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February 16, 2023

Debt Download

Welcome to Goodwin's Debt Download, our monthly newsletter covering what you need to know in the leveraged finance market. We hope you’re staying warm during the winter doldrums.

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Last year’s collapse of the Terra stablecoin (UST) and its sister token (Luna) triggered a freefall in cryptocurrency markets and, ultimately, the failure of several cryptocurrency lenders and other digital assets-based platforms. The bankruptcy filings that followed are leading to interesting issues of first impression as bankruptcy courts weigh in on previously untested areas of law. One such decision, from the U.S. Bankruptcy Court for the Southern District of New York in the Celsius Network, LLC, et al. chapter 11 cases, examined questions of ownership of digital assets on deposit with, or otherwise held by, a bankrupt cryptocurrency platform. There, the bankruptcy court looked to the documentation governing the relationship between Celsius and customers of its “Earn Program” and found that, based on the unambiguous terms of use to which such customers agreed when opening their accounts, they were transferring ownership of any cryptocurrency deposited in Earn accounts to Celsius. Accordingly, the court found that when Celsius filed for chapter 11, digital assets held in Earn accounts were not owned by the customer, but rather became property of the bankruptcy estate.

The Celsius Network decision will help guide, but not bind, how the courts in the Voyager Digital Ltd., FTX Trading Ltd., BlockFi Inc., and other similar bankruptcy cases decide related issues in those cases.

Key takeaways from the Celsius Network decision include:

  • The terms of use to which customers agree with cryptocurrency platforms are critical to the analysis of ownership and property of the estate issues; courts are likely to apply principles of applicable contract law to determine the outcome.
  • If the terms of use to which customers agree when depositing digital assets on a platform provide that the platform may lend such assets to third parties, pledge such assets as collateral, or otherwise use such assets to generate income, and further that the customer relinquishes its right to exercise rights of ownership over such assets while on deposit with the platform  ̶  as did the terms of use for Celsius’s “Earn Program”  ̶  such digital assets are likely to be deemed property of the bankruptcy estate if the platform files for bankruptcy.
  • The decision does not negate defenses customers may have to claiming ownership of digital assets, including the presence of fraud or other criminal activity or material misrepresentations, which could lead a court to find customers are entitled to receive their assets back.
  • Because the digital assets held in the relevant accounts in the Celsius Network cases are considered property of Celsius’s bankruptcy estate rather than property of Celsius’s customers, Earn customers do not get their assets back and become general unsecured creditors of Celsius, and Celsius is permitted to sell the digital assets to underwrite the administrative costs of its bankruptcy cases and, ultimately, to distribute consideration received or remaining assets to its creditors pursuant to a chapter 11 plan.

To learn more, check out this recent Goodwin publication: Who Owns Digital Assets When a Cryptocurrency Platform Files Bankruptcy? The Terms of Use Answer the Question

In Case You Missed It – Check out these recent Goodwin publications:
Innovations in Private Fund Liquidity Solutions and New York Finalizes Commercial Financing Disclosure Regulations


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Nikolaus J. Caro, and Robert J. Stein.

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