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.
In the Inre Celsius Network LLC, et al.Judge Martin Glenn was asked to rule on this very issue in the context of determining whether Celsius could sell stablecoins held in Celsius Earn Accounts, and he framed the matter as follows: Are the Terms of Use an agreement that full title and ownership of Earn Assets transfers from Earn Account Holders to Celsius when the Account Holders have deposited cryptocurrency into their Earn Accounts?
In his opinion of the January 4, 2023 memorandum, Judge Glenn ruled that the “Celsius Terms of Use constituted a valid and enforceable contract between [Celsius] and Account Holders, and that the Terms unequivocally transfer title and ownership of Earn Assets held in Earn Accounts by the Account Holders to
[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;
- Celsius’ terms of use are a “clickwrap” agreement that New York courts accept “overwhelmingly” as sufficient to constitute mutual consent;
- The Terms of Use clearly state the “advantage of the deal”; And
- While the account holders may not have intended the effects of the contract, no evidence has suggested that the account holders lacked the intention to enter into a contract governed by the Terms of Use.
- Updates to the Terms of Use were valid changes to the agreement an account holder entered into when they created an account with Celsius;
- Each version of the Celsius Terms of Use, starting with version 5 of the Terms, includes a provision that Account Holders “grant Celsius. . . all right and title to such Digital Assets, including proprietary rights;” And
- 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 decision, however, has some nuances. Judge Glenn did not rule on the defenses individual Earn account holders may have against the Terms of Use and also did not determine ownership of assets in the debtors’ custody program, withholding accounts, or loan program. Finally, the decision also did not address the rights of any state or state agency that Celsius violated state securities laws by marketing unregistered securities.
The content of this article is intended to provide general guidance on the subject. Specialist advice should be sought regarding the specific circumstances.
