Bloomberg Law
Dec. 5, 2022, 10:00 AM

Bankrupt Celsius, Customers Gear Up for Crypto Ownership Fight

James Nani
James Nani

Celsius Network will battle some customers in bankruptcy court this week over cryptocurrency ownership, one of the first legal tests to determine who truly owns the assets in trading platforms under Chapter 11.

The US Bankruptcy Court for the Southern District of New York will rule on two categories of assets, with arguments revolving heavily around interpretation of the crypto lender’s contract with its customers.

The Monday hearing will address assets held in the Celsius “Earn” program, a customer account program that paid out rewards but stopped taking in new business after a period of time after regulatory pressure. The second hearing, starting Dec. 7, will be about assets held in “Custody” and “Withhold” accounts, which were programs that held about $200 million of customers’ crypto assets at the time of its bankruptcy in July.

Crypto exchanges, lenders, customers, and regulators will closely watch the hearings for takeaways on how to navigate ownership of cryptocurrency stored in bankrupt firms. Voyager Digital Ltd., FTX Trading Ltd., and BlockFi Inc. have all filed for Chapter 11, and will address how they will pay out creditors’ crypto assets.

“While the answers to these questions of ownership will depend greatly on the facts of Celsius’ case, future cases will likely begin with a premise set by these highly anticipated rulings,” said Rick Hyman, a partner at Crowell & Moring LLP.

But the Celsius case has unique facts and terms of service, and the conclusion may not be applied universally.

“Ownership of the crypto in each of the companies will in large part be a function of the terms of the customer agreements,” said Brian Davidoff, a partner at Greenberg Glusker.

Who Owns What?

Celsius will argue before Chief Judge Martin Glenn that “Earn” program customers, under terms of use, gave the company their assets. And Celsius now wants to sell $18 million worth of stablecoin from the Earn accounts to fund its reorganization.

The Earn issues are the “largest question” related to who owns the cryptocurrency, Celsius has said.

Earn customers argue that the cryptocurrency in the program belongs to them.

That makes the Earn issue particularly important. If customers can withdraw whatever cryptocurrency Celsius still has, the firm will face more reorganizing challenges.

The court will also hear arguments over who owns cryptocurrency in Celsius’ Custody and Withhold accounts.

Celsius has said cryptocurrency in its Custody and Withhold accounts belong to customers. But even if the assets don’t belong to the Celsius estate, the judge will consider Celsius arguments that it should continue to hold on to the cryptocurrency to deal with other potential claims.

In opposition, creditor groups say there’s no justification for holding the funds, she said.

As of the bankruptcy petition date, there was roughly $180 million in Custody and $14.5 million in Withhold.

The judge will also consider contractual issues over whether Celsius’ customers are bound by user agreements when they signed up, and any changes made to those terms afterward, said Adam Levitin, a Georgetown University law professor.

Other objectors have said a court should determine whether Celsius is a Ponzi scheme before ownership issues are decided.

“If the court rules that the contractual terms are what govern, that’s likely to be the case in Voyager and BlockFi, but the specific terms in those cases are different, so the ultimate outcome could be different,” Levitin said.

‘Incestuous World’

Ultimately, contract interpretation will likely be the basis of the court’s findings, said Sullivan & Worcester partner Amy A. Zuccarello.

“As far as extrapolation, I think that there is likely to be some guidance gained by the Court’s determinations because terms and conditions across platforms may contain similar language,” she added.

Like contract terms, recent crypto bankruptcies also have shown how closely intertwined many of the companies are. Such was the case with former FTX CEO Sam Bankman-Fried’s $1 billion bailout efforts over the summer.

That means other crypto entities are going to watch closely to see if their terms will be enforced, and if they need to redo them, said Joanne Gelfand, an Akerman LLP bankruptcy attorney.

“These exchanges live in almost an incestuous world where there’s a lot of friendships and communication between owners and bailouts left and right,” Gelfand sad. “So, to the extent that there’s any cooperation and consensus as to terms of use, it may be a huge signal to other exchanges as to whether, if they’re in bankruptcy or if they intend to file, they will be able to claim that the customer property belongs to them.”

‘Hard to Extrapolate’

With so few federal laws and rules guiding cryptocurrency, many key decisions in cryptocurrency bankruptcies will depend on the facts of each case, Judge Michael E. Wiles of the US Bankruptcy Court for the Southern District of New York told attendees of a November bankruptcy conference.

State and common law will likely be factored in frequently, as will exchanges’ terms and conditions with customers, Wiles said.

How crypto companies actually treated customer’s digital assets will also play a big role. That could limit how broadly key court decisions in Voyager or Celsius could be applied in other crypto bankruptcies, Wiles said.

In addition, Celsius or Voyager cases are in the Second Circuit. And their rulings may not be persuasive to the Third Circuit, where the FTX or BlockFi cases are filed.

“It’s very hard to extrapolate a general rule that’s going to be applicable to all of these cryptocurrency cases,” Wiles said.

To contact the reporter on this story: James Nani in New York at

To contact the editors responsible for this story: Maria Chutchian at, Melissa B. Robinson at; Roger Yu at