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Celsius Bankruptcy Judge Says Account Holders Don’t Own Their Accounts


More than half a million people who deposited money with collapsed crypto lender Celsius Network have suffered a major blow to their hopes of getting their money back, with the judge in the company’s bankruptcy case ruling that the money belongs to Celsius and not the depositors.

The judge, Martin Glenn, found that Celsius’s terms of service — the lengthy contracts that many websites publish but few consumers read — meant that “the cryptocurrency assets became Celsius’s property.”

The ruling underscores the wild west nature of the unregulated crypto industry. On Thursday, New York Attorney General Letitia James moved to impose some sort of injunction, or at least legal consequences, against Celsius founder Alex Mashinsky, whom she accused in a lawsuit of defrauding hundreds of thousands of consumers.

Crypto fortunes have plunged in recent months since Celsius became the first major crypto platform to implode last year, and its bankruptcy in July froze at least $4.2 billion for 600,000 Americans, according to court filings, and heralded the collapse of FTX four months later.

And while Glenn’s ruling won’t affect FTX, whose terms of use were different, some analysts saw the ruling spreading beyond Celsius.

“There are many other platforms that have terms of use similar to Celsius,” said Aaron Kaplan, an attorney at the finance-focused firm Gusrae Kaplan Nusbaum and co-founder of his own crypto company. Clients must “understand the risk they are taking when they deposit assets on inadequately regulated platforms,” ​​he said.

James’ lawsuit, meanwhile, claimed that Mashinsky used “false and deceptive representations to induce [customers] to invest billions of dollars in digital assets.” The suit seeks unspecified damages from Mashinsky and seeks to bar him from a variety of financial and other work in New York.

A Celsius spokesman, Luke Wolf, said Mashinsky is no longer involved in the management of the company. Mashinsky did not respond to a message seeking comment.

For years, Celsius promised extravagant interest rates in the neighborhood of 20 percent to people in a kind of fantasy version of a real-life bank, driving many who had no interest in crypto to enter the market.

The suit says Mashinsky was the cause. “In hundreds of interviews, blog posts and live streams,” it says, “Mashinsky promoted Celsius as a safe alternative to banks, while concealing that Celsius was actually engaged in risky investment strategies.”

Crypto’s Frozen Mystery: The Fate of Billions in Celsius Deposits

Mashinsky was known for his regular “Ask Mashinsky Anything” online questions and answers and T-shirts with messages like “Banks Are Not Your Friends.” Scores of fans on YouTube and Twitter paid tribute to the cult of “The Machine”, as he was nicknamed. If FTX’s Sam Bankman-Fried was the public face of crypto in the halls of Washington, Mashinsky was often its most prominent symbol to ordinary investors.

The suit painted a picture of a person intent on pitching himself as a hero to the unbanked and working class, when much of those people’s money was actually being used to fund very risky investments.

“Proclaiming himself and his company a modern-day Robin Hood, Mashhinsky boasted that Celsius is ‘delivering returns … to people who would never be able to do it themselves, [and] we take it from the rich,” the suit said. “These promises were false.”

According to the bankruptcy court, however, there may be a limit to what the legal system can do when crypto companies are savvy enough to protect themselves. Investors and a number of states that joined their proposal say the language was at least “ambiguous” in the rights it gave Celsius. But Glenn disagreed.

Attorneys for Celsius, Joshua Sussberg and Patrick J. Nash Jr., and attorneys for the creditors, Gregory Pesce and Andrea Amulic, did not respond to requests for comment.

The bankruptcy ruling focused specifically on whether Celsius, as part of the restructuring, can now sell $18 million in so-called stablecoins, a type of virtual currency, to stay solvent. But the implications are much greater. By determining that the money in the accounts was not actually owned by the 600,000 account holders, the court has basically said that they are now just unsecured creditors. And “there simply won’t be enough value available to repay” them, Glenn wrote.

The effects could go beyond them to affect other crypto platforms with strict language in the fine print – and spell trouble for customers in the event of a collapse.

“This just raises another question about how difficult it is to trade in the wild west of crypto,” said Brian Marks, who teaches economics and business law at the Pompea College of Business at the University of New Haven and has studied the Celsius case. “I wouldn’t be surprised to see other companies reconsider their terms and conditions after this.”

The connections between crypto firms are vast, and the mistakes of one can spread to another, even months later. On Thursday, crypto lender Genesis said it would lay off 30 percent of its employees, partly as a result of a loan to FTX sister firm Alameda Research.

Celsius creditors are also affected by the FTX bankruptcy. Mashinsky’s former firm, the New York lawsuit revealed, had lent $1 billion to Alameda which it backed with FTX’s token FTT.

“The value of FTT has since fallen by approximately 95%,” it said, “leaving Celsius with an almost worthless security.”

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