The “cryptocurrency winter” has caused several high-profile cryptocurrency bankruptcies. Among the many novelties that emerge in these bankruptcy cases, one in particular was at the center: Are the crypto assets deposited in client accounts owned by the client or owned by the bankrupt cryptocurrency company’s property?
The answer to this question has significant implications for a cryptocurrency company, its account holders/customers, as well as other stakeholders.
[Celsius].” Therefore, the Earn Assets (cryptocurrency assets, including stablecoins) in the Earn Accounts have become the property of the bankruptcy Celsius since the bankruptcy filing.
In reaching this conclusion, Judge Glenn noted the following:
- Ownership of the crypto assets in the Earn account is a matter of contract law;
- A valid and enforceable contract requires (i) mutual consent, (ii) consideration, and (iii) intent to be bound;
- Terms Version 8 states (with added emphasis):
In consideration of Rewards payable to you on eligible digital assets using the Earn service. . . and the use of our Services, 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’s Virtual Portfolio or elsewhere, and to pledge, re-pledge, mortgage , re-hypothecate, sell, loan or otherwise transfer or use any quantity of such Digital Assets, separately or together with other assets, with all related proprietary rights, and for any period of time, and without retaining possession and/or control of Celsius as an amount of digital assets or any other monies or assets and to use or invest such digital assets in Celsius’s sole discretion. You acknowledge that with respect to digital assets used by Celsius pursuant to this paragraph:
3. In the event that Celsius becomes bankrupt, goes into liquidation or is otherwise unable to repay its obligations, any eligible digital asset used in the Acquire Service or as collateral under the Lending Service may not be recoverable and you may have no remedy or legal right in respect of Celsius’s obligations to you other than your rights as a creditor of Celsius under any applicable law;
- Of the approximately 600,000 Earn account holders, 89% have created accounts by first accepting Terms version 5 or later, and 99.86% of Earn account holders have accepted Terms version 6 or later.
The implication of the Earn Account Holders ruling, which the Court noted that it did not take lightly, is that the Earn Account Holders are unsecured creditors of Celsius’s bankruptcy assets. To put the result into context, if the cryptocurrency assets were owned by the Earnings Account Holders, those Holders would be entitled to the restitution of those cryptocurrency assets. As unsecured creditors, Earn account holders will have to share the pool of assets available to unsecured creditors. If there isn’t ultimately enough value to repay all unsecured creditors (a likely outcome), earned account holders will likely recoup less than 100%.
The content of this article is intended to provide general guidance on the subject. Specialist advice should be sought regarding the specific circumstances.