Celsius 'Earn' Assets Belong to Bankrupt Crypto Lender, Judge Rules

A federal judge ruled that customers of Celsius Network's interest-bearing "Earn" product had turned over control of their assets to the bankrupt crypto lender, meaning they are part of the company's bankruptcy estate.

Judge Martin Glenn, the chief U.S. bankruptcy judge in the Southern District of New York, said in a court order Wednesday that Celsius' terms of service made it clear it took possession of crypto assets deposited into its Earn product, dealing a blow to some customers hoping to recoup their funds from the company. Celsius held around $4.2 billion in various cryptocurrencies in its Earn product as of July 2022, with $23 million of that being in stablecoins.

"The Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the 'Estates')," he wrote.

Glenn also wrote that Celsius had "established a good business reason to permit the sale" of about $18 million worth of stablecoins, a move that state regulators and the U.S. Trustee's office had opposed. The proceeds from the sale of these stablecoins would fund Celsius' administrative costs for the next several months.

"A rare point of agreement among all parties is that the Debtors’ liquidity is precipitously running out," Glenn wrote. "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.'

The ruling allowing Celsius to retain control over the assets in its Earn account will have ramifications for cryptocurrency investors using similar products across other platforms, a number of which have also entered bankruptcy in recent months.

"The issue of ownership of the assets in the Earn Accounts is a contract law issue. The Debtors and Committee argue that the cryptocurrency assets deposited in Earn Accounts were owned by the Debtors and are now property of the Estates. Many Earn account holders ('Account Holders') argue that the Account Holders, rather than Celsius, own the cryptocurrency assets in the Earn Accounts and that cryptocurrency assets should promptly be returned to them," Glenn wrote.

Some of these account holders had argued that Celsius was in breach of its own contract or that Celsius had "failed to uphold its fiduciary duties," but the judge called Celsius's terms of service "unambiguous."

The court will hold a hearing on Jan. 10, 2023, at 11:00 a.m. ET to discuss a motion on by when Celsius creditors can submit their claims. A filing from Kirkland & Ellis attorney Joshua Sussberg currently proposes Feb. 9, 2023, as the deadline for proofs of claim, extending certain existing deadlines if approved.

A less-contentious area of concern for customers of bankrupt crypto exchanges are wallet services. Platforms such as Celsius and BlockFi, another bankrupt crypto lender, have generally treated wallet funds as belonging to their users rather than the companies themselves. Still, even this area is not without some controversy.

Some customers from BlockFi have filed a motion in its bankruptcy proceedings, arguing they had tried to convert some funds from BlockFi Interest Accounts to Wallet Accounts prior to BlockFi's bankruptcy, but that BlockFi is now trying to reverse some of these transactions.

"BlockFi evidently hoped no one would notice its attempt to sneak in a backdoor determination that customer assets are instead property of the estate through a largely evidence-free Motion on just 14 days’ notice over the Christmas and New Year holidays. BlockFi is required to seek such determination through an adversary proceeding, giving customers the full protections and safeguards of service of a complaint and summons, reasonable time to respond, the opportunity to take discovery, and a decision by the Court after a trial or other dispositive proceeding," the filing said.

In total, the sum of these accounts adds up to about $1.6 million, the filing said.

According to the document, the customers at hand transferred their funds from interest accounts to wallet accounts between Nov. 10, 2022, and Nov. 18, 2022. On Nov. 10, BlockFi announced it was suspending withdrawals, but, according to the court filing, the company did not say it was suspending these conversions.

According to the filing, at no point within this window did BlockFi say it would suspend transfers from interest accounts to wallet accounts.

"According to the Debtors’ own Motion, instead of actually halting transfers from BIA to Wallet, they simply stopped truing up the Wallet Reserve," the filing said. "... Each member of the Ad Hoc Committee received an email from BlockFi confirming that the transfer had taken place. Each member of the Ad Hoc Committee was able to see, in the BlockFi app, that assets had moved from BIA to Wallet."