When Bankruptcy And Crypto Collide – Bankruptcy Court Holds That Cryptocurrency Assets In Customer Accounts Constitute Assets Of The Bankruptcy Estate – Insolvency/Bankruptcy

In a recent decision of interest to cryptocurrency investors,
Judge Martin Glenn, Chief Bankruptcy Judge for the United States
Bankruptcy Court, Southern District of New York, issued a decision
in the In re Celsius Network LLC bankruptcy case relating
to customer “Earn Accounts.” See Memorandum Opinion and
Order Regarding Ownership of Earn Account Assets, In re Celsius
Network LLC, No. 22-10964 (MG) (Bankr. S.D.N.Y. Jan. 4, 2023),
ECF No. 1822.

The Court held that under the Celsius terms of use, customers
transferred ownership of the coin deposits in their “Earn
Accounts” to Celsius, rendering the assets presumptively
property of the Celsius bankruptcy estate. In reaching his
decision, Judge Glenn applied “ordinary contract rules,”
stating that the account holders’ passive acceptance of the
electronic terms of use satisfied the necessary elements required
to form an enforceable contract, thus transferring ownership of the
crypto assets to Celsius. Notably, however, Judge Glenn remarked
that customers may seek to rebut that presumption during the claims
allowance process.

Unfortunately for crypto customers, Judge Glenn’s ruling
means they hold nothing more than unsecured claims in the Celsius
chapter 11 cases and will likely recover pennies on the dollar if
that.

Significantly, this decision only relates to assets in the
“Earn Accounts,” and does not determine ownership in the
Celsius Custody Program, Withhold Accounts, Borrow Program, or
whether any individual account holder has valid defenses to the
contract between account holders and the Celsius debtors. In
addition, this decision makes clear the determination of ownership
of customer accounts is a fact-sensitive inquiry and depends on the
precise terms and conditions set forth in account holder
contracts.

How Can We Help?

In light of the Celsius ruling, all services with custody of
client funds should review their terms of service. FRB will
continue to follow industry developments in bankruptcy and
blockchain to keep our clients well-informed and ahead of the
curve.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.