Bad News if You're a Celsius Earn Customer: You'll Be Back of the Queue for a Payout
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Bad News if You're a Celsius Earn Customer: You'll Be Back of the Queue for a Payout

Created 4mo ago, last updated 4mo ago

The ruling puts some 600,000 customers at the back of the line when the crypto lenders' remaining assets are divvied up, but the ruling can be challenged later in the claims process.

Bad News if You're a Celsius Earn Customer: You'll Be Back of the Queue for a Payout

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If you are one of the roughly 600,000 people who entrusted $4.2 billion to an interest-bearing account with Celsius Network, the bad news is that a bankruptcy judge just said it doesn't belong to you.

Specifically, it belongs to Celsius — and has from the moment you opened a high-yield Earn account offering as much as 18% on your crypto.

The worse news is, that means you'll be last in line when the court divvies up what's left after former CEO Alex Mashinsky's bad investment decisions — he bet heavily on very risky DeFi projects to be able to offer those rates — caused it to freeze withdrawals in June and enter Chapter 11 bankruptcy a month later.

In his ruling Wednesday, Chief U.S. Bankruptcy Judge Martin Glenn ruled that:

"Based on Celsius's unambiguous terms of use ... when the cryptocurrency assets (including stablecoins) were deposited in Earn accounts, the cryptocurrency assets became Celsius's property."

He said the language in the Celsius terms of use were very clear in that regard, citing them as saying:

"Not granting a security interest to users and, to the contrary, providing that "once such eligible digital assets are received by Celsius ... they shall be Celsius' property, in every sense and for all purposes."

In the short term, that means that Celsius' management can sell $18 million worth of stablecoins to cover the costs of remaining in Chapter 11 past March, when it has said the company will run out of money.

In the long term, it does not mean Celsius customers will get nothing. But they will be behind secured creditors and people who had non-interest bearing accounts at Celsius (not that there were many of the latter.)

Other Avenues

A dozen U.S. states had fought Celsius' current management's attempt to claim ownership of the funds — saying that customers may not have understood the terms, and that the company was under investigation in several states for regulatory violations that might prevent it from enforcing the terms of service, or that the terms themself might have been illegal.

That includes the possibility that Celsius violated state securities laws. A majority of states and the Securities and Exchange Commission have argued that crypto earn accounts like those offered by Celsius are actually unregistered securities offerings and thus illegal.

Indeed, another bankrupt crypto lender, BlockFi, paid $100 million in fines to the SEC and 32 state securities regulators in February 2022 to settle similar charges.

Beyond that, Judge Glenn noted that Celsius customers can continue to challenge the company estate's ownership of their funds on other grounds, including a "litany of allegations including, but not limited to, fraudulent inducement into the contract, fraudulent conveyance, breach of contract, and that the contract was unconscionable," Judge Glenn wrote. "These allegations may (or may not) have merit, and the creditors' rights with respect to such claims are explicitly reserved for the claims resolution process." He added:

"Creditors will have every opportunity to have a full hearing on the merits of these arguments during the claims resolution process."
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