Events Leading Up to the Decision
From the outset of the Chapter 11 cases, Celsius has taken the position that digital assets deposited by account holders in Earn accounts were Celsius’ property and became property of the estates upon the filing. However, until the Decision, the bankruptcy court presiding over the Chapter 11 Cases (the Bankruptcy Court) had not weighed in on the issue, and Celsius was not authorized to sell or use the digital assets absent further court authority.3 In September 2022, Celsius requested authority to sell stablecoin held in the Earn accounts to provide much-needed liquidity to fund operating expenses and the costs of the Chapter 11 cases, but several parties, including the official committee of unsecured creditors, objected on the basis that Celsius had not yet met its burden to establish that the platform actually owned the stablecoin it was intending to sell.
In November 2022, Celsius filed an amended motion requesting entry of an order establishing that the digital assets in the Earn accounts are property of the estates and granting authority for Celsius to sell up to $18 million in stablecoin from the Earn accounts, and submitted supporting declarations regarding the debtors’ rights to these assets.4 The creditors’ committee ultimately agreed that the digital assets deposited into the account holders’ Earn accounts at Celsius are property of the estates, but many individual account holders as well as several state governments objected and asserted a variety of arguments for why account holders retained ownership rights to the digital assets.
Nature of the Earn Accounts
Prior to the July 15, 2022, petition date, Celsius’ platform offered a few different programs or account types for customers: (i) “Earn,” (ii) “Custody,” and (iii) “Borrow.” The Earn program was Celsius’ main product, and Celsius had approximately 600,000 accounts in the program. Under the Earn program, an account holder would deposit digital assets into its Earn account on the Celsius platform, and Celsius was permitted to invest such assets at its own discretion in order to obtain a return on investment that was shared with Earn account holders. As a result, Celsius generally did not retain or segregate the digital assets deposited in the Earn accounts but rehypothecated, loaned, and exchanged those assets as it would its own assets. In contrast, under the Custody program, Celsius was not permitted to invest customer digital assets held in Custody accounts, and such assets did not generate investment returns. Under the Borrow program, account holders pledged their digital assets to Celsius as collateral for cash loans, and Celsius would release the collateral back to the account holders when the loans were repaid. At the time of filing, Celsius also maintained “Withhold” accounts for (i) digital assets sent to Celsius that were not supported by Celsius’ platform and (ii) digital assets to be temporarily held for account holders in jurisdictions in which Celsius was not authorized to offer the Earn or Custody programs.
The nature of the debtors’ interests in and rights to the digital assets held under each of these programs or accounts is different, and accordingly the disputes as to whether the digital assets held under these programs are property of the estate have unfolded through separate motions and proceedings.5
The Property of the Estate Decision
Disputes over ownership of digital assets will continue in the Celsius and other digital asset bankruptcy cases. The Decision makes clear that terms of the applicable user agreements, including the rights granted to the insolvent platform under such agreements, will be a primary focus of those disputes. As such, it is important for blockchain market participants to be thoughtful about the language in any digital asset customer agreements, including the choice of law provision, and any related marketing materials.
And while the Bankruptcy Court found that the contract language on title transfer and ownership was dispositive to determining that the digital assets at issue in the Decision are property of the estate, it is important to recognize that the contract language may not be dispositive in all contexts, particularly if a party is seeking to exclude assets from a bankruptcy estate. Other factors include, among other things, whether the assets to be excluded have been commingled with estate property and whether a party can trace those assets following such commingling.8 Further, as a practical matter, Celsius has a significant shortfall in the amount and types of coins it was holding for Earn account holders, so it would not be possible for Celsius to return the digital assets to each account holder even if the contract terms provided that the Earn account holders retained ownership of the digital assets.9 Market participants should therefore be mindful of practical, as well as legal, risks of digital asset investing.
1In re Celsius Network LLC, Case No. 22-10964 (Bankr. S.D.N.Y. Jan. 4, 2023), Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, Docket No. 1822.
2See, e.g., U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 121 (Apr. 11, 2022).
3See Final Cash Management Order, Docket No. 1152 (Bankruptcy S.D.N.Y. Oct. 21, 2022).
4Docket Nos. 1325, 1326, 1328, 1584.
5For example, Celsius has taken the position that digital assets held as part of the Custody program are not property of the estate but that a large portion of the custodied digital assets cannot be released to customers until preference claims against the customers are resolved. On December 20, 2022, the Bankruptcy Court issued an order without a legal analysis stating (i) that digital assets held in the dedicated wallet for the Custody program and digital assets that were transferred to Celsius but not supported by the Celsius platform are not property of the estate, but (ii) such assets could be released only if the debtors did not have potential preference claims against the applicable account holder. See Docket No. 1767. The Bankruptcy Court did not address the more complex questions of whether digital assets held for the Custody program outside the dedicated wallet are property of the estate or whether the other withhold account assets are property of the estate.
9As of November 25, 2022, Celsius reported having just over $5.053 billion in digital liabilities owed to account holders but had only approximately $2.638 billion in digital assets. Of that $2.638 billion in digital assets, the debtors only had approximately $1.676 billion of digital assets in their actual possession or control. See Public Coins and Budget Report, Docket No. 1676.