After about a month of hemming and hawing, Celsius Network recently filed for Chapter 11 bankruptcy protection. In the month leading up to the pretense dropping, customers’ access to their funds was cut off while the lender looked for ways to stay afloat.
Now, following the first bankruptcy hearing on July 18, Celsius’ legal team has reportedly floated a new idea aimed at preventing a total collapse – claiming ownership of user funds.
Not Your Keys, Not Your Crypto
This line has been repeated ad nauseam ever since the MtGox days years ago. Unfortunately, the warning seems to have been well-placed yet again. A few days ago, economists predicted that Celsius investors might be left empty-handed after court proceedings are over, intimating that Celsius was less of an asset manager and more of an unregulated bank.
“Celsius is not an asset manager, it is a shadow bank. And deposits in banks are not even “customer assets”, even less “assets under management”. Celsius’s Terms of Use make it clear that customers who deposit funds into Celsius’ interest-bearing accounts lend their funds to Celsius to do with them as it pleases. And he specifically says that in the event of bankruptcy, customers might not get all — or even some — of their money back.
It didn’t take long for this prediction to manifest itself in the real world. According to documents from the court case, the company’s lawyers argue that many of the funds users deposited on the platform were effectively at Celsius’ disposal, not their own.
More than 77% of funds available to Celsius
In the retail section of Celsius’ business operations, three key segments are identified: the Earn program, the Borrow program and the Custody program. Of these, the last is the only section in which the deposited funds are fully declared under the responsibility of the user who made the deposit.
Unfortunately for Celsius users, the custody section only accounts for about 4% of all deposits on the platform. The lion’s share was made in the Earn program, accounting for a whopping 77% of all deposits.
What does this mean for Celsius users? Well, according to the terms of service of the platform, “Title of the coins is transferred to Celsius, and Celsius has the right to use, sell, pledge and remortgage these coins.”
The underlying legal language was helpfully explained by attorney David Silver on Twitter, who lambasted Celsius’ defense and the hesitation to clearly define itself as a type of financial entity or other – noting the company’s pivot towards allegedly redefining itself as more of a Bitcoin mining entity than anything else.
At this time, no statement has been made by the court regarding Celsius’ claims in the current bankruptcy filing.
