A federal bankruptcy judge ruled that Celsius Network owns most of the cryptocurrency that customers deposit on its online platform, meaning that Celsius customers will be the last to receive repayment from the crypto lender.
Key Takeaways
- Cryptocurrency lender Celsius Network’s assets from its Earn product belong to the company, rather than customers, according to a Jan. 4 federal bankruptcy court ruling.
- The bankruptcy judge’s ruling indicates that crypto platform customers do not always own their account assets.
- Separately, New York’s state attorney general sued Celsius Network founder Alex Mashinsky for fraud.
Judge Rules All Rights ‘Unambiguously Transferred’
In a 45-page decision, Judge Martin Glenn, the chief U.S. bankruptcy judge in the Southern District of New York, concluded that the deposits in the lender’s yield-bearing Earn accounts belong to Celsius, not individual account holders. Celsius had 600,000 accounts in its Earn program when it filed for Chapter 11 in mid-2022. The accounts collectively held about $4.2 billion, including stablecoins then valued at around $20 million.
“The Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the ‘Estates’),” Glenn wrote.
Some account holders believed that Celsius was in breach of contract; however, Glenn disagreed, writing, “The Court finds that there was a valid contract between Celsius Account Holders and Celsius and that the contract terms unambiguously transferred all right and title of digital assets to Celsius.”
Attorney General Alleges Fraud
In separate news, New York’s attorney general sued Celsius Network founder Alex Mashinsky on Thursday, claiming he defrauded investors of billions of dollars in digital currency by concealing the failing health of his now-bankrupt cryptocurrency lending platform.
A complaint filed by New York state Attorney General Letitia James said Mashinsky promoted Celsius as a safe alternative to banks and paid interest as high as 17% on deposits.
“Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” James said in a statement. “Making false and unsubstantiated promises and misleading investors is illegal.”
According to James, Mashinsky’s fraud ran from 2018 to June 2022, when deposits were frozen, with more than 26,000 New Yorkers among his victims.
The Bottom Line
Investor confidence may be waning rapidly as federal and U.S. state governments continue their crusade against risky crypto practices. The Celsius bankruptcy ruling will affect investors using similar products across other platforms, many of which have entered bankruptcy in recent months.
With the latest ruling, the phrase ‘Not your keys, not your crypto’ becomes relevant again as it expresses that crypto investors cannot be certain that their crypto holdings are secure unless they are stored in a wallet they control. As Celsius and FTX controlled the wallets of customers, the funds belonged to them, and the customers lost all their money.