Who Owns Your Coins?

Well earlier this month, federal bankruptcy Judge Martin Glenn found that when people deposited assets with a now bankrupt crypto lenders Celsius, and in exchange received interest on those deposits, that those assets became the property of Celsius. The effect was to make the customers of that earned program, as it was called, defined as what's known in finance terms as unsecured creditors. What that means in practice is they're unlikely to get all their money back because of the

ongoing bankruptcy. Many investors signed up for these accounts in part because of the potentially higher returns that Celsius had promised them on the deposits. In some cases, as much as eighteen percent, even with current levels of interest rates. That's way more than you'd make at a savings bank, for example. But unlike at a bank, those deposits which were held in crypto were not in any way covered

by any sort of federal deposit insurance. And just to give a little bit of context about how many people are affected here, the value of those accounts back in July was more than four billion dollars. But this ruling won't only affect Celsius customers. For more on what else you should expect, we've got Bloomberg report to Jeremy Hill.

Prior to this ruling, thousands of Celsius users may have been clinging to the hope that one day the company would simply raise the gates on the website, as it were, and let them withdrawther crypto if it was there. We know that there's a big hole in the balance sheet. A lot of the crypto just isn't there anymore. Jeremy,

welcome back to the show. Thanks for having me. You, of course, one of the folks who's been sort of dragged, potentially kicking, potentially screaming into covering way more crypto than you might have expected going into two. But one of the things that has certainly taken up a lot of your time and reporting is the ins and out of these various rulings affecting some of these crypto companies. Why are these different rulings important? Like, what's what's going on? Um?

Is it that there just weren't many bankruptcies before? Is because judges are doing unexpected things like what's the landscape here? You're pretty much right there? I mean, crypto as we know it occupies a sort of strange place in the legal landscape. Is bitcoin is security? Is ethere um a security? If not? What does that mean for users of websites that get into trouble? These are questions that hadn't been answered.

The SEC hasn't said much about this, the CFTC, So when crypto lenders started landing in bankruptcy last year, immediately lawyers around the country being scratching their heads, saying, oh, what are judges going to say about this? We're now starting to get some of those rulings and those, as you have report said, very highly paid crypto bankruptcy lawyers. What are some of the most important cases that they've

been involved in? What are some of the judges talking about I know Celsius is a big one that happened recently. This is Celsius. Depositors put money into Celsius expecting that all the money was still there and they're just earning an interest on it. But now it seems as though potentially in this bankruptcy hearing they could potentially not be that. Celsius is certainly the biggest so far because FTX, for example, just hasn't had enough time to play out. Celsius and

Voyager both went bankrupted around the same time. Both were crypto lenders, so users deposited coins and then the companies lent them out to generate yield, much like traditional banks do UM but as we now know UM, these were not regulated like banks. They didn't resemble banks in a

lot of ways. And so most recently we got a ruling out of the Celsius case regarding whether or not customer deposits that were put into interest bearing accounts, whether those coins belong to Celsius or whether they belong to users. That's very important for recoveries. So what the judge fouled, if I'm remembering correctly, is if you because you didn't as a person. But if you theoretically had to posited crypto in a particular kind of Celsius account, that crypto

ceased to be your crypto. According to this judge, that's a resolutely right. So there's a lot of discussion about terms of service, a lot of exhibits submitted to the court showing what the contract between the users and Celsius looked like when someone signed up for these so called

earn accounts. What the judge found here was when you clicked the box that said I accept, you were agreeing to some lines in that contract that said, by depositing coins with Celsius into this kind of account, I grant right entitle to Celsius. So these coins are no longer mine legally speaking, they belong to Celsius. So, after much thinking and review and arguing, the judge said, yeah, that's what the contract says, like, I'm really sorry to tell

you that this is not your bitcoin anymore. There is a saying, of course, in the crypto industry, not your keys, not your coins. If you're not in personal possession, then um, you know both. And so as a person, a theoretical Jeremy who is now looking at this court ruling, like, what does this mean for you in practice? So you already are an an interesting spot because the entity with

which you deposited your crypto filed for bankruptcy. Now you're having from this judge not necessarily even your crypto and not actually your crypto at all. Does this mean this person has an even lower chance of getting any of their crypto back? Pretty much. So. Prior to this ruling, thousands of Celsius users may have been clinging to the hope that one day the company would simply raise the gates on the website as it were, and let them withdrawther crypto if it was there. We know that there's

a big hole in the balance sheet. A lot of the crypto just isn't there anymore. Now with this ruling, we know that all Celsius users that have interest sparing accounts are going to be treated like unsecured creditors. So they're going to get um the term is pro rata. They're gonna get their proportion of whatever pie is created as a result of the of this bankruptcy, rather than just getting whatever coins they were owed. So in some

it's more equitable. Everybody's in the same bad spot. In another sense, you're probably kind of sad if you had some dogecoin or whatever, I don't know, Celsius or an accepted dogecoin. If you had some dochecoin on the platform and you would like to just get it back, there might be enough for you to get it all back, but you're just not allowed. Now it's not yours. How

do they have ranked unsecured creditors? So like, where would a theoretical Jeremy be in the kind of here's the pie, You're like a dred a thousand, ten thousand, Like where are you? So unsecured creditors generally aren't ranked. You're all in the same bucket, right, So it doesn't really matter what kind of coins you had or the size of

your holdings, if you had good ones or bad ones. Um, you're just gonna get the same percentage slice of the assets that every other general unsecured creditor is and that includes like vendors to Celsius, so not only users, but the people who literally keep the lights on utilities, what have you. You're all on the same boat. And is it a percentage of the amount that was owed or is it just the percentage of the amount that's left.

So they're going to decide at some point when to like calcify the amount of the claims that might have already happened. I actually don't know off the top of my head, but that date will matter because it will be you'll get a percentage of what you're owed as of X date. Got it. So just because so you were owld say, you know, two thousand dollars, you might get back one or one hundred dollars maybe depending on what the pool is. Sure, yeah, we don't know the

recovery levels quite yet. It could be a lot better than that. I mean, the likelihood that everybody's going to get all their stuff back is vanishing lee small. Something amazing would have to happen. Well, what is the benefit to Celsius of having these assets be classified this way? This is pretty great for Celsius because among the assets deposited and earn accounts was like three million dollars worth

of stable coins. Um those are easily turned into dollars that the company can use to keep paying its bankruptcy lawyers and still live in bankruptcy. So they've been asking to sell these stable coins for a while because the company's running out of money sometime in the early spring. It's projected that they'll be out of cash, and uh, finding financing from a third party for this company is like,

not very likely. I don't I don't envy those bankers, So this is this is great for them in the sense that they cannot keep it lights on a little longer. Got it up next. More from Bloomberg Reports or Jeremy Hill on what the recent Celsius ruling could mean for Crypto. We'll be right back now. One of the things that you've talked about in the previous appearances on the show is the fact that it's not this isn't a thing that's going to get resolved tomorrow. What are some of

the timelines that folks should be prepared to encounter. Well, I don't have exact dates off the top of my head, but at some point Celsius is going to file what's called a disclosure statement, and that disclosure statement is going to lay out the plan for getting Celsius out of bankruptcy and repaying creditors. The document is used to inform creditors users about the shape of that plan, and everybody gets to vote, um, how much sheer vote matters depends

on where this sort of value breaks in the company. Um, but it's an important document and that's like, that's like a key thing to look out for. And have any of the other crypto companies that have entered into bankruptcy in the past year and a half filed similar documents already? Voyager has. Voyager has because they were going to sell themselves to FTX that they had a plan again, so they had their ducks in a row, and then something really bad happened and uh, now they're trying to sell

themselves to Finance dot US. That process is proceeding. They're facing some pushback, but if I recall correctly, that's been rolled into a plan, so a disclosure statement exists with estimated recoveries. Lager Digital has announced the crypto exchange operator Binance will acquire its s. That's the deal worth just over a billion dollars. Binance was one of several bidders

for Voyager, which is currently in bankruptcy. Voyager said the move will start the process of allowing customer access to their funds, and of course the pushback comes from a combination of UM, there's a phrase that we've used here sometimes which is like light regulatory objection, which is to say, like the regulators haven't been like raw, but they've been

like m we have concerns. And so the U s SEC had some concerns about the binance US proposal to acquire Voyager, that's right, and other state securities regulators and they have been you know, they vary in in their forcefulness, and it seems like an overarching concern is like we don't really know that much about finance, um as I understand that finance is sort of famously opaque in some ways. So these are objections that can very much be overcome.

It's in no way like an all out stop on the process a judge after rule or they might be settled before the sale hearing. And just because we're talking about fd X and passing the a lot of attention has been obviously on kind of the criminal case against stand backmun Freed. He has pleaded not guilty. Multiple of his former closest colleagues are appearing to be testifying against Back and pun Freed, possibly for you know, leniency applied

to their own potential future prosecutions. But in terms of the ft X bankruptcy what like where are the ass in the process. I think the biggest thing right now is the company's trying to get judges sign off on procedures for selling some assets. So we know that f t X does have plenty of good assets and the proceeds of those sales will go towards repaying creditors. So ledger X, I don't know if that's included in this round of bid procedures, but that's a that's a good asset.

We understand that is going to be sold off. So the thing is like bankruptcies take so long because there's a lot of red tape and you have to get judges sign off for things that seem really small. Just like, here's how we plan to go about soliciting people that may want to buy our assets. Is this okay? And then everybody else gets to weigh in and say like, no, you need to reach out to a broader pool, or

it's too faster, it's too slow. So we're in the process right now, and you know, in terms of that outreach the you're describing Block five, another one of these crypto companies that run into distress UM put out its own presentation and how to hearing. You know, in January essentially saying we try to get more than a hundred people to you know, buy us effectively, and didn't quite succeed. The funny thing about these processes is that the bankers that run the sales, they have to reach out to

just as many people as possible. Oftentimes we never into learning who exactly was contacted. But it's really important for the court that the bankers and lawyers show we tried our best and cast the net as wide as possible, even if we thought this company has absolutely no interest in buying our assets, but it's worth a shot, right yeah. I mean they've got to justify those fees somehow, certainly too.

Just as a kind of a final question, you know, the market continues to be challenging as it were, and you know we've seen just in January multiple exchanges saying they're cutting twenty thirty in some cases of staff. We have different types of banks withdrawing from the crypto universe entirely other than like the kind of the obvious headline numbers, Are there any interesting underlying considerations that may affect any part of these bankruptcy proceedings related to just the states

of the markets, right, Now that's a good question. I mean, if the price of crypto goes up, it's good for crypto bankruptcies if you especially if judges find that the crypto held by the bankrupt company belongs to the company itself, as in the case of Celsius, then theoretically they can sell that crypto and start repaying creditors, so that would be a good thing. Interestingly, in the case of FTX, some early indications seemed to say that the contract between

users in the company was different than Celsius. The users retained title, so rather than being all general and secure creditors that are like rooting for the price to go up so that they'll get more money back. We may see a situation where some people are made whole and some people are not, and the price of the crypto doesn't matter as much. Exciting times lost to do Absolutely well, I'm sure we'll have you back to smoke about it more. Thank you for joining. Thank you. That was Bloomberg reposto

Jeremy Hilt. You can find more of his reporting on the Bloomberg terminal and on Bloomberg dot com, and check out our twice weekly use less of Bloomberg Crypto This is Bloomberg Crypto, a daily podcast from Bloomberg and I heart rate You. For more shows from I heart Radio, visit the I heart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net.

The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Farup and Sharon Barriro. Our associate producers are Ty Butler and Moses on Them. Desta wonder At is our engineer. Original music by Leo Sidrn. I'm Stacy Marie Schmal. We'll be back tomorrow