The Anatomy of a CeFi Collapse
One of the major highlights of the crypto meltdown of 2022 is the inevitable collapse of Celsius Network. Founded by Alex Mashinsky in 2017, Celsius Network was not just a systematically important crypto intermediary; it was arguably the most significant Centralized Finance (CeFi) lending platform.
At its peak, it offered lenders up to 17% APY on deposited assets, and prior to its collapse in 2022, it recorded between $11-$12 billion assets under management (AUM),with its total loan issuance reaching a staggering $8 billion. Its valuation, like those of its competitors, raised eyebrows, catalyzing European Central Bank President Christine Lagarde's public warning that unregulated crypto lenders and assets inherently possess dubious worth.
Nonetheless, Celsius came crashing down like a house of cards.
The raison d'être for the failure of Celsius Network was the depositor run that plagued the market in 2022, a year rightly described as crypto’s annus horribilis.
The $4 Billion Dispute and the Court Ruling
Perhaps the most distressing event at the time of the collapse was the liquidation of Celsius's 39,500 Bitcoin by Tether Limited.This was the collateral posted as security against a $816 million loan obtained by Celsius.
In 2024, an adversary proceeding allowed Celsius Network to file a lawsuit against Tether Limited in connection to the forced liquidation of its collateral in 2022, with the claim that such act was not only unfair but was also a gross violation of their lending agreement.
Celsius claims Tether’s hasty decision to liquidate its collateral ultimately cost the company over $4 billion worth of BTC at current market prices, describing it as a “fire-sale” and implying that its collateral was disposed of at below-market prices without following the agreed-upon procedures.
In June, 2025, a US bankruptcy court delivered a bench ruling allowing Celsius £4 billion Bitcoin lawsuit to proceed after rejecting Tether's key arguments for its dismissal. The core claims allowed to proceed in this lawsuit are:
- Breach of contract and violation of the duty of "good faith and fair dealing."
- Fraudulent and preferential transfers under the U.S. Bankruptcy Code.
The lawsuit centers on whether Tether followed the specific liquidation procedures outlined in their lending agreement, particularly regarding the timing of the margin call and sale. Besides, it also seeks to uncover fraudulent and preferential transfers that may have run contrary to the fundamental principle of fairness in bankruptcy law.
While the first legal claim in Celsius suit emphasizes the crucial need for precise, legally sound lending and collateral agreements (often called Master Agreements) in CeFi lending, the second claim is a legal attempt to recover the value of the liquidated Bitcoin by asserting that Tether received an unfair preferential transfer contrary to bankruptcy law.
Coded vs Legal Crypto Lending and Collateral Agreements
The lawsuit highlights the fundamental differences in contract structure between traditional and decentralized crypto finance.
1. Legal Agreements (CeFi)
A legal lending and collateral agreement involves identifiable, corporate organizations bound by a set of legal obligations enforceable in court. These are typically structured as Master Agreements, which govern all transactions between two entities.
The Celsius Network and Tether lending agreement is a prime example. The existence of this legally sound contract has allowed Celsius to successfully initiate a lawsuit in the U.S., despite Tether being incorporated outside the country.
2. Coded Agreements (DeFi)
A coded agreement describes the architecture of Decentralized Finance (DeFi) lending protocols (e.g., Aave and Compound). These protocols use smart contracts to automatically manage the entire lending process.
The agreement is coded, transparent, and automatically enforced, eliminating the risk of a breach of terms by a centralized counterparty, thereby removing the need for human trust or judicial intervention.
The Crux of Celsius $4 Billion Bitcoin Lawsuit
The crux of Celsius's claim centers on a breach of an existing obligation by Tether. This alleged breach centers on Tether's failure to honor the contractually mandated 10-hour waiting period after issuing a margin call, leading to a "fire sale" of over 39,500 Bitcoin collateral at a significantly below-market average price of $20,656. Celsius argues that this constituted a breach of contract, a violation of good faith, and a preferential/fraudulent transfer that must be reversed to recover value for all creditors.
The Key Regulatory Lessons
1. Contractual Rigor and Liquidation Protocol is Non-Negotiable
The Celsius v. Tether lawsuit provides a stark lesson in centralized financial risk. Even massive institutions operating in crypto are bound by the precise language of their Master Agreements. The entire multi-billion dollar dispute hinged on Tether allegedly failing to honor a specific, procedural obligation—the 10-hour notice period—before liquidating collateral.
The key lesson for compliance is that Centralized finance (CeFi) firms must implement flawless, automated compliance controls that guarantee adherence to every clause in their Master Agreements. Violations are not just operational failures; they become targets for fraudulent and preferential transfer lawsuits in bankruptcy, which can cost the solvent party hundreds of millions in settlements.
2. U.S. Jurisdiction Extends Globally
The court’s ruling on jurisdiction has wide-reaching implications for offshore crypto entities. Operating outside the United States does not grant immunity from U.S. law. The judge found that "domestic ties" (US-based communications, personnel, or financial accounts) were sufficient to apply the U.S. Bankruptcy Code to Tether.
In effect, any crypto firm (exchange, lender, stablecoin issuer) that interacts with U.S. customers or infrastructure must structure its operations with the assumption that it is subject to U.S. regulatory and judicial oversight. Geographic distance is not a legal shield.