Who Owns Digital Assets When A Cryptocurrency Platform Files Bankruptcy? The Terms Of Use Answer The Question

• Jurisdiction: United States,Federal
• Law Firm: Goodwin Procter LLP
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Technology, Insolvency/Bankruptcy, Fin Tech
• Author: Mr Michael Goldstein, Howard Steel, Kizzy Jarashow, Barry Z. Bazian, Alexander Nicas, Artem Skorostensky and James Lathrop
• Published date: 10 January 2023

In a decision of first impression regarding whether certain digital assets are property of a bankrupt debtor's estate (attached here), Chief Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York, presiding over the Celsius Network, LLC, et al. chapter 11 bankruptcy cases, held that, based on the unambiguous Terms of Use¹ entered into by the customers, digital assets² held in a yield-earning account (each an "Earn Account") on Celsius's cryptocurrency platform are not owned by the customer, but rather are property of the bankruptcy estate.³

The Celsius Network decision is the first in a likely series of rulings in Celsius's bankruptcy cases on the issue of who owns digital assets deposited by customers that will help guide, but not bind, how the courts in the Voyager Digital Ltd., FTX Trading Ltd., BlockFi Inc., and other crypto bankruptcy cases decide similar issues in those cases.

Key Takeaways

• The Terms of Use that customers enter into with cryptocurrency platforms are critical to the analysis; courts are likely to apply principles of applicable contract law to determine ownership and property of the estate issues.
• Unless the Terms of Use expressly provide for digital assets to be held in trust for the customer, digital assets held in yield-earning or other accounts, where property is hypothecated by the cryptocurrency platform, are likely to be deemed property of the bankruptcy estate.
• Because the digital assets held in the Earn Accounts are considered property of the estate under section 541 of the Bankruptcy Code, Celsius is permitted to sell the digital assets to underwrite the administrative costs of its bankruptcy cases and ultimately, to distribute any consideration received or remaining assets pursuant to a chapter 11 plan.

Celsius's Earn Program

In March 2018, Celsius launched its digital asset-based finance platform. From its inception, Celsius's "core" financial product and the focus of its marketing was the "Earn" program. Under the Earn program, Earn Account holders transferred their digital assets to Celsius in exchange for "rewards" that Celsius advertised as more attractive than other digital asset investment opportunities. These "rewards" were typically weekly interest payments set and adjusted by Celsius. Once an account holder deposited digital assets into an Earn Account, Celsius hypothecated a portion of those assets in various ways to generate revenue for Celsius, including loaning and staking certain digital assets. Earn Account holders could also borrow against digital assets they deposited with Celsius, using those assets as collateral. Celsius, in turn, used deposited digital assets to generate income for Celsius and to fund its operations and growth.

Importantly, from its inception, the Terms of Use for the Earn program always stated that title of the digital assets deposited by the Earn Account holders were held by Celsius and not the customer - although this language became increasingly more specific over time.

Legal Framework

When Celsius filed bankruptcy in July 2022, there were over 600,000 customers using the Earn program who had transferred digital assets to Celsius with a collective market value of approximately $4.2 billion as of July 10, 2022. Hence, a key gating question arising out of the bankruptcy filing was: who holds title to the digital assets transferred into Celsius's Earn program...