Who owns cryptocurrency held by a cryptocurrency exchange? Do the cryptocurrency assets belong to the customers who deposited the crypto with the exchange, or do the cryptocurrency assets belong to the exchange itself? The answer to this question will have huge significance, both in terms of creditor recoveries as well as preferential transfer liability exposure.

The ownership issue first arose in the Chapter 11 cases filed by Celsius Network LLC and its affiliated debtors (collectively, “Celsius”) in the Southern District of New York. In January 2023, the bankruptcy court held that cryptocurrency deposited in the Celsius “Earn” program accounts (the “Earn Accounts”) was property of the Celsius bankruptcy estate. In so holding, the court considered the applicable “Terms of Use” and found that they unambiguously transferred ownership of the assets in the Earn Accounts to Celsius. The court centered its decision on a provision in the Terms of Use which granted Celsius “all right and title to such Digital Assets, including ownership rights.” Based on this language, the court found that title and ownership of the cryptocurrency held in the Earn Accounts was “unequivocally transferred to the Debtors and became property of the Estate on the Petition Date.”

However, the court’s January decision addressed only ownership of the cryptocurrency deposited in the Earn Accounts. Left undecided was whether Celsius owned the cryptocurrency pledged as collateral for its retail loans. To answer this question, the court once again began its analysis by considering the underlying operative agreements, namely the Loan Terms and Conditions (the “Loan Terms”) and the General Terms of Use (the “General Terms”). The Loan Terms, in operative part, provided:

In consideration for the Loan, you grant Celsius the right, subject to applicable law, without further notice to you, to hold the Digital Assets provided as Collateral in Celsius’ name or in another name, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and to use or invest such Digital Assets at Celsius’ own risk.

Loan Terms, Version 7 at 14 (emphasis added). The General Terms provided:

[N]otwithstanding the use of expressions such as “borrow,” “loan,” and “collateral” etc., which are used to reflect terminology adopted in the market for transactions of the kind provided for pursuant to the Loan Agreement, title to the Digital Assets shall pass from you to CNL on the basis of an outright sale, subject to your right to request at a later date the delivery of equivalent (but not identical) Digital Assets to those sold to CNL.

General Terms, Version 5 at 8 (emphasis added).

The court held that, taken together, these provisions “clearly and unambiguously transferred ownership of collateral to the Debtors.” Accordingly, the cryptocurrency held in the Earn Accounts was property of the Celsius bankruptcy estate.

Implications

We now have two rulings on cryptocurrency ownership, both of which held that the underlying agreements transferred ownership of the cryptocurrency to the debtor exchanges. The latest ruling in the Celsius case is sure to have significant implications.

First, unless it is reversed on appeal, the opinion means that customers of the Debtors’ retail borrower program do not own the cryptocurrency in their digital accounts and will instead be relegated to the status of unsecured creditors with a highly uncertain recovery. Second, the court’s decision opens potential preferential transfer liability to the extent that customers withdrew any of the cryptocurrency in the 90-day lead up to the bankruptcy filing since the cryptocurrency was property of the bankruptcy estate. Third, the opinion underscores the Wild West nature of crypto: Unlike deposits at a federally insured financial institution, deposits at cryptocurrency exchanges are not insured and may be at risk. Finally, customers or account holders in other cryptocurrency exchanges or businesses should carefully review the applicable terms of use to determine if those terms transferred ownership of their digital assets to their cryptocurrency counterparty.