US judge says Celsius network owns most of customer crypto deposits

Jan. 4 (Reuters) – A US bankruptcy judge ruled on Wednesday that Celsius Network owned most of the cryptocurrency customers deposited on its online platform, meaning most Celsius customers would end up in line for repayment in the event of a cryptocurrency lender’s bankruptcy.

The ruling by US Bankruptcy Judge Martin Glenn in New York affects nearly 600,000 accounts that held assets valued at $4.2 billion when Celsius filed for bankruptcy in July. Glenn wrote that the company did not have enough funds to pay back these deposits in full.

The ruling means that most percentile clients will have lower priority than clients with interest-free accounts and other secured creditors. It was not clear if the percentile had significant secured debt.

The ruling also prevents a struggle for higher priority among clients with interest-bearing accounts, avoiding a situation where some of those clients are paid back 100% of their deposits while clients in the same situation are able to recover “only a small percentage” of their deposits, depending on Glenn. Celsius’ Terms of Service indicated that the cryptocurrency lender took ownership of customer deposits in interest-bearing Earn accounts, according to Glenn. This means that Kassab’s customers will be treated as unsecured creditors in the event of Celsius’ bankruptcy, and will be last in line to repay after Celsius pays off higher-priority debts.

Twelve US states and the District of Columbia have objected to Celsius’ attempt to claim the digital assets. They argued, among other things, that it was unclear whether customers understood the terms of service and that Celsius was under investigation in several states for violating regulations, which could prevent the company from relying on the terms of use.

Glenn writes that the ruling doesn’t mean Earn’s customers won’t get “anything” in the bankruptcy case, nor does it stop further challenges to Celsius’ ownership of cryptocurrency deposits.

Celsius clients may be able to file fraud or breach of contract claims against a cryptocurrency lender, and state regulators may be able to prove that the account holders’ contracts were unenforceable because they violated the government’s securities laws, according to the ruling.

“The court does not underestimate the consequences of this decision for private individuals, many of whom have deposited large savings in the Celsius platform,” Glenn wrote. “Creditors will have every opportunity to obtain a full hearing on the merits of these arguments during the claims settlement process.”

The ruling authorizes Celsius to sell approximately $18 million in stablecoins held in customer earning accounts.

In December, Glenn determined that a relatively small group of customers with various types of percentage accounts were entitled to a refund of their deposits during the Celsius bankruptcy. This provision was limited to customers with non-interest custodial accounts, whose funds were not commingled with other Celsius assets, and whose accounts were too small for Celsius to seek to recover to pay other customers.

The broader question of who owns crypto assets is crucial in other crypto bankruptcies as well, including those of crypto lenders Voyager Digital and BlockFi.

Additional reporting by Dietrich Knuth and Tom Hales in Wilmington, Delaware; Editing by Alexia Garamfalvi

Our standards: Thomson Reuters Trust Principles.