US court weighs new question of crypto ownership in bankruptcy

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WILMINGTON, Delaware, Dec 7 (Reuters) – A U.S. judge is this week looking for the first time at who owns bitcoin and other tokens in frozen accounts at a bankrupt digital asset exchange in a case that could shape customer protection in the cryptocurrency industry.

US Bankruptcy Judge Martin Glenn in New York will determine who owns cryptocurrencies held in accounts at the Celsius Network LLC exchange, which suspended withdrawals and then fell into Chapter 11 during this crypto crash. year.

Glenn’s eventual decisions will help shape the treatment of crypto in accounts that have been frozen at other bankrupt companies such as FTX, Voyager Digital Ltd and BlockFi, which do not have enough funds to reimburse everyone. In totality.

If Celsius deposits are determined to belong to customers, users are much more likely to recover their assets. If the account holdings belong to Celsius, those customers will be last in line for redemption, collecting pennies on the dollar.

Unlike bank deposits or brokerage accounts, which are backed by the US government up to $250,000 and $500,000 respectively, crypto deposits are uninsured and digital asset companies are loosely regulated and often operate at low cost. the stranger.

Crypto companies usually offer a variety of accounts and they will likely be treated differently in the event of bankruptcy.

Celsius, for its part, argued that its “earning” accounts, which offer customers interest, should be treated differently from its “custodial” accounts, which provide a place to store cryptocurrency without earning interest. . BlockFi, which is in the early stages of its own bankruptcy case, also offers interest-bearing accounts and depository accounts.

“It can get complicated,” Glenn said during Wednesday’s hearing. “I try as quickly as possible to solve as many problems as possible.”

“WORSE THAN THE BANKS”

Courts will also have to look beyond user agreements and examine how crypto companies actually handled deposits, bankruptcy experts say.

“It’s going to be a really thorny issue for the court, because there’s the portrayal of what should have happened versus what’s actually happening on the ground,” said Yesha Yadav, associate dean and professor of law at Vanderbilt University.

FTX customers have sought reassurance that their terms of service state that they own the crypto in their account. FTX founder Sam Bankman-Fried pushed back on the idea when asked about it last week during a New York Times DealBook interview.

“So there’s this element of the terms of service,” Bankman-Fried said when asked if the agreement prevents FTX from transferring client funds to its Alameda Research business unit. “But there were a number of other parts of the terms of service, a number of other parts of the platform on top of that.”

If a company used the deposited crypto to make loans or mixed it with the holdings of other clients, as was the case with Celsius’ high-yield accounts, it would prove that the company owned the crypto in the same way as a traditional bank owns its deposits. .

Celsius wants Glenn to declare the crypto in the “custody” accounts as client property and on Wednesday the judge said a subset of those accounts could be distributed to clients.

The company also wants the judge to find the holdings in the high-yield “win” accounts are the property of Celsius, which plans to use tokens to pay lawyers and advisers to find a way out of the chapter’s bankruptcy. 11.

“I felt like I was stabbed in the back because repeatedly (Celsius founder Alex) Mashinsky said, ‘Banks are not your friends,'” Daniel Frishberg told Reuters , a “won” client, ahead of Wednesday’s hearing. “In fact, they were much worse than the banks.”

However, a decision on crypto ownership may not be the end of the road for clients. Even though customers clearly own the assets, bankrupt crypto firms won’t have enough funds to reimburse everyone, and figuring out who gets paid and in what amounts can take months or years.

“Bankruptcy courts are now at the forefront of crypto rulemaking as they will decide fundamental issues related to asset allocation and client custody,” Yadav said. . “This is going to have a huge influence on crypto businesses and crypto customer behavior.”

Reporting by Tom Hals in Wilmington, Delaware, and Dietrich Knauth in New York Editing by Amy Stevens, Noeleen Walder, Matthew Lewis and Rosalba O’Brien

Our standards: The Thomson Reuters Trust Principles.

Tom Hall

Thomson Reuters

Award-winning journalist with more than two decades of international news experience, focusing on high-stakes legal battles on everything from government policy to business negotiation.

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