Kharkov, Ukraine - February 2, 2022: Celsius CEL coin symbol. Trade with cryptocurrency, digital and virtual money, mobile banking. Hand with smartphone, screen with crypto icon close-up — Stock Editorial Photography

Celsius owned the assets in Earn accounts, not the users, judge rules

A United States federal judge has ruled that Celsius Network owned all the digital assets deposited in its Earn accounts, not the users.

Ownership of the assets on Earn accounts has been in contention since the collapsed lender filed for bankruptcy mid-last year. Celsius has maintained that its terms of use entitle it to ownership of the assets. Users have disputed the claims, arguing that the terms of use were vague and that statements from the lender’s leadership, including founder Alex Mashinsky, led them to believe they owned the assets.

Now, U.S. Bankruptcy judge Martin Glenn has ruled in favor of the lender.

“The Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the ‘Estates’),” Judge Glenn stated in his ruling.

The landmark ruling has significant ramifications. For one, it sets a precedent for other digital asset lender bankruptcy proceedings, and there isn’t a shortage of these.

More significantly, it throws into question when (and if) most Celsius users will get their money back. Before filing for bankruptcy, Celsius held over $4.2 billion in assets for 600,000 clients in Earn accounts.

Judge Glenn’s ruling means that these clients are now categorized as unsecured creditors to Celsius. In the bankruptcy proceedings, they are prioritized below the customers who used non-interest-bearing accounts and the secured creditors.

In addition to ruling that Celsius owns the digital assets in Earn accounts, Judge Glenn gave the lender the green light to sell $18 million worth of digital assets and channel the funds to its operations.

“A rare point of agreement among all parties is that the Debtors’ liquidity is precipitously running out. The Debtors need to generate liquidity to fund these Chapter 11 cases and continue down the path either of a standalone plan reorganization, a sale, or even a liquidation plan,” the New York judge stated.

Big blow for Celsius Network customers

The ruling is a big blow for Celsius clients, who have waged a great legal battle against the company. They argued that the terms of use were vague and ambiguous at best. They also claimed that statements made by Alex Mashinsky led them to believe they owned the assets.

The customers had the support of regulators from 12 U.S. states and the District of Columbia, who argued it was unclear if the clients fully understood they were giving up ownership of their assets. In addition, Celsius is under investigation in several states, which prevents the lender from relying on its terms of use.

Judge Glenn, in his ruling, made it clear he understands that he had dealt a big blow to ordinary investors.

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

Judge Glenn previously ruled that Celsius must return $44 million to customers of its Custodial wallet. These customers were not earning any interest, and the company did not own their funds, he ruled.

The ruling will reverberate through other bankruptcy proceedings. BlockFi, another bankrupt lender, recently filed a motion seeking to only return funds to users of its non-interest-bearing accounts.

While Celsius was winning its current legal battle, its founder Mashinsky was sued by the New York Attorney General’s Office for fraud. NYAG Letitia James is seeking damages, disgorgement, and a ban on Mashinsky from conducting other business in the state.

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