Custody

Celsius Custody customers finally begin withdrawals 263 days after freeze

Celsius users with funds held in its custody program have finally begun to withdraw funds, but users report delays due to a backlog of requests.

Some Celsius customers have reported being able to withdraw funds from the bankrupt crypto firm for the first time, some 263 days after the lender froze withdrawals in the lead-up to its bankruptcy filing.

According to numerous social media posts, as of March 2, certain customers who held funds in Celsius’ Custody accounts have been overjoyed that they were finally able to withdraw their funds from the lender.

Customers report they received an email a few weeks ago listing those who were eligible to remove their funds, before receiving another on March 2 noting withdrawals could be processed.

An email sent from Celsius to eligible customers on March 2. Source: Twitter

While some users who whitelisted wallets ahead of their withdrawal attempt received their funds within minutes, others pointed to large delays.

Celsius customers discussing withdrawal processing times on Reddit. Source: Reddit

A backlog of withdrawal attempts seems to have built up, however, with some claiming that withdrawal requests are being converted into support tickets that could take some days to process as a result of “too many requests and not enough staff.”

A Reddit user claimed they were told their request could take days to process. Source: Reddit

On Jan. 31, Celsius published details on who was eligible to withdraw, with customers who had only ever held funds in custody accounts able to currently withdraw 94% of their original funds.

The custody accounts were only available to United States residents. The withdrawals are restricted to these customers, much to the disappointment of customers with funds in other accounts offered by Celsius.

Related: Wrapped Bitcoin supply drops to negative after 11,500 wBTC burn linked to Celsius

Custody account holders may yet be able to get back the other 6%, pending future court hearings.

Customers who had transferred funds from the earn or borrow programs to a custody account are apparently able to withdraw 72.5% of their funds at this point in time, up to a maximum of $7,575.

The lender had first announced they would be freezing withdrawals on June 13, citing “extreme market conditions,” before filing for bankruptcy on July 13.

Galaxy acquires institutional crypto custody firm for $44M

Galaxy Digital invests $44 million to acquire institutional cryptocurrency custody platform GK8.

Galaxy Digital has invested $44 million into an institutional cryptocurrency custody platform to tap into its proprietary asset storage and management capabilities.

Mike Novogratz’s cryptocurrency investment firm has completed the acquisition of GK8, which has developed its own patent cryptocurrency custody technology aimed at giving secure asset management for institutional users.

The service specializes in providing cold vault technology that allows the execution of transactions without internet connectivity. Its in-house multi-party computation (MPC) vault provides the ability to automate transactions, and the service also provides access to decentralized finance networks, tokenization, NFT and trading.

A statement from Novogratz highlighted increased investor demand for custody services as a key reason behind the acquisition. GK8’s cold storage solutions and wallet technology will be onboarded into Galaxy Digital’s upcoming prime brokerage platform GalaxyOne.

The business deal will see Galaxy add an office in Tel Aviv to its organization, with nearly 40 GK8 employees becoming part of the wider group. GK8 founders Lior Lamesh and Shahar Shamai stay on through the acquisition to lead Galaxy’s custodial technologies offering.

Related: Mike Novogratz calls Helios a ‘transformative acquisition’ for Galaxy

GalaxyOne is touted to offer a broad range of cryptocurrency financial services to institutional-grade users on its launch. This will include trading, lending, derivatives, cross-portfolio margining as well as custodial offerings managed by GK8.

Galaxy doubled down on its investments into the cryptocurrency mining sector in December, announcing a $65 million acquisition of Argo Blockchain’s main mining operation. The mining firm had to sell off its Helios mining facility to avoid bankruptcy during a tough year for the sector. 

SEC proposes tougher rules as part of its crypto custody crackdown

The new proposals set forth by the Gensler-led Securities and Exchange Commission seek to “expand the scope” of rules set out by the 2009 Custody Rules.

A five-member panel of the United States Securities Exchange Commission (SEC) has voted 4-1 in favor of a proposal that may make it more difficult for cryptocurrency firms to serve as digital asset custodians in the future.

The proposal, which is yet to be officially approved by the SEC, recommends amendments to the “2009 Custody Rule” will apply to custodians of “all assets” including cryptocurrencies, according to a Feb. 15 statement from SEC Chairman Gary Gensler.

Gensler stated that currently, some crypto trading platforms that are offering custody services are not actual “qualified custodians.”

According to the SEC, a qualified custodian is generally a federal or state-chartered bank or savings association, trust company, a registered broker-dealer, a registered futures commission merchant or a foreign financial institution.

In order to become a “qualified custodian” under the newly proposed rules, U.S. and offshore firms would additionally need to ensure that all custodied assets — including cryptocurrencies — are properly segregated, while these custodians will be required to jump through additional hoops such as annual audits from public accountants, among other transparency measures.

While Gensler said these amendments would “expand the scope” to all asset classes, he specifically took a shot at the crypto industry:

“Make no mistake: Today’s rule, the 2009 rule, covers a significant amount of crypto assets. […] Further, though some crypto trading and lending platforms may claim to custody investors’ crypto, that does not mean they are qualified custodians. Rather than properly segregating investors’ crypto, these platforms have commingled those assets with their own crypto or other investors’ crypto.”

“When these platforms go bankrupt—something we’ve seen time and again recently—investors’ assets often have become property of the failed company, leaving investors in line at the bankruptcy court,” the SEC chairman added.

Gensler also pointed to the industry’s track record to suggest that few crypto firms would be reliable enough to serve as qualified custodians:

“Make no mistake: Based upon how crypto platforms generally operate, investment advisers cannot rely on them as qualified custodians.”

However, not every SEC member is on board with Gensler’s plans.

Commissioner Hester Peirce’s statement in response to the proposed rule changes on investment adviser custody set out by SEC Chairman Gary Gensler. Source: SEC.

While the proposal isn’t “regulation by enforcement” per se, Commissioner Hester Peirce said “the latest SEC statement seems designed for immediate effect” to take down the crypto industry:

“Such sweeping statements in a rule proposal seem designed for immediate effect, a function proposing releases should not play. These statements encourage investment advisers to back away immediately from advising their clients with respect to crypto.”

As for the proposal itself, Peirce believes it would do more harm than good.

She said that such stringent measures will force investors to remove their assets from entities that have developed sufficient safeguarding procedures to mitigate and prevent fraud and theft:

“The proposal would expand the reach of the custody requirements to crypto assets while likely shrinking the ranks of qualified crypto custodians. By insisting on an asset neutral approach to custody we could leave investors in crypto assets more vulnerable to theft or fraud, not less.”

As for the next steps, Peirce noted the agency will soon schedule in a 60-day comment period once the proposal has been published in the Federal Register.

Related: US lawmakers and experts debate SEC’s role in crypto regulation

However, the commissioner is concerned that this timeframe isn’t sufficient to allow the public to analyze all aspects of the proposal.

Those who voted in favor of the proposal hope to implement the new rules within 12 to 18 months, according to Peirce, who added that it was an “aggressive timeline” given the changes being proposed.

US securities regulator probes Wall Street over crypto custody: Report

According to sources, the regulator has been probing registered investment advisers over how they’ve offered crypto custody to their clients.

The United States Securities and Exchange Commission (SEC) has been probing traditional Wall Street investment advisers that may offer digital asset custody to its clients without the proper qualifications.

A Jan. 26 Reuters report citing “three sources with knowledge of the inquiry” said the SEC’s investigation has been going on for several months but accelerated after the collapse of the crypto exchange FTX.

The investigations by the SEC have not been known before as the agency’s inquiries are not public, said the sources.

As per the Reuters report, much of the SEC’s efforts in this inquiry are looking into whether registered investment advisers have met the rules and regulations around the custody of client crypto assets.

By law, investment advisory firms must be “qualified” to offer custody services to clients and comply with custodial safeguards set out in the Investment Advisers Act of 1940.

Cointelegraph reached out to the SEC to seek clarity on the matter but did not receive an immediate response.

The recent revelation suggests the SEC hasn’t turned a blind eye to traditional investment firms in the digital asset space, Anthony Tu-Sekine said, who leads Seward and Kissel’s Blockchain and Cryptocurrency Group, in a note to Reuters:

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians.”

“I think it’s an easy call for the SEC to make,” he added.

Related: Senator Warren proposes reducing Wall Street’s involvement in crypto

On Nov. 15, 2022, the Wall Street Blockchain Alliance (WSBA) wrote a letter to the SEC to seek clarity on what potential amendments, if any, apply to the “Custody Rule” as it pertains to digital assets.

A letter written to the SEC by six members of the WSBA seeking regulatory clarity over digital asset custodial rules. Source: SEC.

Cointelegraph has reached out to the WSBA to ascertain whether they have received a response from the SEC.

Meanwhile, the securities regulator has continued to beef up its crypto enforcement efforts over the year. In May 2022, it expanded its “Crypto Assets and Cyber Unit” team by nearly 100%.

It’s also kept busy dealing with the ongoing lawsuit against Ripple Labs, actions relating to FTX’s collapse and its founder Sam Bankman-Fried, among many more.

Celsius amasses 30 potential bidders for its assets, withdrawal motion approved

The bankrupt lender is set to hold auctions for its assets in January, while it’s been given the green light to return some customer funds.

Bankrupt crypto lender Celsius Network has attracted 30 potential bidders for its various assets, including its retail platform and mining business.

According to a company presentation filed on Dec. 20, more than 125 parties have been contacted since September, with 30 potential bidders executing non-disclosure agreements — a legal contract used to protect sensitive information about a company or the bidding terms that is typically required during negotiations.

Celsius said that so far, it has received multiple bids proposing a variety of potential transactions and business structures to acquire its assets — such as migrating Celsius customers to the acquirer’s platform along with a haircut of their assets .

The lending platform also revealed it had received a number of single asset bids.

With the bidding deadline reached on Dec. 12, the auction for Celsius’ various assets is now set for Jan. 10, after being pushed back from the original date of Dec. 15, according to earlier documents filed by Celsius.

Amended dates for bidding procedures as per Celsius court filings on Dec. 15. Source: Stretto

The latest presentation notes that as of Nov. 25, the company held crypto valued at approximately $2.6 billion, but even after this is combined with all of its non-crypto assets, Celsius is still $1.2 billion short of being able to pay off all debts.

Its ongoing mining operations have been successful, however, with Celsius claiming that it has generated positive operating cash flow every month this year as it continues to deploy more mining rigs.

Related: BlockFi files motion to return frozen crypto to wallet users

In related news, on Dec. 20 bankruptcy judge Martin Glenn granted a motion filed by Celsius on Sept. 1, allowing them to reopen withdrawals for a minority of their customers.

The assets eligible to be withdrawn are those that were only ever held in the Custody Program; for amounts less than $7,575; and for funds that were transferred from Earn or Borrow Programs into the Custody program within 90 days of Celsius filing for bankruptcy on July 13.

The order also applies to “ineligible Withhold Assets,” with assets included in this definition to be determined following meetings between Celsius, the Withhold Ad Hoc Group and the Celsius Official Committee of Unsecured Creditors.

Celsius had ‘insufficient’ accounting and operational controls, says examiner

The examiner revealed that Celsius’ digital assets in its customer’s Custody wallets account officially became underfunded on Jun. 11.

The independent examiner in crypto lender Celsius’ bankruptcy case has alleged that the company failed to set up “sufficient” accounting and operational controls in its handling of customer funds. 

In an interim report released on Nov. 19, examiner Shoba Pillay made a number of stark observations in her court-appointed investigation into the bankrupt cryptocurrency lending platform.

One of the main revelations in Pillay’s report was that Celsius’ “Custody” program was launched “without sufficient accounting and operational controls or technical infrastructure,” which allowed shortfalls in Custody wallets to be funded from its other holdings.

“[…] no effort was made to segregate or separately identify any assets associated with the Withhold accounts, which were commingled in the Main wallets.”

When it was launched on Apr. 15, Celsius’ Custody program allowed users to transfer, swap and use coins as loan collateral. It was introduced after the firm was ordered by the New Jersey security regulators to create a product that was distinguished from Celsius’ “Earn” product, which receives rewards.

This co-mingling of wallets means that there is now uncertainty on which assets belonged to the customer at the time of the bankruptcy filing, said Pillay, noting: 

“As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.”

The interim report has also shed light on what ultimately forced the lending platform to halt withdrawals on Jun. 12. 

Pillay said the breaking point came around on Jun. 11, when customers’ Custody wallets became underfunded. By Jun. 24, this fell a further 24% to $50.5 million in underfunding.

Celsius’ Surplus and Deficit of Digital Assets in Custody Wallets. Source: U.S. Bankruptcy Court.

The revelation comes as a filing with the New York-based bankruptcy court last week states that Celsius customers must file claims against Celsius by Jan. 3. 2023 in order to be eligible for distributions from the case.

However, customers who agree with Celsius’s scheduling of their claims do not need to submit proof of claim, according to a Nov. 20 Twitter post from Celsius.

Related: Celsius bankruptcy proceedings show complexities amid declining hope of recovery

Pillay said that Celsius’ Custody and Withdrawal programs were created on short notice following “intense regulatory pressure” from New Jersey’s Bureau of Securities, who started an investigation into whether Celsius’ “Earn” accounts constituted securities pursuant to U.S. securities laws in mid-2021.

Other accounting insufficiencies highlighted in the report include a revelation that Celsius, founded in 2017 by Alex Mashinsky and Daniel Leon, didn’t start tracking its balance sheet until after this confrontation with regulators in May. 2021, which it then used Google Sheets.

The collapse of the Terra ecosystem was one of the main factors that led to Celsius’ financial troubles in May. 2022, which saw its native coin, Luna Classic (LUNC), formerly LUNA, and the network’s algorithmic stablecoin TerraClassicUSD, USTC — previously TerraUSD (UST) — fall north of 98% in value.

Celsius also stated on Nov. 20 that its next court date is scheduled for Dec. 5, where they plan on advancing discussions around its Custody and Withhold accounts, among other matters.

Celsius had ‘insufficient’ accounting and operational controls, says examiner

The examiner revealed that Celsius’ digital assets in its customer’s Custody wallet account officially became underfunded on Jun. 11.

The independent examiner in crypto lender Celsius’ bankruptcy case has alleged that the company failed to set up “sufficient” accounting and operational controls in its handling of customer funds. 

In an interim report released on Nov. 19, examiner Shoba Pillay made a number of stark observations in her court-appointed investigation into the bankrupt cryptocurrency lending platform.

One of the main revelations in Pillay’s report was that Celsius’ Custody program was launched “without sufficient accounting and operational controls or technical infrastructure,” which allowed shortfalls in Custody wallets to be funded from its other holdings:

“[…] no effort was made to segregate or separately identify any assets associated with the Withhold accounts, which were commingled in the Main wallets.”

When it was launched on April 15, Celsius’ Custody program allowed users to transfer, swap and use coins as loan collateral. It was introduced after the firm was ordered by the New Jersey security regulators to create a product that was distinguished from Celsius’ Earn product, which receives rewards.

This co-mingling of wallets means that there is now uncertainty on which assets belonged to the customer at the time of the bankruptcy filing, said Pillay, noting: 

“As a result, customers now face uncertainty regarding which assets, if any, belonged to them as of the bankruptcy filing.”

The interim report has also shed light on what ultimately forced the lending platform to halt withdrawals on June 12. 

Pillay said the breaking point came around on June 11, when customers’ Custody wallets became underfunded. By Jun. 24, this fell a further 24% to $50.5 million in underfunding.

Celsius’ Surplus and Deficit of Digital Assets in Custody Wallets. Source: U.S. Bankruptcy Court.

The revelation comes as a filing with the New York-based bankruptcy court last week states that Celsius customers must file claims against Celsius by Jan. 3, 2023, in order to be eligible for distributions from the case.

However, customers who agree with Celsius’ scheduling of their claims do not need to submit proof of claim, according to a Nov. 20 Twitter post from Celsius.

Related: Celsius bankruptcy proceedings show complexities amid declining hope of recovery

Pillay said that Celsius’ Custody and Withdrawal programs were created on short notice following “intense regulatory pressure” from New Jersey’s Bureau of Securities, who started an investigation into whether Celsius’ “Earn” accounts constituted securities pursuant to United States securities laws in mid-2021.

Other accounting insufficiencies highlighted in the report include a revelation that Celsius, founded in 2017 by Alex Mashinsky and Daniel Leon, didn’t start tracking its balance sheet until after this confrontation with regulators in May. 2021, which it then used Google Sheets.

The collapse of the Terra ecosystem was one of the main factors that led to Celsius’ financial troubles in May. 2022, which saw its native coin, Luna Classic (LUNC), formerly LUNA, and the network’s algorithmic stablecoin Terra Classic USD, (USTC) — previously TerraUSD (UST) — fall north of 98% in value.

Celsius also stated on Nov. 20 that its next court date is scheduled for Dec. 5, where they plan on advancing discussions around its Custody and Withhold accounts, among other matters.

Major client demand was the ‘tipping point’ for BNY Mellon’s crypto services

BNY Mellon CEO Robin Vince pointed to a survey earlier this year that found 91% of institutional asset managers were interested in investing in tokenized assets.

BNY Mellon CEO Robin Vince says “client demand” was the “tipping point” that ultimately led to the bank’s launch of institutional-focused crypto services last week.

BNY Mellon, America’s oldest bank, became the first large bank in the country to offer custody of institutional clients’ Ether (ETH) and Bitcoin (BTC) on Oct. 11.

In an Oct. 17 conference call following the release of its third quarter earnings, Vince pointed to a survey commissioned by the bank this year, which found that 91% of large institutional asset managers, asset owners and hedge funds were interested in investing in some type of tokenized asset within the next few years.

“About 40% of them already hold crypto in their portfolios. About 75% of them are actively investing or exploring investing in digital assets,” he said, adding:

“And so what we heard from our clients is they want institutional grade solutions in the space.”

The new custody service was launched last week, allowing select institutional clients to hold and transfer Bitcoin and Ether on the same platform they manage their stocks and bonds.

Vince said that the digital asset custody solution was not created “just for the purpose” of custody crypto and that the bank sees it “as the beginning of a much broader journey.”

During the call, Vince said he envisioned the tokenization of “all kinds of assets and currencies,” including traditional financial assets as well as assets that “haven’t been as easy to manage in the financial system,” commenting:

“Some of those things could be much better managed using tokens.”

Examples he mentioned included commodities, real estate, forests and certificates relating to environmental, social and governance issues.

However, the BNY Mellon CEO said it could be years or even decades before the industry could see full adoption of tokenized assets.

“I’m not going to put an exact time scale on it […] But we thought that with a longer-term view this was an important space,” he said. 

Related: BNY Mellon, America’s oldest bank, launches crypto services

He also noted that they’re not spending a “ton” of money on the space, but will instead be investing in “smart” places in the ecosystem.

The bank, which has $43 trillion in assets under management as of 2022, had been playing with the idea of allowing clients to transfer and issue Bitcoin and other cryptocurrencies as early as February 2021 during the bull run for the asset class.

Are custodied crypto funds at risk? Industry veterans explain

Investments under custody are usually very safe, until the accountability of the custodian is called into question.

With rumors of insolvency flying high among crypto firms such as Celsius and Three Arrows Capital, investors couldn’t help but ask a simple question: What happened to all the funds that were supposedly under “safe custody?” As it turns out, a small fraction of crypto firms began leveraged trading with customers’ deposits to deliver promised high APY returns on supposedly fixed-income instruments. Things worked out well when the market was thought to have endless potential.

However, as token prices plunged, such firms simultaneously suffered heavy losses on their positions and an increase in withdrawal requests as investors rushed to protect their capital. The combination of selling pressures led to lower coin prices and the likely obliteration of investors’ initial principal as firms allegedly became insolvent.

Not all asset custodians took enormous risks with clients’ deposits during the bull market in an attempt to attract more capital. At the European Blockchain Convention in Barcelona, Cointelegraph news editor Aaron Wood spoke to Bit.com’s business development lead, Leslie Hsu. Bit.com is a centralized crypto exchange launched in March 2020 in Seychelles. Here’s what Hsu had to say:

“So at Bit.com, we actually use a third-party custody service. Once all assets are in custody, the exchange won’t use your money or clients’ assets for tasks like margin trading.”

However, Hsu explained that due to a concept known as regulatory arbitrage, it would be difficult for administrative bodies to crack down on supposed bad actor custodians that take unreasonable risks with clients’ capital. “Different countries all have different regulations. For example, like in the U.S., they only allow U.S. domiciled entities to trade over there. Right now, there’s no single piece of international legislation covering all potential crypto-related issues.” In some jurisdictions, gambling laws even take precedence over administrative rules when it comes to regulating digital assets.

At another panel, Cointelegraph’s managing editor Alex Cohen spoke to Michael Lau, global head of sales at regulated crypto exchange Bullish. For Lau, the issue of trust not only comes in the ability to create services but also in how one executes them, explaining:

“From our perspective, we decided we would be regulated one day. So then there’s an element of accountability, right? Someone is actually auditing our inner workings and making sure that we can actually fulfill the promises we are making.”

Lau shared that when he first joined the industry in February 2020 after a career in traditional finance, he was surprised at the high level of retail involvement for digital assets. “I remember the New York Stock Exchange is only about 20% retail, and the Chinese Stock Exchanges were around 40% retail, but I really looked at crypto, and it was all retail with very few institutions in it.”

But Lau said that he is rather satisfied with the continued demand for regulation in the industry. “There’s a certain level of professionalism and accountability demanded of fund managers. As an investor, I want to know that I’m going to be protected. I want to know that the fund manager follows the rules. I want to make sure that there’s proper segregation of assets. So we’ve noticed a lot more demand for regulation as of late.”