They 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 suffered a major blow to their hopes of recovering their funds, the judge in the company’s bankruptcy case having decided that the money belonged to Celsius and not to the depositors.

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

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The decision highlights the wild nature of the unregulated crypto industry. On Thursday, New York Attorney General Letitia James moved to impose some sort of restraining order, or at least legal repercussions, on Celsius founder Alex Mashinsky, whom she accused 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 freezing at least $4.2 billion for 600,000 Americans, documents show. legal proceedings, and foreshadowing the collapse of FTX four months later.

And while Glenn’s decision doesn’t affect FTX, whose terms of service were different, some analysts felt the decision extended beyond Celsius.

“There are plenty of other platforms that have similar terms of service to Celsius,” said Aaron Kaplan, an attorney at finance-focused Gusrae Kaplan Nusbaum and co-founder of his own crypto firm. Clients need to “understand the risks they are taking when depositing their assets on poorly regulated platforms,” he said.

James’ lawsuit, meanwhile, alleged that Mashinsky used “false and misleading representations to induce them to deposit billions of dollars in digital assets.” The lawsuit seeks unspecified damages from Mashinsky and wants to bar him from a range of financial and other work in New York.

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A Celsius spokesman, Luke Wolf, said Mashinsky was no longer involved in running the business. Mashinsky did not respond to a message seeking comment.

For years, Celsius promised outlandish interest rates of around 20% for people in some kind of fancy version of a real-world bank, pushing many people who had no interest in crypto to come in. on the market.

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

Mashinsky was known for his regular online “Ask Mashinsky Anything” Q&As and his t-shirts with messages like “Banks are not your friends”. Crowds of fans on YouTube and Twitter hailed the cult of “The Machine”, as it was dubbed. 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 mainstream investors.

The suit painted an image of someone determined to portray themselves as a hero to the unbanked and working class when much of these people’s money was actually being used to fund very risky investments.

“Boasting himself and his company to be a modern-day Robin Hood, Mashinsky bragged that Celsius “offers a return…to people who would never be able to do it themselves, [and] we take it from the rich,” the suit 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 their motion say the language was at least “ambiguous” in the rights it gave Celsius. But Glenn disagreed.

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

The bankruptcy ruling specifically addressed whether Celsius, as part of the restructuring, could now sell $18 million in so-called “stablecoins,” a type of virtual currency, to help stay solvent. But its implications are far greater. By ruling that the money in the accounts did not really belong to the 600,000 account holders, the court essentially declared that they are no more than unsecured creditors. And “there simply won’t be enough value available to pay them back,” Glenn wrote.

The effects could even go beyond them to impact other crypto platforms with strict language in their fine print – presenting problems for customers in the event of a meltdown.

“It just raises another question about how difficult it is to transact 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 revisit their terms and conditions after this.”

The connections between crypto firms are vast, and the failures of one can spill over to the other, even months later. On Thursday, cryptolender Genesis announced that it would lay off 30% of its staff in part following a loan to sister company FTX Alameda Research.

Celsius’ creditors are also affected by the bankruptcy of FTX. Mashinsky’s former company, the New York lawsuit revealed, had loaned Alameda $1 billion which it collateralized with FTX’s FTT token.

“FTT’s value has since fallen by around 95%,” he said, “leaving Celsius holding nearly worthless collateral.”

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