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 with collapsed crypto lender Celsius Network have faced a major blow to their hopes of getting their money back, after a judge in the company’s bankruptcy case ruled that the money belongs to Celsius and not to investors.

The judge, Martin Glenn, found that the Celsius statement – a long contract that many websites publish but few consumers read – meant that “the property of the cryptocurrency became the property of Celsius.”

The decision underscores the Wild West nature of the crypto industry. On Thursday, the Attorney General of New York, Letitia James, decided to impose an order, or legal consequences, for the founder of Celsius, Alex Mashinsky, who was accused of defrauding hundreds of thousands of consumers.

Crypto assets have fallen in recent months since Celsius became the largest crypto platform to intervene last year, its return in July freezing at least $4.2 billion to 600,000 Americans, according to court documents, and reflecting the collapse of FTX four months later.

And although Glenn’s decision will not affect FTX, whose terms of use were different, some experts saw the decision as extending beyond Celsius.

“There are many other platforms that have terms of use that are similar to Celsius,” said Aaron Kaplan, an attorney with investment management firm Gusrae Kaplan Nusbaum and co-founder of his crypto company. Customers need to “understand the risks they are taking when they put their assets on unregulated platforms,” ​​he said.

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James’ lawsuit alleges that Mashinsky used “false and misleading information to create [customers] investing billions of dollars in digital assets. The suit seeks unspecified damages against Mashinsky and seeks to bar him from various financial and other activities in New York.

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 many years, Celsius promised excessive interest in the region of 20 percent to people in a kind of fantasy version of the real bank of the world, driving many who were not interested in crypto to enter the market.

The suit says Mashinsky was the cause. “In hundreds of interviews, blog posts, and livestreams,” it says, “Mashinsky promoted Celsius as a safe banking option while concealing that Celsius was involved in money laundering.”

Crypto’s cool secret: The future of billions in Celsius deposits

Mashinsky was known for his regular “Ask Mashinsky Anything” online quizzes and T-shirts with messages like “Banks Are Not Your Friends.” Fan groups on YouTube and Twitter have praised 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 recognizable symbol to ordinary investors.

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The shirt painted a picture of a man who wanted to present himself as a hero to the poor and working class when most of these people’s money was being used to support the worst.

“Portraying himself and his company as a modern-day Robin Hood, Mashinsky boasted that Celsius ‘provides productivity … to people who could not do it themselves, [and] we take it from the rich,’” the suit said. “These promises were false.”

According to the court, however, there may be limits to what the law can do when crypto companies have enough information to protect themselves. Investors and several partner countries said the language was “ambiguous” in the rights it granted Celsius. But Glenn disagreed.

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

The bankruptcy decision focused mainly on whether Celsius as part of the reorganization can now sell $ 18 million in so-called stablecoins, a type of virtual currency, to be solvent. But the consequences are far greater. Ruling that the money in the accounts did not belong to the 600,000 account holders, the court said they were now unsecured debts. And “there will never be enough money to pay them back,” Glenn wrote.

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The consequences may go beyond them to affect other crypto platforms that have strong language in their fine print – presenting problems to customers in the event of a crash.

“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 studied the Celsius case. “I wouldn’t be surprised to see other companies reassess what they have next.”

The connections between crypto companies are many, and the failures of one can affect the other, even months later. On Thursday, crypto lender Genesis said it would lay off 30 percent of its workforce, possibly due to a loan from Alameda Research’s FTX firm.

Celsius borrowers are also affected by the FTX refund. Mashinsky’s former company, the New York lawsuit revealed, loaned $1 billion to Alameda in exchange for FTX’s trademark.

“FTT’s price has fallen by almost 95%,” it said, “leaving Celsius with a worthless collateral.”

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