So you think your crypto belongs to you? Think again
by Temple Melville, CEO of The Scotcoin Project Community Interest Company (CIC)
As we know, most people don’t read terms and conditions attached to all manner of products and services they buy exhaustively. But, in crypto, you better at least look them over if you want to keep your tokens.
Quite apart from bad actors like FTX, who simply took what wasn’t theirs, we now have a court ruling in the USA which means that if you are ‘staking’ – i.e. putting your crypto to work to earn ‘interest’ – you no longer own the crypto. Instead, those tokens belong to the platform or exchange you hold them on.
This month, a federal judge ruled that customers of Celsius’s interest-bearing ‘Earn’ product had turned over control of their assets to the bankrupt crypto lender. This means all the customer deposits trapped within the framework are fair game for liquidators. This will affect a lot of people – Celsius held around $4.2 billion in various cryptocurrencies in its Earn product, as of July 2022.
Celsius’s terms of service made it clear it took possession of crypto assets deposited into its Earn product. As a result, customers hoping to recoup their funds from the company will likely get nothing.
Such was the ruling of Judge Martin Glenn, the chief US bankruptcy judge in the Southern District of New York in the Celsius bankruptcy. The liquidators of Celsius now have hundreds of millions of dollars, if not billions, more to work with.
For the average token holder that used the platform, this means instead of getting back your deposit you will only get a fraction of your holding, if you are lucky. The liquidators will get more, other creditors will get more, but you will on all likelihood be stranded.
Staking has always seemed to me to be distinctly left field. Crypto doesn’t earn money, ‘interest’ has to be paid by effectively creating new tokens. This has several effects – not the least of which is increasing supply and, therefore, reducing the value of each token held. But, more than that, this ruling has highlighted the pitfalls of handing over your crypto to an unregulated entity and expecting to get it back, never mind any interest on top.
Another grey area, but not quite so difficult, is the wallets provided by exchanges and platforms to their customers. Both Celsius and BlockFi have prevented customers from transferring out of ‘earning’ products into their holding wallets – which generally the companies have until now regarded as belonging to their clients.
Of course, this is why these companies are now in the process of reversing transactions that customers desperately tried to enact, getting their funds out of the ‘earning’ wallets to increase the cash available to them for their own uses.
Perhaps the most interesting development through all of this is that courts are now ruling on matters which will, in time, lead to greater clarity and confidence in what crypto companies can and cannot do. The Financial Conduct Authority is, for instance, already pushing for exchanges and platforms not having access to clients’ wallets.
It is undoubtedly a tough time for anyone with tokens held on these exchanges. But, in a very strange way, hopefully this is another example of how the collapse of Celsius, FTX, and the others is leading us towards the light we so desperately need in the world of crypto.