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Client Alert- Celsius Court Decides Crypto Account Ownership Issue

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Summary

Many are familiar at some level with the high-profile bankruptcy cases involving crypto exchange FTX, hedge fund Three Arrows Capital and crypto lenders BlockFi, Celsius Network and Voyager Digital Ltd. Of particular interest to anyone that holds assets with a cryptocurrency exchange is what happens to these assets when the counterparty, or exchange holding the deposit, becomes a debtor in bankruptcy.

Indeed, an unresolved question is just who owns the cryptocurrency deposited with a cryptocurrency exchange debtor – the depositor or the exchange? Some people have asserted that cryptocurrency exchanges should be considered analogous to banks or brokerages, and the cryptocurrency held in their accounts should be thought of as owned by the depositor. Generally, if the assets held by the debtor are owned by the customers in what amounts to a “custodial” account, then they will not be the property of the debtor’s estate in bankruptcy and the customers should receive their assets back at some point during the bankruptcy case. However, if there is a determination in the bankruptcy case that the assets are “owned” by the debtor, then the customers will likely be treated as nothing more than unsecured creditors and, based on their lower priority, would receive a recovery only after payments are made to secured and other priority creditors.

Not surprisingly, the answer to who owns the assets in a customer account will likely be determined in these recent cryptocurrency cases based on the language of the account agreements. If the customer signed an agreement that gives control of the deposited assets to the exchange, even by innocuously “clicking” the “I agree” button on a webpage, this will, in most cases, determine the issue. This was precisely the result in the recent decision from Judge Martin Glenn in the Celsius Network LLC bankruptcy.

On July 13, 2022, Celsius Network filed for bankruptcy protection under chapter 11 in the Southern District of New York Bankruptcy Court. Celsius had approximately 600,000 customer accounts that held cryptocurrency assets with a market value of approximately $4.2 billion. There was a dispute over whether the cryptocurrency assets in the accounts were owned by the bankruptcy estate or by the customer account holders. Celsius filed a motion seeking to sell approximately $18 million in “stablecoins” held in the accounts in order to fund the operations of the bankruptcy estates. Stablecoins have been defined as a type of cryptocurrency in which the price of the coin is pegged to another asset such as fiat currency, exchange-traded commodities, or other cryptocurrencies. Nor surprisingly, opposition to the motion was filed by a number of parties including the United States Trustee, the official committee of unsecured creditors and holders of customer accounts. Celsius filed an amended motion that sought a determination that the “Terms of Use” agreed to by customers as a condition to opening an account provide that the cryptocurrency assets are property of Celsius, and that the Terms of Use are an enforceable “clickwrap” contract.

Judge Glenn determined that the cryptocurrency assets constitute property of the estates and held that the Debtors were authorized to sell the stablecoins outside of the ordinary course of business. He concluded that the Terms of Use formed an enforceable contract between the debtors and the account holders, and that the Terms of Use unambiguously transferred title and ownership of the assets from the account holders to the debtors. Judge Glenn reserved the issue of the account holders’ defenses to contract formation for a later stage in the proceedings.

The obvious takeaway here is that those seemingly harmless Terms of Use we all agree to by clicking a button on our browser screens actually do have consequences. It also highlights the issue that these are not cases that will be uniformly determined in the same manner. A number of these account agreements do not give ownership in the account assets to the exchange, but instead treat these assets more like a traditional bank or brokerage deposit account which is owned by the account holder even in the event of an insolvency event. In the meantime, there is a proposed plan to amend the UCC to address this issue and protect these account holdings by clarifying when and how a customer might transfer (or retain) title to these assets. But, for now, read the Terms of Use before “clicking.”

LPGM’s Bankruptcy and Creditors’ Rights team regularly represents interested parties in complex business reorganizations and liquidations including matters such as those described in this client alert.

Contact: LPGM Partner Michael T. Conway, mconway@lpgmlaw.com, 212-784-2404.