Bankrupt crypto lender Celsius was lax with custody program

A new report by the examiner of the bankrupt crypto lender Celsius Network details shortfalls in controls and operations at two of the company's product offerings related to digital assets it held in custody for customers, raising issues of whether and how these users can get reimbursed.

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The programs, Custody and Withhold, were similar, and allowed users to keep their digital coins in the lender while supposedly maintaining ownership of them. The programs' users have been claiming that they shouldn't be lumped together with other unsecured creditors and should be reimbursed in full.

In her interim report, examiner Shoba Pillay found that Celsius launched the Custody program "without sufficient accounting and operational controls or technical infrastructure." As a result, Custody wallets were overfunded through June 10, but then became underfunded by $50.5 million — a 24% shortfall — by June 24.

With the Withhold program, "no effort was made to segregate or separately identify any assets" associated with the accounts, the report said. "As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing," Pillay wrote in the report. The findings may complicate customers' efforts at reimbursement.

The judge in Celsius's bankrupcty case approved the appointment of an examiner in September to probe how the lender stored its assets and whether any of them were comingled. The report noted that Celsius sped up the rollout of its Custody program due to regulatory pressure from New Jersey's regulator. It also received inquiries or subpoenas from the Securities and Exchange Commission beginning in August of 2021.

Celsius halted withdrawals in June and filed for bankruptcy in July after its risky bets fell through and it experienced a rush of customers seeking their funds back. Its troubles were part of a series of crises that roiled the industry in the spring and included the implosion of the TerraUSD stablecoin, the failure of hedge fund Three Arrows Capital and the bankruptcy of brokerage Voyager Digital. A new round of convulsions has hit the crypto market more recently with this month's spectacular collapse of Sam Bankman-Fried's FTX empire.

Kyle Ortiz, partner at Togut, Segal & Segal representing Custody account holders, and Deborah Kovsky-Apap, partner at Troutman Pepper representing Withhold account holders, didn't immediately return requests for comment.

The bankruptcy case is Celsius Network LLC, 22-10964, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).