A bankruptcy judge recently declined to determine whether the native token of Celsius, known as CEL, should be classified as a security. The judge cited the ongoing legal battle between Ripple Labs and the US Securities and Exchange Commission (SEC) as the reason for not making a definitive ruling. Otis Davis, a major CEL token holder, had requested the judge to recognize the legal precedent set in the Ripple/XRP case in order to establish a separate committee for CEL token holders. However, the judge denied Davis’ motion, clarifying that the decision did not establish whether crypto tokens or transactions involving them should be considered securities under federal securities laws.
The order made it clear that both the SEC and the committee retained the right to challenge any transactions involving crypto tokens. The judge explicitly stated, “Nothing in the Motions, this Order, or announced at the Hearing constitutes a finding under the federal securities laws as to whether crypto tokens or transactions involving crypto tokens are securities.”
The legal dispute between the SEC and Ripple began in 2020 when the agency accused Ripple of illegally raising $1.3 billion through the sale of XRP, claiming it to be an unregistered security. However, last month, a US court ruled in favor of Ripple in the ongoing lawsuit brought by the SEC. The court stated that selling XRP on exchanges did not constitute an investment contract. However, the court also determined that direct sales of XRP to institutional investors qualified as securities, granting a partial victory to the SEC. This ruling has since been referenced in other court cases, including one involving Terraform Labs.
In addition to the legal battle with the SEC, Celsius has faced scrutiny over its handling of CEL tokens and marketing strategy. Shoba Pillay, a court-appointed examiner, conducted an investigation into Celsius and claimed that the company’s business model differed significantly from what it communicated to customers. Pillay alleged that Celsius “on a stand-alone basis has been insolvent since inception” and accused the crypto lender of using CEL as part of a scheme to enrich executives at the expense of customers.
The investigation revealed that Celsius spent over $558 million to purchase CEL tokens on open markets, leading to a significant increase in the token’s price. The inflated price benefited top executives, including CEO Alex Mashinsky and co-founder Daniel Leon, who sold large amounts of CEL tokens, resulting in considerable gains. Celsius allegedly sought to protect the price of CEL by increasing the size of its resting orders to counteract any price drops caused by Mashinsky’s sales.
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