David Little was starting to lose hope. Like thousands of other investors, he lost a large chunk of his cryptocurrency savings — which at one point accounted for more than half his net worth — when the experimental crypto bank Celsius Network filed for bankruptcy this summer.

Then he had an idea. In July, Mr. Little, a 35-year-old engineer in Houston, wrote a letter to the U.S. Bankruptcy Court for the Southern District of New York, arguing that he and others who had deposited their digital currencies in a special type of Celsius account should be able to withdraw the funds. Soon he started getting calls from fellow depositors — a man who was struggling to pay rent, a woman who had lost her retirement savings.

Mr. Little started a group chat that grew to include hundreds of Celsius customers. Within days, they raised $100,000 to hire the law firm Togut, Segal & Segal to press their case in court.

“If I do become part of the cautionary tale in crypto, I’ll know I didn’t just sit by and do nothing,” Mr. Little said.

The company’s implosion was one of the most damaging episodes of this summer’s crypto crash, a moment of reckoning that exposed the industry’s risky practices and ruined thousands of investors. Celsius customers alone lost $5 billion, and the firm’s collapse sent tremors across the digital currencies market, tanking the price of Bitcoin and Ether.

Now the crash has entered a crucial new phase: a frenzied rush to recover lost funds. The effort stretches beyond Celsius, as the amateur traders who bet on a range of failed crypto projects seek compensation, file lawsuits and mobilize online. At the same time, some of the industry’s most powerful firms are examining what’s left of the distressed companies in a hunt for potential deals.

The stakes are highest for the ordinary investors who lost everything. Celsius depositors are scrambling to salvage even a portion of their savings, congregating in online forums to debate legal strategy and offer emotional support. For weeks, they have flooded the Bankruptcy Court with hundreds of impassioned letters detailing their losses and proposing ideas to maximize recoveries. Apart from Mr. Little’s group, at least one other customer coalition has hired a lawyer to recover a share of Celsius’s remaining assets, an unusual show of grassroots activism for a bankruptcy case.

“I’m astounded by how fast and furious some of the creditor bodies are forming,” said Thomas Braziel, a partner at the investment firm 507 Capital, which specializes in bankruptcy. “Usually in bankruptcies with really small claimants, they get absolutely hosed by big law firms and the debtor.”

The recovery efforts have gained steam as the cryptocurrency market has gradually stabilized. The price of Bitcoin rose to about $25,000 this week from a low of $18,000 in June, though it remains more than 60 percent off its peak of roughly $68,000 last November.

Whether the grassroots organizing and back-room dealmaking will lead to substantial payouts for people who lost money remains uncertain. The Celsius case is complex, and historically, investors who have lost cryptocurrencies in a corporate collapse have struggled to get them back. The 2014 bankruptcy of Mt. Gox, an early exchange, cost investors billions and led to years of legal wrangling.

Customers hope the company’s bankruptcy will be less drawn out. For years, Alex Mashinsky, the crypto bank’s founder, trumpeted an opportunity that seemed too good to pass up: savings accounts where people could deposit cryptocurrencies and receive annual yields as high as 18 percent. In weekly “ask me anything” videos, he cast Celsius as a populist alternative to traditional banks, which have federally insured deposits that pay much less interest.

Mr. Mashinsky’s pitch turned Celsius into a sensation. Last year, the company, which is based in New Jersey, had one million customers and managed assets worth $20 billion.

A crypto enthusiast, Mr. Little put most of his Bitcoin into Celsius in early 2021. (He declined to reveal the total value of his deposit.) “This had been such a trustworthy platform,” he said. “It wasn’t anything near what was advertised.”

To generate its 18 percent returns, Celsius took risks, investing customer deposits in experimental crypto products, according to court papers. (The company did not respond to a request for comment.) In June, the market crash set off the equivalent of a bank run, forcing Celsius to halt withdrawals and eventually file for bankruptcy.

In legal documents, Celsius reported that it had $4.3 billion in total assets but $5.5 billion in liabilities, including $4.7 billion it owed to customers. That gap will make it difficult for Celsius to return its users’ deposits. In one of hundreds of letters sent to the Bankruptcy Court, a couple in Australia, Katie and Christopher Davis, said they had put about $150,000 into Celsius, hoping to use the money to start a family.

“That was our life savings,” they wrote. “It was our chance of having a baby.”

The fate of those funds now depends on a complex legal process that will take months to unfold.

In court, lawyers for Celsius have cited the terms of use that customers signed to argue that most depositors transferred ownership of their cryptocurrencies to the company. That assertion has major legal ramifications: If the judge rejects the company’s argument and determines that the company was merely storing its customers’ property, then the firm would have to return what remains of those deposits immediately.

Celsius is pursuing alternate routes to pay back customers and even restart the business. The company has a Bitcoin mining operation, which its lawyers say could help generate funds for depositors.

Mr. Little is pushing for a faster resolution. Before Celsius’s bankruptcy, he moved his savings from one of the company’s popular interest-bearing accounts to a “custody” account that did not offer interest and was supposed to provide a safe method of storage.

About 58,000 customers held cryptocurrencies in the company’s custody accounts. The lawyer whom Mr. Little’s group hired, Kyle Ortiz, plans to argue that those funds — worth $180 million — remain the customers’ property under the terms of service.

For Celsius’s interest-bearing accounts, that would be a difficult case to make, legal experts said. But custody holders have a better shot, because the contractual language appears more favorable.

“The custody customers have a decent chance of prevailing and getting their money back,” said Adam Levitin, a bankruptcy professor at Georgetown Law.

At a hearing on Tuesday, a lawyer for Celsius, Joshua Sussberg, offered further reason for hope. The company is working to to resolve the custody issue, he told the judge, and potentially get those assets “back to customers.”

Celsius depositors are tracking the case closely. The demand to view a livestream of the hearing was so high that the Bankruptcy Court had to borrow another court’s Zoom link to accommodate the roughly 500 people who logged in. In Telegram group chats, the customers offered a running commentary on the proceedings, posting fire emojis when Mr. Sussberg suggested that custody recoveries were likely.

The custody initiative is one of several efforts by Celsius customers to recoup deposits. In federal bankruptcy cases, the Justice Department appoints a committee of creditors to represent the interests of the people to whom a company owes money. But individuals or groups of creditors can also hire their own lawyers to pursue narrower aims.

A full recovery for the custody group would help only a small portion of Celsius users, leaving the rest to consider other legal strategies.

“There are other groups who are starting to follow suit,” said Jon Dimetros, a custody-account holder who’s involved in fund-raising efforts. “Just to make sure there’s a level playing field.”

Celsius is also attracting interest from possible buyers. Last week, the crypto company Ripple said it was “interested in learning about Celsius and its assets, and whether any could be relevant to our business.”

An acquisition would present its own complications.

Last month, Sam Bankman-Fried, the chief executive of the crypto exchange FTX, offered to buy crypto from Voyager Digital, a digital-asset company that collapsed at the same time as Celsius, and then transfer an unspecified amount of cash to Voyager’s customers. He framed the proposal as a way to swiftly resolve the process and avoid years of costly court fights. Voyager rejected the plan, calling it a “low-ball bid dressed up as a white knight rescue.”

Changpeng Zhao, the chief executive of the crypto exchange Binance, said both Celsius and Voyager had approached his company to discuss selling some of their assets. “Our team’s engaging in all of those conversations,” he said in an interview.

Regardless of whether an outside bidder emerges, a resolution in the Celsius case is unlikely any time soon. Mr. Little said he was prepared to wait for the savings he lost.

“It was a very, very long-term hold,” he said. “This was something that was potentially going to go to my daughters.”

In June, he tried moving his funds out of Celsius, but the transfer never went through. Now when he checks his account, the uncertainty is expressed in a single word: “Pending.”





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