Embattled cryptocurrency business, Celsius Network, presently under bankruptcy protection in the US, is seeking court approval in New York in order to allow a small group of custody customers to withdraw digital assets which were held in separate custody to other assets. Earlier this year Celsius froze withdrawals, swaps and transfers of customer assets before filing for bankruptcy in July.
In a filing with the United States Bankruptcy Court for the Southern District of New York, Celsius moved for orders that customers' digital assets held in the Celsius Custody Program and Withhold Accounts be released to those customers.
Approximately USD50 million worth of crypto assets would be included in the proposed release. The proposed release does not include customers who held Celsius Earn and Borrow accounts. According to Celsius' lawyers, users did not maintain legal ownership of cryptocurrencies deposited in earn or loan accounts, such as the Earn and Borrow accounts.
To complicate matters further, Celsius submitted in the motion that users who transferred assets exceeding a statutory minimum from Earn or Borrow accounts to the Custody Program or a Withhold Account within 90 days of Celsius filing for bankruptcy would also not be eligible to withdraw their assets.
The treatment and protection afforded to client's cryptocurrency holdings is a key matter to be considered when a crypto business is in difficulty. We anticipate further developments in this area globally as a number of recent high profile insolvencies move through the Courts in the United States and elsewhere.
Closer to home, and relevant to this issue, when New Zealand-based crypto exchange Cryptopia shut down in January 2019 and subsequently entered into liquidation, one of the questions raised was whether cryptocurrencies deposited by clients should be classified as trust property within the meaning of New Zealand's Companies Act and thus have to be distributed to account holders, or whether the cryptocurrencies should be deemed to be Cryptopia's assets and used to repay creditors.
In that case, the court found that the cryptocurrencies were being held on trust for the account holders and Cryptopia had no right to use the assets to repay creditors in the liquidation.