My Crypto’s Gone: Cryptocurrency in Earning Accounts Belongs to Celsius, Not Customers FinTech

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The cryptocurrency in Celsius’ Earn accounts belongs to the bankruptcy estate, not the depositors who placed it there, according to a Jan. 4 memorandum notice from Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York.

The decision is a blow to individual customers who have deposited crypto assets in approximately 600,000 Earn Accounts (the Earn Accounts) operated by Celsius Network LLC and its affiliates (the Debtors). Shortly before Celsius Debtors filed for bankruptcy in July 2022, Earn accounts contained crypto worth around $4.2 billion. Debtors froze withdrawals from Earn accounts before filing, and the bankruptcy stay prevents withdrawals after filing. Now, Earn Account customers who had hoped for a full return of their cryptocurrency find themselves with unsecured general claims and potentially facing a significant loss.

In arriving at his decision, Justice Glenn distilled the issue into a question of contract law. He argued that the Terms of Service that governed the Earn Accounts constituted a valid and binding contract between the Celsius Debtors and the Earn Account Holders. Further, these Terms of Use unambiguously transfer title and ownership of Earned Assets deposited in Earned Accounts from Account Holders to Debtors. See opinion, roll no. 1822 at p. 30.

Depositors who placed crypto in accounts were asked to agree to the terms of service. Celsius debtors had eight versions of these terms, and undisputed evidence showed that 99% of Earn account holders accepted version six or later.

The latest version of the terms of service stated that in exchange for certain payable rewards, depositors granted Celsius. . . all right and title to such Qualifying Digital Assets, including ownership rights. . . . The deal continued:

In the event that Celsius goes bankrupt, goes into liquidation, or is otherwise unable to repay its obligations, any Eligible Digital Asset used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any remedy or legal right. in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under applicable laws.

See Opinion at 10-11.

This provision and similar language proved determinative for Judge Glenn. He concluded that the contracts and subsequent amendments to those contracts were enforceable under New York law. See Opinionat 27 (citing Whit v., 2015) (In New York, clickwrap agreements are valid and enforceable contracts.) Also, because this language was unambiguous, it must work to do what it says it does. it does, namely transferring ownership of the Deposited Assets from Depositors to Celsius.

Notably, Justice Glenn said Wednesday’s ruling does not determine the underlying ownership of other Celsius deposit programs, such as the custodial program, the holdback program or the borrowing program. Additionally, he noted that depositors who have been deprived of their crypto ownership may have various defenses or breach of contract claims against the estate. He concluded: The Court does not take lightly the consequences of this decision on individuals, many of whom have deposited significant savings on the Celsius platform.

This could be the start of a series of important decisions in the Celsius business. Judge Glenn will then preside over a second phase of litigation, where the bankruptcy court will consider an expanded set of issues such as preferential claims involving customers who withdrew assets within 90 days of bankruptcy. Justice Glenn’s opinion may also serve as a milestone as judges grapple with thorny questions about ownership of digital assets at stake in the industry.

Wednesday’s decision has already impacted the administration of the Celsius case. Judge Glenn included a ruling that Celsius debtors could sell certain crypto assets to increase liquidity, as those assets were found to be owned by the estate. Additionally, on Friday, January 6, Judge Glenn dismissed a series of motions from Earn Account clients seeking to be named as secured creditors, finding instead that they were unsecured creditors in accordance with his Wednesday, January 4 notice.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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