is expected to examine whether the company is distributing unregistered tokens as part of its staking business, says Keith Blackman of Bracewell LLP, who advises his clients on crypto-related and blockchain matters.
The SEC may ponder whether token sales may interfere with the mining business from an interest conflict viewpoint, grounds upon which, the regulator’s past interactions with Celsius would prove relevant to this case, suggests Blackman.
If the SEC does permit Celsius to emerge from Chapter 11, there still exists the possibility of regulatory interventions down the line. Its future involvement is echoed by Stephen Rutenberg of Polsinelli PC, who predicts various instances where the SEC may be called upon again.
Bearing in mind its past interventions with entities like Kraken and Coinbase, the SEC might intervene again in line with Fahrenheit’s staking division, especially if it plans to invest a significant proportion of its crypto through staking, requiring eventual registration with the SEC as an investment company, according to Guseva.
The Celsius journey might become a reference blueprint for how the SEC approaches this area of regulation. This case, Celsius Network LLC, Bankr. SDNY, No. 22-10964, 11/9/23, may become a landmark case in this respect.