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Celsius Network's Bankruptcy Ruling Affects 600k Accounts Worth $4.2bn

On Wednesday, a US bankruptcy judge ruled that Celsius Network owns most of the cryptocurrency deposited by customers on its platform.

Celsius Network Logo
Celsius Network Logo

This ruling affects approximately 600,000 accounts with assets valued at $4.2bn at the time of Celsius' bankruptcy filing in July. Judge Martin Glenn stated that the company has insufficient funds to repay these deposits fully. As a result, most Celsius customers will have lower priority than those who hold non-interest-bearing accounts and other secured creditors. It is currently unclear whether Celsius has any significant secured debt.

Twelve US States Object to Celsius' Claim on Digital Assets

Twelve US states and the District of Columbia objected to Celsius' claim on the digital assets in question. These objections included the argument that it was unclear whether customers understood the terms of service and that Celsius was being investigated in several states for violating regulations. This could prevent the company from relying on the terms of use.

Earn Customers May Bring Fraud or Breach of Contract Claims

The ruling does not necessarily mean that Earn customers will receive nothing in the bankruptcy case and does not prevent further challenges to Celsius' ownership of the crypto deposits. Earn customers may be able to bring fraud or breach of contract claims against the company. State regulators may argue that the accountholders' contracts cannot be enforced due to violations of state securities laws. Judge Glenn stated that "creditors will have every opportunity to have a full hearing on the merits of these arguments during the claims resolution process."

Celsius Authorized to Sell $18m in Stablecoins From Customer Earn Accounts

The ruling also authorizes Celsius to sell approximately $18m in stablecoins held in customers' Earn accounts. In December, Judge Glenn ruled that a small group of customers with different types of Celsius accounts were entitled to their deposits back during the company's bankruptcy proceedings. This ruling was limited to customers with non-interest-bearing custody accounts whose funds were not commingled with other Celsius assets and whose accounts were too small for the company to attempt to claw back to repay other customers.

Crypto Asset Ownership a Critical Issue in Other Crypto Bankruptcies

The crypto asset ownership issue is also critical in other crypto bankruptcies, including the cases of Voyager Digital and BlockFi.

Impact on Celsius Customers

The ruling has significant implications for the approximately 600,000 affected Celsius customers, many of whom deposited significant savings into the platform. As unsecured creditors, they will be last in line for repayment after higher-priority debts are taken care of. It is not yet clear how much of their deposits they will be able to recover, as the final distribution of assets will depend on the outcome of any fraud or breach of contract claims and challenges to ownership, as well as the number of funds available after higher priority debts are repaid.

Possible Challenges to Celsius' Ownership

While the ruling establishes that Celsius owns most of the cryptocurrency in question, it does not prevent further challenges to this ownership. Customers may bring fraud or breach of contract claims against the company. State regulators may argue that the accountholders' contracts cannot be enforced due to violations of state securities laws. It will ultimately be up to the court to decide the outcome of such claims and challenges during the claims resolution process.

Implications For the Broader Cryptocurrency Industry

The ruling in the Celsius bankruptcy case has wider implications for the cryptocurrency industry as a whole. It highlights the importance of thoroughly understanding the terms of service and the ownership of digital assets when using a crypto platform. It also underscores the risks associated with investing in cryptocurrency and the need for proper due diligence before entrusting digital assets to a third party.