New York Judge orders Celsius to return $44M in crypto to customers

New York Bankruptcy Judge Martin Glenn has ordered defunct crypto exchange Celsius to return $44 million in crypto to its customers.

On Wednesday, the judge ruled that a subset of assets in the exchange's custody accounts could be distributed to its former customers. As of August this year, Celsius held $210 million in custody accounts. However, only 44 million of those assets fulfilled the order's criteria.

The company pledged Glenn to declare assets in its custody accounts as client property, while the high-yield earn accounts should belong to Celsius. The crypto exchange argued that the court should treat its "earn" and "custody" accounts differently.

In crypto, an earn account is an interest-bearing account, while a custody account only offers a space to store digital assets without generating interest. BlockFi, which just started its bankruptcy proceedings, also provided similar types of products.

Celsius plans to use some of its assets in the earn accounts to pay for the bankruptcy proceedings. On Monday, the company received approval for a $2.8 million key employee retention program (KERP) to continue limited operations.

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Glenn is the first U.S. judge to weigh in on the crypto ownership of frozen assets at a defunct crypto exchange. He discussed the difficulty of the case during Wednesday’s hearing.

"It can get complicated," Glenn said. "I'm trying as expeditiously as possible to get through as many issues as I can."

Analysts said that the way Celsius operated its earn accounts showed that the firm managed crypto deposits the same way a traditional bank would manage its deposits. Celsius also used the deposited crypto to make loans or blended it with other customer holdings.

Investor Daniel Frishberg expressed his disappointment in the way Celsius managed the business. He said it was like being “stabbed in the back” because Celsius founder Alex Mashinsky used to look down on banks. Frishberg described Celsius as “much worse than the banks."

"I felt like I was stabbed in the back because (Celsius founder Alex) Mashinsky said several times, ‘Banks are not your friends,'"

Daniel Frishberg, investor

Founded in 2017, Celsius announced bankruptcy on July 13. Before filing for Chapter 11, Celsius suspended customer withdrawals. The company was $1.2 billion in the red when it went bankrupt. Of its $5.5 billion liabilities, $4.7 billion represents customer holdings.

Impact on future proceedings

Analysts said that Glenn’s handling of Celcius would shape the rulings for future cases, especially since several major crypto firms also filed for Chapter 11 this year. Bankrupt firms like Voyager Digital, FTX and BlockFi do not have enough assets to repay their creditors in full.

Customer funds in crypto companies are not insured because these companies do not fully adhere to U.S. securities and commodities laws. Many of them also operate offshore.

Meanwhile, traditional financial products such as bank deposits and brokerage accounts are backed by the U.S. government. Bank and broker clients can get up to $250,000 and $500,000.

According to several bankruptcy specialists, the court must look beyond the user agreements and examine how crypto firms handle customer deposits. Vanderbilt University law professor Yesha Yadav said the issue would be “thorny” for the court due to the discrepancy between the regulation and real-life practice.

"The bankruptcy courts are now the vanguard of rulemaking in relation to crypto, because it's going to be deciding fundamental issues in relation to asset allocation and client custody," Yadav said. "This is going to have enormous influence on crypto companies and crypto customer behavior."