The "crypto winter" of 2022 brought a bear market and a recent wave of bankruptcies to the crypto industry, leaving some retail customers of crypto exchanges frozen out of their accounts. As the bankruptcy filings mounted from Voyager Digital and Celsius Network ("Celsius," or the "Company") to FTX US and BlockFi, lawyers, industry experts, market participants and retail customers wondered alike '- who owns the cryptocurrency stored on a debtor's platform in the event of a bankruptcy? Although limited to the specific terms of the customer agreements at issue in Celsius, Judge Martin Glenn issued a ruling in the Celsius bankruptcy proceedings giving an initial indication as to how this inquiry may be assessed.1
On the date of its bankruptcy filing, Celsius had approximately 600,000 accounts in its "Earn" program (the "Earn Accounts"). The Earn program allowed customers (the "Depositors") to deposit cryptocurrencies on the Celsius platform and receive from the Company as much as 18% interest annually. The Earn Accounts at Celsius held approximately $4.2 billion in cryptocurrency assets as of July 10, 2022, including $23 million worth of stablecoins. From the beginning of the Celsius bankruptcy proceedings, the Depositors advocated that cryptocurrencies held on the Celsius platform should be returned to them as quickly as possible. However, with respect to Earn Accounts, the Company took the position that the Celsius terms of use (the "Terms of Use") unambiguously provide that all rights to such cryptocurrencies, including ownership rights, belong to the Company. The issue came to a head when the Company brought a motion seeking to sell certain of the stablecoins held in the Earn Accounts.
Judge Glenn's 45-page decision agreed with the Company, and overruled objections supported by hundreds of individual Depositors, as well as the objections of a number of governmental entities, including the Texas State Securities Board and the United States Trustee. Judge Glenn determined that the $4.2 billion in cryptocurrency deposited by customers into the Earn Accounts belongs to the Company - not the depositors. As a result, the Company can sell or exchange the stablecoins held in Earn Accounts in the ordinary course of business to fund the Company's operations and pay the expenses of the bankruptcy case.
A Dispute over Ownership of Crypto-Assets
On September 15, 2022, the Company filed a motion seeking authority to, among other things, sell a portion of the cryptocurrency held in the Earn Accounts (the "Stablecoin Sale Motion") to fund its bankruptcy case, which lead to a spate of objections falling into two broad categories:
- Several state regulators contended...
