Celsius bankruptcy judge ruling says account holders don’t own their accounts

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More than half a million people who deposited money in Crypto lender Celsius Network faced a major blow in their hopes of recovering their money, with the judge in the company’s bankruptcy case ruling that the money belongs to Celsius and not to the depositors .

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

The decision underscores the Wild West nature of the unregulated crypto industry. On Thursday, New York Attorney General Letitia James moved to impose some kind of order, or at least legal consequences, on Celsius founder Alex Mashinsky, who she accused in a lawsuit of defrauding hundreds of thousands of consumers.

Crypto’s fortunes have plummeted in recent months since Celsius became the first major crypto platform to implode last year, its bankruptcy in July locking out at least $4.2 billion for 600,000 Americans, according to court papers, and foreshadowing the collapse of FTX four months later.

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

“There are many other platforms that have similar terms of use to Celsius,” said Aaron Kaplan, a lawyer and financial firm focused on Gusrae Kaplan Nusbaum and co-founder of his own crypto firm. Clients need to “understand the risks that they take by depositing their assets on insufficiently regulated platforms,” ​​he said.

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

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

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

The lawsuit says Mashinsky was the reason. “In hundreds of interviews, blog posts, and broadcasts,” he says, “Mashinsky promoted Celsius as a safe alternative to banking while hiding that Celsius was actually engaged in risky investment strategies.”

Crypto’s frozen mystery: the fate of billions in Celsius storage

Mashinsky was known for “Ask Mashinsky Anything” online Q&As and t-shirts with messages like “Banks are not your friend.” Crowds of fans on YouTube and Twitter hailed the cult of “The Machine”, as it was nicknamed. If FTX’s Sam Bankman-Fried was the public face of crypto in the halls of Washington, Mashinsky was often its most important symbol to ordinary investors.

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The lawsuit painted a picture of a man intent on presenting himself as a hero to the working class and the unbanked when much of that money was used to finance risky investments.

“Mashinsky portrayed himself and his company as a modern-day Robin Hood, boasting that Celsius’ yielded … to those who would never have been able to do it themselves, [and] we took it from the rich,’” the lawsuit said. “Those 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 the motion said the language was at least “ambiguous” in the rights it granted Celsius. But Glenn disagreed.

Celsius’ attorneys, 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 decision focuses specifically on whether Celsius as part of the restructuring can now sell $ 18 million in so-called stablecoins, a type of virtual currency, to help remain solvent. But its implications are greater. When they decided that the money in the accounts was not really owned by those who have 600,000 accounts, the court basically said they are now just unsecured creditors. And “there simply won’t be enough value available to repay” them, Glenn wrote.

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The effects could go even further than to impact other crypto platforms with strict language in the fine print – presenting problems to customers in the event of a collapse.

“This just raises another question about how difficult it is to transact in the Wild West of cryptocurrencies,” 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 re-examine their terms and conditions after this.”

The connection between crypto companies is vast, and the failure of one case ripples into 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 from FTX sister company Alameda Research.

Celsius creditors are also affected by the FTX bankruptcy. Mashinsky’s former company, the New York lawsuit revealed, loaned $1 billion to Alameda that it secured with the FTX token.

“The value of FTT has dropped by about 95%,” he said, “leaving Celsius to hold almost worthless collateral.”

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