Notes 1/5: Celsius Bankruptcy, BNB Burn

The Celsius bankruptcy case is back in the news.

The crypto lending platform, which claimed to run a “sophisticated finance platform”, filed for bankruptcy last year amid the rough and tumble of a debilitating crypto winter.

In a decision about the case today, Judge Martin Glenn wrote that the company’s contract with its users was “unambiguous” and that it had ownership rights to its customers crypto. This means that most Celsius customers, who hold crypto worth less than $100 on its platform, may not get their funds back.

The ruling is significant because it has a bearing on other crypto bankruptcy cases before the courts. But it may not have mean much in the biggest filing – that of FTX’s – before the courts. This is because FTX’s user agreement states that users hold the rights to their cryptocurrencies. It also forbids the exchange from engaging in trading with user tokens. That, as we know, is a rule that FTX broke.

A Decentralized Celsius?

Today’s ruling is one more black mark against centralized finance (CeFi) in the context of crypto.  

Could decentralized finance (DeFi) – a supposed panacea to the problems ailing intermediary-driven transactions – have provided a solution? In other words, would a decentralized Celsius have provided users better options to recover their crypto?

The chances are slim.

I could not find evidence of formal user agreements at prominent DeFi platforms like Yearn and Uniswap. DeFi currently functions on a “buyer beware” principle in which there are no guarantees and users of a platform are responsible for their own research.

The argument for this approach is that DeFi transactions are “peer-to-peer” mechanisms between two parties facilitated by a software platform. Cryptocurrencies are deposited in smart contracts maintained by a group of developers and governed by entities claiming to be decentralized autonomous organizations (DAOs).

Smart Contract Agreements

But smart contracts also fall under the current legal purview because agreements between two parties need not always be in writing. A code-only contract provides users with certain implied rights. For example, automated machines that dispense products in exchange for money or tokens make certain unwritten promises about the service and efficiency of their system.

According to this piece, 47 states already have provisions in place to govern smart contracts. That Uniform Electronic Transactions Act (UETA) states that “…electronic records, which include records created by computer programs, and electronic signatures (i.e., digital signature using public key encryption technology) be given the same legal effect as their written counterparts.”  

There’s also the question of ownership. Smart contracts claim to be governed by DAOs. But recent evidence has proven that such entities are sham constructs that hide behind the veil of acronyms to mint profits.

Besides, a group of developers are responsible for writing and maintaining smart contract code and ensuring its execution. Hacks, which have occurred with increasing frequency on such platforms, compromise the security of user crypto, making such developers responsible for the system’s security.

Burn BNB Burn

BNB, Binance’s native token, is due another burn or destruction of BNB in circulation after its last quarterly burn in October 2022. Binance CEO Changpeng Zhao (CZ) tweeted about the possibility of another burn happening soon yesterday. The periodic burn mechanism supposedly constrains BNB supply and helps inflate its token price.

That, at least, is the official explanation. Unofficially, BNB’s dearth is not a contributor to its price. Ninety percent of the token is staked across various platforms. Those staked tokens, in turn, have spawned many derivatives that are circulating in markets with dubious credentials and security. Meanwhile, the buybacks by Binance at high prices are a source of profits to BNB holders, many of whom are rich venture capital firms. Already, BNB’s price has jumped by roughly 5% in the last two days.

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