A federal bankruptcy judge has ruled that cryptocurrency deposited into Celsius Network’s interest-bearing accounts actually belonged to the company, thanks to fine print.
According to a 45-page document filed Wednesday in the U.S. Bankruptcy Court for the Southern District of New York, the judgment gives Celsius users ownership of $4.2 billion in cryptocurrencies deposited into its high-interest Earn program.
Through the Earn program, Celsius allows users to deposit cryptocurrencies such as Bitcoin, Ethereum, and Tether and collect interest on a weekly basis. Depending on the time frame and coin, the platform offers up to 18% interest per annum.
The document states that Celsius has approximately 600,000 accounts in its Earn program, with a combined value of approximately $4.2 billion as of July 10, 2022. About $23 million of that was in stablecoins. But the judge ruled that all are now the property of the estate, also known as Celsius. Due to Celsius’s “clear” terms and conditions, any crypto assets deposited into Earn Accounts, including stablecoins, become the property of Celsius, the filing said.
Celsius, once one of the largest cryptocurrency lenders in the world, filed for bankruptcy protection in mid-July 2022. At the time, Celsius said it had assets and liabilities of between $1 billion and $10 billion and had more than 100,000 creditors.
Celsius froze customer withdrawals in June, citing "extreme market conditions" before filing for bankruptcy. The freeze was never lifted. The judge ruled that the crypto assets held in those accounts are now the property of Celsius. The decision stands in stark contrast to the arguments made by thousands of Celsius customers who claimed that the funds they deposited were in fact their own. Celsius was in a court battle with clients over ownership of deposited funds last month as it sought to sell about $18 million worth of stablecoins from Earn accounts to fund its organization. Celsius can now sell those assets.
For those hoping to fight the court ruling and get their funds back, that seems unlikely because "there simply wasn't enough value to fully reimburse all account holders," the filing said. In bankruptcy proceedings, priority in obtaining frozen funds is usually given to secured creditors. But the filing treats Earn plan account holders as Celsius' unsecured creditors, meaning their recovery is contingent on distributions to unsecured creditors under the Chapter 11 bankruptcy plan.
“If only some account holders prevail on the argument that they own the crypto assets in their accounts, they would expect to recover 100% of their claims, while the majority of account holders, as unsecured creditors, may only recover a small portion of their partial claim." Going forward, this judgment could set a precedent for investors across the crypto industry and what one's terms of use really mean for people depositing money on the platform. It could also be indicative of what might happen to other Chapter 11 bankruptcy proceedings taking place in the crypto space, such as FTX, Voyager, and BlockFi, to name a few.
