Troubled cryptocurrency lending platform Celsius Network LLC said today that it’s preparing to file for Chapter 11 bankruptcy after being labeled “deeply insolvent” by Vermont’s Department of Financial Regulation.

The decision by Celsius to file for bankruptcy came on the same day that Vermont’s regulator announced that it had launched an investigation into whether the company violated state security laws. It is alleged to have done so by offering customers high-interest cryptocurrency accounts and unethically using customer funds to invest in illiquid products.

Celsius announced that it had suspended withdrawals and transfers because of “extreme” conditions on June 13, amid a downturn affecting the price of cryptocurrencies in the ongoing crypto winter. The company claimed at the time that it was taking action to stabilize liquidity and operations while it took steps to preserve and protect assets.

A month later, the company’s operations remain suspended. The filing of Chapter 11 bankruptcy will allow Celsius to restructure its operations.

Earlier in the day, the Vermont department didn’t hold back, saying that it “believes Celsius is deeply insolvent and lacks the assets and liquidity to honor its obligations to account holders and other creditors.”

“Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities,” the department claims, adding that it used assets as collateral for additional borrowing to pursue leveraged investment strategies. “Additionally, some of the assets held by Celsius are illiquid, meaning they may be difficult to sell, and a sale may result in financial losses,” the regulator noted. “The company’s assets and investments are probably inadequate to cover its outstanding obligations.”

The regulator further claimed that it believes that Celsius has been engaged in unregistered securities offers by offering cryptocurrency interest accounts to retail investors and that Celsius also lacks a money transmitter license. As a result, it’s alleged, Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors and ability to repay its obligations to depositors and other creditors.

Vermont is not alone in investigating Celsius, with the state’s regulator joining a multistate investigation. A multistate investigation is not the only legal issue Celsius faces, with a lawsuit filed against the company on July 8.

The lawsuit was filed by Jason Stone, the chief executive of KeyFi Inc. and alleged Celsius of fraud and acting as a “classic Ponzi scheme.” Stone alleges that Celsius owes his company millions of dollars as part of a profit-sharing agreement and that Celsius had been using its customer deposits to “manipulate crypto-asset markets” and “had failed to institute basic accounting controls which endangered those same deposits.”

Image: Celsius