Who Owns the Crypto, the Customer or the Debtor?

Whose crytpo is it?  With the multiple cryptocurrency companies that have recently filed for bankruptcy (FTX, Voyager Digital, BlockFi), and more likely on the way, that simple sounding question is taking on huge significance.  Last week, the Bankruptcy Court for the Southern District of New York (Chief Judge Martin Glenn) attempted to answer that question in the Celsius Network LLC bankruptcy case.

The Facts of the Case

Celsius and its affiliated debtors (collectively, “Debtors”) ran a cryptocurrency finance platform.  Faced with extreme turbulence in the cryptocurrency markets, the Debtors filed Chapter 11 petitions on July 13, 2022.  As part of their regular business, the Debtors had allowed customers to both deposit cryptocurrency digital assets on their platform and earn a percentage yield, as well as take out loans by pledging their cryptocurrencies as security. One specific program offered by the Debtors was the “Earn” program, under which customers could transfer certain cryptocurrencies to the Debtors and earn “rewards” in the form of payment of in-kind interest or tokens.  On the petition date, the Earn program accounts (the “Earn Accounts”) held cryptocurrency assets with a market value of approximately $4.2 billion.  Included within the Earn Accounts were stablecoins valued at approximately $23 million in September 2022.  A stablecoin is a type of cryptocurrency designed to be tied or pegged to another currency, commodity or financial instrument. 

Recognizing their emerging need for liquidity, on November 11, 2022, the Debtors filed a motion seeking entry of an order (a) establishing a rebuttable presumption that the Debtors owned the assets in the Earn Accounts and (b) permitting the sale of the stablecoins held in the Earn Accounts under either section 363(c)(1) (sale in the ordinary course of business) or section 363(b)(1) (sale outside the ordinary course of business) of the Bankruptcy Code.  The motion generated opposition from the U.S. Trustee, various States and State securities regulators and multiple creditors and creditor groups.  The Official Committee of Unsecured Creditors objected to the sale of the stablecoins under section 363(c)(1) but argued that the sale should be approved under section 363(b)(1) because the Debtors had shown a good business reason for the sale (namely to pay ongoing administrative expenses of the bankruptcy cases).  On January 4, 2023, the court issued its forty-five (45) page memorandum opinion granting the Debtors’ motion.

The Court’s Decision

Although the ownership issue may appear complex given the nature of the assets (i.e., cryptocurrency), the bankruptcy court framed the issue into relatively straightforward state law questions of contract formation and interpretation.  The court first analyzed whether there was a valid contract governing the parties’ rights to the cryptocurrency assets in the Earn Accounts.  Under governing New York law, a valid, enforceable contract requires an offer and acceptance (i.e., mutual assent), consideration and an intent to be bound.  The court found that all three elements were satisfied.  The Debtors required that all customers agree to and accept “Terms of Use.”  The Terms of Use was set up as a “clickwrap” agreement that required customers to agree to the terms and prevented the customers from advancing to the next page and completing their sign up unless they agreed to the Terms of Use.  Under New York law, “clickwrap” agreements are sufficient to constitute mutual assent.  The court also found that consideration was given by way of allowing the customers to earn a financing fee (i.e., the rewards in the form of payment of in-kind interest or tokens).  Finally, the court noted that no party had presented evidence that either the Debtors or the customers lacked intent to be bound by the contract terms.  Accordingly, the court held that the Terms of Use constituted a valid contract, subject to the rights of customers to put forth individual contract formation defenses in the future, including claims of fraudulent inducement based on representations allegedly made by the Debtors’ former CEO, Alex Mashinsky.

Having found a valid contract to presumptively exist, the court turned its attention to what the Terms of Use provided in terms of transfer of ownership.  In operative part, the Terms of Use provided:

In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service … and the use of our Services, you grant Celsius … all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all the attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and use or invest such Digital Assets in Celsius’ full discretion. You acknowledge that with respect Digital Assets used by Celsius pursuant to this paragraph:

  1. You will not be able to exercise rights of ownership;

  2. Celsius may receive compensation in connection with lender or otherwise using Digital Assets in its business to which you have no claim or entitlement; and

  3. In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.

Based on this language, the court held that the Terms of Use unambiguously transferred ownership of the assets in the Earn Accounts to the Debtors.  Central to the court’s decision was that under the Terms of Use customers had granted the Debtors “all right and title to such Digital Assets, including ownership rights.”  Based on this language, the court found that title and ownership of the cryptocurrency held in the Earn Accounts was “unequivocally transferred to the Debtors and became property of the Estate on the Petition Date.” 

Finally, the court found that the Debtors had shown that they needed to generate liquidity to fund the bankruptcy cases, and that additional liquidity would be needed early this year.  Accordingly, the court held that the Debtors had shown sufficient cause to permit the sale of the stablecoins outside of the ordinary course of business in accordance with section 363(b)(1). 


Given the turbulent nature of the cryptocurrency market and the likelihood of further cryptocurrency bankruptcy filings, the court’s ruling is sure to have significant implications. First, unless it is reversed on appeal, the opinion means that the Debtors’ Earn program customers do not own the funds in their digital accounts and will instead be relegated to the status of unsecured creditors with a highly uncertain recovery.  Second, the opinion underscores the Wild West nature of crypto and the fact that unlike deposits at a federally insured financial institution, deposits at cryptocurrency exchanges are not similarly insured and may be at risk.  Third, customers or account holders in other cryptocurrency exchanges or businesses should carefully review the applicable terms of use to determine if those terms transferred ownership of their digital assets to their cryptocurrency counterparty.  It is likely a fair assumption that such other terms of use transferred ownership in the same way that the Celsius Terms of Use did, in which case customers must remain vigilant of the financial health of their cryptocurrency counterparty.  Finally, all parties engaging in on-line business transactions, including those outside of cryptocurrency, are on notice that clickwrap agreements commonly found in such transactions are, at least under New York law, enforceable.  In short, those agreements mean something, and the fact that a party did not read the terms before agreeing to them through a “click” is likely not going to be a viable defense to the enforcement of those terms. 

© Copyright 2023 Squire Patton Boggs (US) LLP
National Law Review, Volume XIII, Number 9