- BlockFi custodial wallet users are allowed a share of a $300 million payout from the platform
- The bankruptcy judge ruled that the money was theirs, not BlockFi’s
- A similar ruling was made in the Celsius case
A New Jersey judge ruled yesterday that users of BlockFi’s custodial wallet are entitled to nearly $300 million as the digital assets held in these wallets belong to the clients and not the bankrupt crypto lender’s estate. However, the judge denied the repayment of $375 million in funds that clients tried to withdraw from BlockFi’s interest-bearing accounts, known as BIA, after the company froze funds last year due to the collapse of FTX.
Different Rules for Wallet Users and Interest Account Holders
Bankruptcy judge Michael Kaplan ruled that all digital assets in custodial omnibus wallets are to be considered client property, and therefore subject to possible avoidance and clawback rights, but noted that BIA account holders who deposited assets into these accounts with the knowledge of the risks in exchange for greater returns will not be repaid.
Judge Kaplan emphasized that the custodial wallet holders did not share the same risks and should not have their ownership of non-estate property diluted by those who took on such risks
Under bankruptcy law, the funds that are deemed to belong to customers can be immediately returned instead of being divided among the company’s estate creditors. The ruling is not dissimilar in nature to one made in January during the Celsius case, where the judge ruled that funds deposited in the Celsius Earn programme belonged to the company whereas those left on the regular Celsius platform belonged to users.
Terms of Service at Heart of Delay
A delay in reimbursements in this case has been caused by disagreement over the status of funds held in BIA during the period between November 10 and November 18, when BlockFi paused transfers and made corresponding changes in the app. During a hearing held on Monday, lawyers for the creditors argued that they should be included in any repayment given that they all attempted to transfer BIA holdings during the period in question. It wasn’t fair, they argued, to ignore the language of the terms of service which promises instant transactions, and that BlockFi was trying to discriminate among customers in the same situation.
BlockFi had argued that no sale of the assets had been completed, despite clients receiving email confirmations, as the user interface was deliberately separated from the underlying transactions.
Folks, just hold it yourself.