Celsius’ bankruptcy judge’s ruling says account holders don’t own their accounts


More than half a million people who deposited money into bankrupt crypto lender Celsius Network have suffered a major blow to their hopes of getting their funds back, with the company’s bankruptcy judge ruling that the money belongs to Celsius, not the depositors.

The judge, Martin Glenn, found that Celsius’s terms of service – the lengthy contracts that many websites publish but few users read – meant that “cryptocurrency assets become the property of Celsius”.

The decision underscores the wild west nature of the unregulated crypto industry. On Thursday, New York Attorney General Letitia James decided to impose some sort of injunction, or at least legal consequences, on Celsius founder Alex Mashinsky, whom she accused in a lawsuit of defrauding hundreds of thousands of consumers.

Crypto’s fortunes have plummeted in recent months since Celsius became the first major crypto platform, I’m imploding last year, its July bankruptcy froze at least $4.2 billion for 600,000 Americans, according to court filings, and portends FTX crash four months later.

And while Glenn’s decision won’t affect FTX, whose terms of use were different, some analysts saw the decision spreading beyond Celsius.

“There are many other platforms that include terms of use that are similar to Celsius,” said Aaron Kaplan, an attorney at the financially focused firm of Gusrae Kaplan Nussbaum and co-founder of his own crypto company. Clients should “understand the risks they are taking when they deposit their assets in under-regulated platforms,” ​​he said.

James’ lawsuit, meanwhile, alleges that Mashinsky used “false and misleading representations to cause [customers] to deposit billions of dollars in digital assets.” The lawsuit seeks unspecified damages from Mashinsky and seeks to bar him from a range of financial and other activities in New York.

A Celsius spokesman, Luke Wolff, said Mashinsky is no longer involved in the company’s management. Mashinski did not respond to a message seeking comment.

For years, Celsius promised extravagant interest rates on the order of 20 percent to people in a sort of fantasy version of a real-world bank, driving many who weren’t interested in crypto into the market.

The suit says Mashinsky is the cause. “In hundreds of interviews, blog posts and live broadcasts,” it said, “Mashinsky promoted Celsius as a safe alternative to banks while concealing that Celsius actually engaged in risky investment strategies.”

The Frozen Crypto Mystery: The Fate of Billions in Celsius Deposits

Mashinski was known for his regular “Ask Mashinski Anything” questions and answers online and t-shirts with messages such as “Banks are not your friend.” Hordes of fans on YouTube and Twitter hailed the cult of “The Machine,” as it was nicknamed. If FTX’s Sam Bankman-Fried was the public face of crypto in the halls of Washington, Mashinsky was often the best-known symbol to ordinary investors.

The suit paints a picture of a man intent on portraying himself as a hero to the unbanked and working class, when much of those people’s money was actually being used to finance high-risk investments.

“Touting himself and his company as a modern-day Robin Hood, Mashinsky boasted that Celsius was ‘bringing mining … to people who could never do it themselves, [and] we take it from the rich,” the suit said. “Those promises were false.”

According to the bankruptcy court, however, there may be a limit to what the legal system can do when crypto companies are resourceful enough to defend themselves. The investors and a number of countries that have signed on to their proposal say the language is, to say the least, “ambiguous” about the rights granted to Celsius. But Glenn disagreed.

Celsius’ attorneys, Joshua Sussberg and Patrick J. Nash Jr., and the creditors’ attorneys, Gregory Pesce and Andrea Amulik, did not respond to requests for comment.

The bankruptcy ruling focuses specifically on whether Celsius, as part of the restructuring, can now sell $18 million in so-called stablecoins, a type of virtual currency, to help it stay solvent. But its implications are far greater. By ruling that the money in the accounts was not actually owned by the 600,000 account holders, the court effectively said they were now just unsecured creditors. And “there just won’t be enough value available to pay them off,” Glenn writes.

The effects may even go beyond them to affect other crypto platforms with strict language in their fine print – creating problems for customers in the event of a crash.

“It just raises another question about how difficult it is to transact in the Wild West of crypto,” said Brian Marks, who teaches economics and business law at the Pompea College of Business at the University of New Haven and has studied the Celsius case. “I wouldn’t be surprised to see other companies revise their terms and conditions after this.”

The connections between crypto firms are vast, and the failures of one can affect another, even months later. On Thursday, crypto lender Genesis said will lay off 30 percent of its staff, partly as a result of a loan to FTX subsidiary Alameda Research.

Celsius’ creditors are also affected by FTX’s bankruptcy. The New York lawsuit revealed that Mashinsky’s former firm lent $1 billion to Alameda, which it secured against FTX’s FTT token.

“The value of FTT has since fallen by approximately 95%,” it said, “leaving Celsius holding almost worthless collateral.”

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