The judge overseeing the bankruptcy proceedings of failed crypto lender Celsius has ordered the firm to return $44 million worth of crypto to customers who never made use of its risky, high-yield deposit accounts.
“I want this case to move forward,” judge Martin Glenn said in a hearing on Wednesday reported by Bloomberg. “I want creditors to recover as much as they possibly can as soon as they possibly can,” Glenn said.
Celsius was a centralized finance product offering exuberant yield to investors willing to loan out funds for risky bets. Earlier this year it emerged that the platform had been exposed to the multibillion-dollar implosion of the stablecoin Terra, causing it to collapse and leaving at least $4.7 billion in customer deposits stranded.
The $44 million in contention, a relative pittance, was held in custodial accounts handled by the exchange, but crucially was never lent out.
The recent ruling confirms what Celsius advisers and stakeholders had already determined among themselves—that funds held in “custody accounts” belong to Celsius users rather than the company itself. Although Celsius had $200 million in custody accounts as of September, most of these funds were moved from interest-bearing accounts shortly before the firm filed for bankruptcy. That may allow Celsius to lay claim to those deposits.
The ruling could have far reaching implications, not just for Celsius depositors, but also for those who had funds stuck on the insolvent crypto exchange FTX. According to Gabriel Shapiro, general counsel at Delphi Labs, the fact that crypto held in ordinary accounts belongs to users means that depositors are not treated as unsecured creditors to the exchange.
Shapiro said that if the same ruling is followed in FTX’s own bankruptcy proceedings, its depositors are ahead of other claimants, including secured creditors.
Unlike custody accounts, it is unclear how the contents of interest-bearing accounts will be treated. Celsius’ lawyers have argued that the firm should be entitled to claim ownership over interest-bearing accounts.
Celsius has also requested permission to sell $18 million worth of crypto held on its balance sheet from these customer interest-bearing accounts. The firm would use the funds to keep paying its existing employees and other ongoing administrative expenses.
Glenn is yet to decide on whether these coins belong to customers or Celsius itself. The judge said he expects to deliver a verdict on the subject next week.
Celsius filed for bankruptcy in July, declaring assets and liabilities between $1 billion and $10 billion. The firm claimed to have over 100,000 creditors, including Pharos USD SP Fund, ICB Solutions and Alameda Research.