A U.S. bankruptcy judge ruled on Jan. 4 that digital assets deposited into the cryptocurrency lending platform Celsius Network’s Earn program belong to the now-bankrupt company’s estate and not individual users.
Celsius filed for Chapter 11 bankruptcy in July 2022 amid a liquidity crisis. At the time, the company had approximately 600,000 accounts that earned interest as part of its Earn program, according to a court document (pdf) published by Celsius claims agent Stretto.
Under the program, users were able to earn interest on cryptocurrencies deposited with the company. However, users lost access to their funds in June last year when the company suspended withdrawals on its platform because of what it said were “extreme market conditions.”
Judge Martin Glenn ruled Wednesday that the roughly $4.2 billion in cryptocurrency deposits belong to Celsius, citing the program’s terms of use.
“The issue of ownership of the assets in the Earn Accounts is a contract law issue,” the judge wrote (pdf) while pointing to the latest version of the Earn program’s terms of use.
According to the judge, the terms state that Celsius held “all right and title to such Eligible Digital Assets, including ownership rights,” of the cryptocurrency assets, including stablecoins, deposited in Earn Accounts.
Stablecoins made up a portion of the Earn accounts and were valued at around $23 million in September, according to Decrypt.
Account holders had argued that the terms of service of the Earn program were “ambiguous” and that ownership of the assets should not be considered until further possible “extrinsic evidence”—statements made by former company Chief Executive Alex Mashinksy—were taken into consideration.
“The objectors say that numerous statements by Celsius’s former Chief Executive Officer (“CEO”), Alex Mashinsky, and possibly other extrinsic evidence, demonstrate that the Account Holders have always owned the assets in the Earn Accounts,” Glenn wrote.
While Glenn noted that the court “does not take lightly the consequences of this decision on ordinary individuals, many of whom deposited significant savings into the Celsius platform,” he ultimately ruled that those who deposited funds are considered unsecured creditors and Celsius can use the digital assets in any way it sees fit.
“As has been said repeatedly in this opinion, creditor’s rights with respect to various defense to and breach of contract claims are reserved. Creditors will have every opportunity to have a full hearing on the merits of these arguments during the claims resolution process,” the judge wrote.
He also noted that the company could sell the millions worth of stablecoins that were deposited into the Earn program accounts and use that to fund its bankruptcy proceedings, as the company is fast running out of funds.
“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 section 363(b) sale, or even a liquidation plan,” Glenn wrote.
“The Debtors project that additional liquidity will be needed in early 2023. The Debtors demonstrate a sound business justification for selling stablecoins, and the Court agrees that it is appropriate to grant authority to do so,” the judge wrote.
In December, Celcius was given an extension to file a Chapter 11 restructuring plan by Feb. 15, 2023.
Last month, Glenn ordered that the cryptocurrency lending platform return around $44 million worth of cryptocurrency to customers but only those held in custodial accounts, a less popular type of account offered by the now-bankrupt company.
Wednesday’s ruling will likely place cryptocurrency platforms’ terms of service under more scrutiny and could potentially play a role in how other bankruptcy proceedings play out, including that of failed cryptocurrency exchange, FTX, which collapsed in November amid a liquidity crisis.
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