Celsius’ Third Bankruptcy Hearing Yields Little in the Way of Customer Relief

The three-hour hearing was largely spent on a back-and-forth over whether custodial account holders will be able to get their money back.

AccessTimeIconSep 1, 2022 at 6:23 p.m. UTC
Updated May 11, 2023 at 5:09 p.m. UTC
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Crypto lender Celsius Networks' customers still want their money back, but a judge appears to be in no hurry to authorize withdrawals – at least right now.

Much of Thursday's three-hour hearing focused on whether custodial account holders should be able to get their funds back, and which types of custodial account holders qualify. Celsius clients believe any custodial account holder – meaning any customer who deposited their funds in a custody account but retained ownership of the assets, as opposed to Earn and Borrow customers who expected some sort of yield or benefit – should receive their funds.

Celsius maintains that only "pure" custodial account holders are eligible, and not customers who originally deposited funds in the Earn product and later converted to custody.

The distinction is important because the lender filed for Chapter 11 bankruptcy protection 89 days after it introduced its custodial wallet to customers. Funds transferred 90 days prior to Celsius’ filing for bankruptcy might be subject to clawback under U.S. law.

Celsius depositors were suspicious of the timing of the filing, but a Kirkland & Ellis lawyer, representing Celsius, denied it was intentional, saying there were “no conspiracies.”

Judge Martin Glenn, of the Bankruptcy Court for the Southern District of New York, did not make a ruling on the matter, and tried several times to end the back-and-forth arguments on the subject.

“The judge is kicking the can down the road,” said Erik Mendelson, director of Blockchain Business Development at OneOf, told CoinDesk. “He wants Celsius' proposal and [the Custody account holders'] declaratory judgement request merged and a court date set to resolve this specific issue.”

Another hearing for the ongoing bankruptcy case is scheduled for Sept. 14, 2022, though the judge also suggested a separate session to hash out the differences may be beneficial. There is also a hearing scheduled for Oct. 6, 2022, to discuss the custody account holders. Both Celsius and the custody account holders will make proposals ahead of that discussion.

In addition to the debate over customer funds, attorneys also discussed how much customer information would be made public as the case progresses. Judge Glenn was initially opposed to redacting creditor email addresses and home addresses on the public docket, but softened after hearing arguments from both sides about the cybersecurity risks. No final decision was made.

Celsius also said it expects some amount of cash relief due to the expected return of a $61 million loan, initially believed to be in stablecoins.

“Those funds are expected to come back into the estate in cash as opposed to in coin,” a lawyer for Celsius told the court. “It’s a minor technicality that happens to help out the company’s cash liquidity.”

The judge later took aim at Celsius law firm Kirkland & Ellis over the crypto lender's cash and asset management track record when one of Celsius’ lawyers was discussing the company’s “robust” accounting practices.

“The debtors’ transparency on where the crypto is being held is lacking,” Judge Glenn said.

No issues were resolved in Thursday's hearing.


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Cheyenne Ligon

Cheyenne Ligon was a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

Krisztian  Sandor

Krisztian Sandor is a reporter on the U.S. markets team focusing on stablecoins and institutional investment. He holds BTC and ETH.

Nikhilesh De

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

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