Tether (USDT) could face scrutiny regarding the liquidation of an $840 million loan to insolvent DeFi platform Celsius during ongoing bankruptcy proceedings regarding the validity of the recovery under bankruptcy law.
The recovery of the loan, revealed by Tether and Bitfinex CTO Paolo Ardoino on June 15, was “carried out in a way to minimize as much as possible any impact on the markets” and the loan was covered, Tether “returned the remaining part to Celsius as per its agreement.”
1/— Paolo Ardoino 🕳🥊 (@paoloardoino) June 15, 2022
Tether reduced almost 50% its CP holdings since 31st March 2022. By end of June only 8.4B CP left. CP exposure going to be reduced to 0.
No exposure to Celsius on our reserves. Liquidated without losses.
No exposure to 3AC. https://t.co/vPUW3s16Pk
Celsius legal representatives proposed an examination of the loan during bankruptcy proceedings, asking the court whether the insolvent DeFi lending platform could recover the value of collateral sold by Tether to recoup the loan.
Overcollateralization Facilitated Recovery of Loan Without Loss
Tether was able to liquidate the loan without loss due to the 130 percent over-collateralization of the loan, placing Tether in a position in which the stablecoin issuer possessed 30 percent more Bitcoin as collateral than the principal.
Celsius’ bankruptcy proceedings have challenged established frameworks for the handling of insolvency within digital asset markets. Celsius filed for bankruptcy protection in the United States at the beginning of July subsequent to a crypto market crash that saw Celsius users face significant losses.
Celsius law firm Kirkland & Ellis, seeking solutions to legal issues present within the case, proposed the question “Can Celsius recover . . . loan liquidations completed in the 90 days before filing?” with the answer clarifying an uncertain area within the scope of bankruptcy law and potentially affecting the reserves used to collateralize USDT.
DeFi Lenders Potentially Forced to Release Collateral
Decentralized Finance practices within the current market paradigm typically rely on taking control over cryptocurrency locked as collateral in order to recover defaulted loans in order to retain a position as a secured lender under contemporary bankruptcy law.
The application of bankruptcy law to digital asset lending, however, could potentially see lenders forced to return digital asset collateral and leave them with an unsecured claim.