Who owns the Crypto, anyway? | Trout pepper

On July 18, the maxim “not your keys, not your currency” took on a whole new meaning for customers of the bankrupt cryptocurrency exchange Celsius Network LLC, which had filed Chapter 11 in the US bankruptcy court. , in the southern borough of New York. During the hearing on the first day, attorneys explained the debtor’s view that the cryptocurrency deposited on the exchange belonged to Celsius, not depositors. They cited the terms of use of Celsius’ Earn Rewards program where retail clients could place cryptocurrency into interest-bearing accounts, which Celsius then merged to fund its lending, trading and other operations. Under the Celsius Terms of Service, “all rights and titles” to the coins in the Earnings Program are transferred to Celsius and Celsius is free to use, sell, pledge and remot such coins.

In other words, according to Celsius’ lawyers, the Earn program coins are owned by the bankruptcy estate,[1] and depositors who thought they were still the owners of those coins are just general unsecured creditors. The extent to which this came as a shock to registrants is reflected in the dozens of outraged and incredulous letters that were filed in the Celsius bankruptcy case.

Coins in the deposit program


In particular, a very small subset of coins on the Celsius platform in the “Custody” service (approximately 4% of the total coins on the exchange, a value of approximately $ 180 million at the time of deposit) could be treated differently in the event of bankruptcy. . A little history is needed for the context: As detailed here, Celsius was subject to several cease-and-desist actions by state regulators in 2021, each claiming that Celsius was illegally offering unregistered securities through his Earn program. After the initial resistance, in April 2022 Celsius unveiled the new custody program where depositors could store digital assets but would not earn rewards or financial compensation. New transfers made by non-accredited investors in the United States starting April 15 will be automatically deposited. (Coins deposited by non-accredited U.S. investors prior to April 15 have been placed into the Earn program and may remain there until moved by depositors.)

The conditions of use of the Custody service provide that the ownership of the documents deposited there remains with the customer and not Not grant Celsius the right to use, sell, pledge and redeem these coins. The Terms of Service are not perfect (or perfectly clear) and do not necessarily indicate an overwhelming case for custodial account holders. For example, they give Celsius the right to offset each other’s debts with coins on deposit, which is more consistent with a creditor relationship, and they warn depositors can be treated as unsecured creditors in the event of bankruptcy. But the language is, at the very least, more favorable to depositors than the terms of service of the Earn program.

The status of the coins on the custody account is likely to peak in a fairly short time, as hundreds of custody depositors have organized themselves into an ad hoc committee and retained advisory services to address this issue. If they can get a judgment that their artifacts are not the property of the bankruptcy estate, they will be in a good position to demand the immediate return of those artifacts.[2]

Coins in the Earnings Program

So where does this end up for depositors in the Earn program, especially non-accredited investors who probably should never have had access to unregistered securities in the first place? Should they resign themselves to being treated as general unsecured creditors who have to wait months or years for a distribution that could be in fiat currency and (even worse) based on the depressed value of their crypto assets at the filing date?

Not necessarily.

On the one hand, the terms of use of the Earn program are somewhat ambiguous: while they speak in terms of transferring title and ownership to Celsius, they also expressly state that depositors only take out “permanent loans” of their digital assets at Celsius. A loan does not usually involve a change of ownership. If I take my car indefinitely to my teenage daughter, she can use the car to do a number of things, but she doesn’t acquire the title. Or, in a more similar situation, I could enter into a mortgage agreement for a margin account that allows my broker to lend my shares to short sellers, but that doesn’t make him the owner of the shares. Earnings program depositors may be able to make similar arguments regarding the status of their coins in the hands of Celsius.

Likewise, New York law examines the substance of a relationship; the words used to characterize it are not decisive. Celsius has expressly denied any fiduciary obligations to depositors in the Terms of Use, which would tend to preclude the conclusion that he held depositors’ coins as an agent or custodian. However, “where a writing erects the essential structure of an agency relationship, even an explicit disclaimer cannot cancel it”.[3] As the New York highest court acknowledged, the existence of fiduciary duties “does not depend solely on an agreement or contractual relationship between the trustee and the beneficiary, but results from the relationship”.[4] In other words, just because Celsius said he isn’t acting as an agent or custodian for depositors of the Earn program doesn’t mean he got away with it. Factual registration is required to determine the true relationship between Celsius and Earn program depositors.

Alternatively, Earn program depositors could seek to reverse their Celsius coin transfers, based on securities law considerations applicable to non-accredited investors or a fraudulent induction theory. (A quick YouTube search reveals many examples of claims made by Celsius executives that seem inconsistent with Celsius’ Terms of Service.)

Earn program depositors could also argue that the terms of use were changed orally by public statements by Celsius executives that they would continue to own and control their coins. The Terms of Service, somewhat surprisingly, contain no oral incorporation or amendment clauses; therefore, according to New York law, a colorful argument can be made that the terms were changed orally to keep the title of the coins with depositors.[5]


Although custodial account holders are likely in a stronger position to exclude their coins from real estate, Earn program depositors may also have a compelling reason to retain ownership of their crypto assets, although further factual development is required. and a legal analysis.

[1] Filing for bankruptcy creates an “inheritance,” consisting of all the debtor’s legal or equitable interests in the property at the start of the case. See 11 USC § 541.

[2] Of course, many of them are likely to be subject to preferential legal action. Pursuant to 11 USC § 547, the debtor in possession can recover payments made to creditors for a previous debt within 90 days of filing for bankruptcy. If the coins in the Earnings program are deemed property of depositors’ property or loans to Celsius, the transfer of the coins to Custody would be the payment of debts to creditors. It is no coincidence that Celsius filed for bankruptcy on the 89th day after the custody accounts were created – the company and its highly trained bankruptcy attorney ensured that all coins transferred from the Earn program to Custody fell within the period, preferably.

[3] Veleron Holding, BV v Stanley, 117 F. Supp. 3d 404, 452 (SDNY 2015).

[4] EBC I, Inc. v Goldman, Sachs & Co., 832 NE2d 26 (NY2005).

[5] See, for example, Merrill Lynch Realty Assocs., Inc. v. Burr140 AD2d 589, 593, 528 NYS2d 857, 860 (1988) (explaining that the New York General Obligations Act “does not prohibit the performance of a subsequent oral agreement to modify or terminate a contract where … the contract does not contain a clause express that it prohibits oral modification “).

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