US judge says Celsius Network owns majority of customer crypto deposits

Jan 4 (Reuters) – A U.S. bankruptcy judge ruled on Wednesday that Celsius Network owns most of the cryptocurrency that customers have deposited into its online platform, meaning most Celsius customers will be last in line to be paid out in case of cryptocurrency bankruptcy.

The ruling by U.S. Bankruptcy Judge Martin Glenn in New York affects roughly 600,000 accounts that hold assets valued at $4.2 billion when Celsius filed for bankruptcy in July. The company does not have sufficient funds to repay these deposits in full, Glenn wrote.

The decision means most Celsius customers will be given a lower priority than customers who had interest-free accounts and other secured creditors. It was unclear whether Celsius had significant secured debt.

The decision also prevents an internal battle for higher priority among customers with interest-bearing accounts, avoiding a situation where some of those customers are paid 100% of their deposits, while similarly situated customers may recover “only a small percentage” of their deposits, according to Glenn. Celsius’ terms of service made it clear that the crypto lender took ownership of customer deposits in its interest-bearing Earn accounts, according to Glenn. This means that Earn’s customers will be treated as unsecured creditors in Celsius’ bankruptcy and will be last in line to be paid once Celsius has paid off higher priority debts.

Twelve US states and the District of Columbia objected to Celsius’ bid 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.

The ruling does not mean that Earn customers will receive “nothing” in the bankruptcy case, and does not stop further disputes over Celsius’ ownership of the crypto deposits, Glenn wrote.

Celsius customers may be able to bring fraud or breach of contract claims against the crypto lender, and state regulators may be able to claim that account holders’ contracts are unenforceable because they violated state laws on securities, according to the decision.

“The court does not take lightly the consequences of this decision on ordinary people, many of whom have deposited significant savings into the Celsius platform,” Glenn wrote. “Creditors will have every opportunity to hear these arguments fully during the claims resolution process.”

The ruling allows Celsius to sell roughly $18 million worth of stablecoins that were held in customers’ Earn accounts.

In December, Glenn managed that a relatively small group of customers with various types of Celsius accounts were entitled to their deposits during the Celsius bankruptcy. This decision was limited to customers who had non-interest-bearing escrow accounts, whose funds were not commingled with other Celsius assets, and whose accounts were too small for Celsius to attempt to withdraw them to pay other customers.

The a broader question who owns crypto assets has also been crucial in other crypto bankruptcies, including the cases of crypto lenders Voyager Digital and BlockFi.

Reporting by Dietrich Knauth and Tom Hals in Wilmington, Delaware; Editing by Alexia Garamfalvi

Our standards: Thomson Reuters Trust Principles.

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