US judge says Celsius Network owns majority of customers’ cryptocurrency vaults

Jan 4 (Reuters) – A US bankruptcy judge ruled on Wednesday that Celsius Network owns most of the cryptocurrency customers deposited on its online platform, meaning most Celsius customers will be last in line for the repayment in case of bankruptcy of the cryptocurrency lender.

US Bankruptcy Judge Martin Glenn’s ruling in New York affects about 600,000 accounts that held $4.2 billion worth of assets when Celsius filed for bankruptcy in July. The company does not have sufficient funds to fully repay those deposits, Glenn wrote.

The ruling means that most Celsius clients will be given lower priority than clients who held interest-free accounts and other secured creditors. It is unclear whether Celsius has significant guaranteed debt.

The ruling also prevents infighting over higher priority among clients with interest-bearing accounts, avoiding a situation where some of these clients are refunded 100% of their deposits while clients in similar situations can recover “only a small percentage” of their deposits, according to Glenn. Celsius’s terms of service clarified that the cryptocurrency lender has taken ownership of customer deposits in its interest-bearing Earn accounts, according to Glenn. This means that Earn’s clients will be treated as unsecured creditors in Celsius’s bankruptcy and will be last in line to repay after Celsius has paid off higher priority debts.

Twelve US states and the District of Columbia had opposed Celsius’s bid to claim the digital assets. They also argued that it was unclear whether customers understood the terms of service and that Celsius was under investigation in several states for violating the regulations, which could likely prevent the company from relying on the terms of use.

The ruling doesn’t mean Earn’s clients will get “nothing” in the event of bankruptcy, and it doesn’t prevent further challenges to Celsius’s ownership of cryptocurrency deposits, Glenn wrote.

Celsius customers may be able to file fraud or breach of contract claims against the cryptocurrency lender, and state regulators may be able to argue that the account holders’ contracts cannot be enforced because they violated the laws state bonds, according to the ruling.

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

The ruling authorizes Celsius to sell approximately $18 million worth of stablecoins that had been held in clients’ Earn accounts.

In December, Glenn ruled that a relatively small group of customers with different types of Celsius accounts were eligible for their deposits to be returned during Celsius’s bankruptcy. That ruling was limited to clients who had non-interest-bearing deposit accounts, whose funds were not mixed with Celsius’s other assets, and whose accounts were too small for Celsius to seek to repossess to repay other clients.

The broader question of who owns the crypto assets is also central to 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

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