Court Rules Celsius Network Owns Customer Crypto Assets

Administrators for Celsius Network have been handed a legal victory this week after a US judge ruling on customer crypto deposits.

Last July New Jersey-based Celsius Network filed for Chapter 11 bankruptcy protection, days after Vermont’s Department of Financial Regulation (DFR) had warned Celsius was “deeply insolvent and lacks the assets and liquidity to honour its obligations to account holders and other creditors.”

The bankruptcy move came after Celsius Network in June froze all withdrawals, swaps, and transfers between customer accounts, citing “extreme” conditions.

Judge ruling

Celsius, which had a value of $12bn was one of the biggest crypto lending platforms in the US, which allowed users to lend out their tokens as collateral for other crypto projects in exchange for annual yields of up to 17 percent.

But investor interest in such high-risk areas dropped off dramatically since the collapse of the TerraUSD “stablecoin” in May 2022, which along with the Luna coin was linked to a similar high-yield scheme.

The collapse of FTX took place in October, and triggered another investor retreat.

Now Reuters has reported that a US bankruptcy judge (Judge Martin Glenn in New York) has ruled on Wednesday that Celsius Network owns most of the cryptocurrency that customers deposited into its online platform.

This means that most Celsius customers will be last in line for repayment in the crypto lender’s bankruptcy.

The ruling impacts roughly 600,000 accounts that held assets valued at $4.2 billion when Celsius filed for bankruptcy in July.

The company does not have enough funds to fully repay those deposits, Glenn reportedly wrote.

The ruling means that most Celsius customers will be lower priority than customers who held non-interest bearing accounts and other secured creditors.

Reuters noted that it was unclear whether Celsius has significant secured debt.

It reported that twelve US states and the District of Columbia had objected to Celsius’ bid to claim the digital assets.

They argued among other things that it was unclear if customers understood the terms of service and that Celsius was under investigation in several states for violating regulations, which could arguably prevent the company from relying on the terms of use.

Further challenges

The ruling does not mean that Earn customers will get “nothing” in the bankruptcy case, and it does not stop further challenges to Celsius’s 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 make the case that the account holders’ contracts cannot be enforced because they violated state securities laws, according to the ruling, Reuters noted.

“The Court does not take lightly the consequences of this decision on ordinary individuals, many of whom deposited significant savings into the Celsius platform,” Glenn wrote. “Creditors will have every opportunity to have a full hearing on the merits of these arguments during the claims resolution process.”

The ruling authorises Celsius to sell approximately $18 million stablecoins that had been held in customers’ Earn accounts.

But the ruling could have implications about the ownership of crypto assets at other failed crypto exchanges, such as crypto lenders Voyager Digital and BlockFi.