Celsius Network Files $3.5 Billion Lawsuit Against Tether Over Bitcoin Collateral Dispute

Key Takeaways:

• Celsius Network has sued Tether for $3.5 billion in federal bankruptcy court.
• The lawsuit alleges fraudulent and preferential transfers of Bitcoin collateral.
• The dispute centers on actions taken 90 days before Celsius filed for bankruptcy.

Celsius Network has initiated legal action against stablecoin issuer Tether and its affiliated entities. 

The lawsuit, filed in federal bankruptcy court, seeks to reclaim over $3.5 billion worth of Bitcoin (BTC) that it claims was lost due to Tether's actions in the lead-up to the lender's bankruptcy.

Celsius Network Loan Agreement and Collateral Dispute

The roots of this legal battle trace back to 2020 when Celsius entered into a loan agreement with Tether Ltd. This arrangement allowed Celsius to borrow USDT and Euro Tether (EURT) at low interest rates, secured by substantial Bitcoin collateral. 

At its peak, Celsius had borrowed nearly $2 billion in USDT, backed by tens of thousands of BTC.

In the 90-day period before Celsius' July 13, 2022 bankruptcy filing, Tether demanded and received significant amounts of new collateral from Celsius, totaling 15,658.21 Bitcoin, and further secured new borrowings with an additional 2,228.01 BTC. 

Celsius claims these actions as “Preferential Top-Up Transfers” and “Preferential Cross-Collateralization Transfers,” alleging they unfairly improved Tether's position at the expense of other creditors.

The complaint, filed on August 9, alleges that Tether's actions led to significant losses for Celsius, including over $3.5 billion in Bitcoin. Celsius seeks to recover these losses through the lawsuit.

A key point of contention in the lawsuit is Tether's actions in June 2022 when Tether issued a final demand for additional collateral, giving Celsius the contractually stipulated 10 hours to respond. 

Celsius filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York in July 2022

Now deleted interview: InvestAnswers interviews Alex Mashinsky, CEO of Celsius Live streamed on June 1, 2022https://t.co/tT2N6NgFfj pic.twitter.com/2QpiM2gWRC

— $inputendorsers (@InputEndorsers) May 28, 2024

Celsius claims that Tether immediately liquidated all of Celsius' collateral worth 39,542.42 BTC without waiting for the agreed-upon period.

This action, referred to as the “Preferential Application Transfer,” allegedly allowed Tether to cover its exposure while depriving Celsius of its remaining BTC at a low market value. 

The lawsuit argues that this breach of contract resulted in a “fire sale” of Celsius' Bitcoin, with all 39,542.42 BTC liquidated against the lender's outstanding debt at a valuation of $816.82 million, which is less than its current worth of over $2 billion.

Questions Raised Over Tether's Handling of Bitcoin Sale

Celsius contends that Tether's liquidation of its Bitcoin was commercially unreasonable. 

The complaint highlights that established market practices dictate that such a large amount of Bitcoin should be sold over a longer period to minimize price impact and secure better pricing. 

Tether's actions allegedly violated these practices by selling Bitcoin hastily at prices lower than actual market rates.

The court filing states that Tether sold this Bitcoin at an average price of $20,656.88 each, notably below the market closing Bitcoin price of $22,487.39 on that date. 

Celsius argues that premature liquidation not only caused substantial financial damage but also eliminated the chance of the automatic stay of bankruptcy to intervene.

Related: Cryptocurrencies and exchanges that have gone bankrupt.

Meanwhile, Tether and its CEO Paolo Ardoino have reacted to Celsius' allegations, explaining that they only sold the BTC because Celsius instructed them to do so during the June 2022 price drop.

In 2022, Tether made available USDt to some of its customers – including Celsius. Tether's arrangements with customers are very simple: Tether provides USDt to selected customers who provide an overcollateralization in Bitcoin.

If the price of bitcoin (the collateral) falls… https://t.co/UuEs1ig8zr

— Paolo Ardoino 🤖🍐 (@paoloardoino) August 10, 2024

Ardoino further characterized Celsius Network's lawsuit as “baseless,” emphasizing Tether's readiness to seek judicial intervention to resolve the dispute. 

Despite Tether's dismissal of the claims, Celsius remains steadfast in its pursuit to reclaim 57,398.64 BTC, valued at over $3.5 billion, from the stablecoin issuer.