The judge overseeing Celsius Network’s bankruptcy case is expected to decide if the crypto firm has full ownership rights over customer deposits, a key legal issue that may resonate for millions of other users of failed crypto platforms.
Judge Martin Glenn of the US Bankruptcy Court in New York is set to consider this week whether Celsius has the right to lend, sell and reinvest billions of dollars of crypto deposited in its high-interest accounts. Customers have clamoured for a return of their coins as quickly as possible, and have argued that Celsius and its founder, Alex Mashinsky, touted that customers would retain control over their deposits.
The immediate impact of a ruling in favour of Celsius would be to allow the company to sell $18m in stablecoins to fund the expenses for a longer stay in chapter 11. But the firm’s request to sell those stablecoins turns on a more fundamental legal question: What rights do crypto banks, brokerages or exchanges have over their customers’ coins?
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“Any decision will be based on the facts in Celsius and will set forth the reasoning which can then be applied to the particular facts in FTX or another case to provide some precedential or persuasive clarity on an issue that is at present unsettled,” said Eric Wise of Alston & Bird, a lawyer representing a number of customers of FTX.
The Wall Street Journal has reported that before filing for Chapter 11 FTX had sent billions of dollars of customer assets to its affiliated trading firm Alameda Research, and that senior FTX officials were aware of it. FTX’s co-founder, Sam Bankman-Fried, has denied knowingly commingling customer funds, or knowing the scale of Alameda’s trading bets.
Lawyers for the committee representing all Celsius customers have largely supported the firm’s argument that customers signed over title to their crypto assets, while warning that it needs a sound business justification for any such sale.
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Several state regulators and individual customers have weighed in against the firm’s position and its plan to sell deposited crypto to fund the chapter 11 case, court filings show. The judge’s decision could influence how much financial flexibility crypto firms have in chapter 11 to use customer assets to forge a restructuring plan.
Some state regulators have said that language in the firm’s contracts was ambiguous and that it should not be selling customers’ coins until it has a plan to exit bankruptcy.
A number of states have questioned whether Celsius can exit bankruptcy with a crypto business intact at all, and whether it makes more sense for the firm to “focus on an expeditious and efficient shutdown” instead.
Write to Soma Biswas at firstname.lastname@example.org
This article was published by The Wall Street Journal, part of Dow Jones
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