January 4 (Reuters) – A US bankruptcy judge ruled on Wednesday that the Celsius Network owns most of the cryptocurrency that customers deposit into its online platform, meaning that most Celsius customers will be the last in line to be repaid in bankruptcy of crypto creditors.
The ruling by US Bankruptcy Judge Martin Glenn in New York affects approximately 600,000 accounts that have assets worth $4.2 billion at Celsius. filed for bankruptcy in July. The company does not have sufficient funds to repay the deposits, Glenn wrote.
The ruling means that most Celsius customers will be given lower priority than customers with non-interest bearing accounts and other secured creditors. It is unclear whether Celsius has secured debt.
The ruling also prevents conflicts for higher priority among customers with interest accounts, avoiding a situation where some customers pay 100% of their deposits while the same customers can recover “only a small percentage” of their deposits, according to Glenn. Celsius’ terms of service make it clear that the crypto lender takes ownership of customer deposits into interest-bearing Earn accounts, according to Glenn. That means Earn’s customers will be considered unsecured creditors in Celsius’ bankruptcy, and will be the last to repay after Celsius pays off its higher-priority debt.
Twelve US states and the District of Columbia objected to Celsius’ bid to claim the digital asset. They argued, among other things, that it was not clear whether customers understood the terms of service and that Celsius was being investigated in several countries for violating regulations, which could argue that the company should not rely on the terms of use.
The ruling does not mean that Earn’s customers will get “nothing” in the bankruptcy case, and does not stop further challenges to Celsius’ ownership of crypto deposits, Glenn wrote.
Celsius customers may bring fraud or breach of contract claims against crypto lenders, and state regulators may make a case that account holders’ contracts are unenforceable for violating state securities laws, according to the decision.
“The court did not take lightly the consequences of this decision for ordinary individuals, many of whom have deposited significant savings into the Celsius platform,” Glenn wrote. “Creditors will have every opportunity to be fully heard on the merits of these arguments during the claims resolution process.”
The decision authorizes Celsius to sell approximately $18 million worth of stablecoins that have been deposited into customers’ Earn accounts.
In December, Glenn rule that a relatively small group of customers with various Celsius accounts were entitled to their deposits back when Celsius went bankrupt. The ruling is limited to customers who have non-interest-bearing custody accounts, whose funds are not commingled with other Celsius assets, and whose accounts are too small for Celsius to pursue repayment of other customers.
At a broader question of crypto asset holders are also critical in 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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