When investors are considering investments in cryptocurrency, it is critical to understand the terms of asset ownership and transfer. Current and potential cryptocurrency investors should be aware that the Southern District of New York (SDNY) recently ruled that holders of cryptocurrency investments with the now-bankrupt cryptocurrency lending company Celsius Network LLC are not the true owners of these assets.
As of July 10, 2022, Celsius held cryptocurrency investments in “Earn Accounts” and identified nearly 600,000 such accounts with a market value of approximately $4.2 billion in cryptocurrency along with nearly $23 million in stablecoins.1 On July 13, 2022, Celsius filed for Chapter 11 bankruptcy in the SDNY and, soon after, several account holders moved to withdraw assets from their accounts.
… you grant Celsius . . . all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, 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 in Celsius’ full discretion. You acknowledge that with respect to Digital Assets used by Celsius pursuant to this paragraph:
1. You will not be able to exercise rights of ownership;
2. Celsius may receive compensation in connection with lending or otherwise using Digital Assets in its business to which you have no claim or entitlement; and
3. In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.2
Accordingly, this important dispute over digital asset ownership is yet to be fully resolved.
1 In re Celsius Networks LLC, No. 22-10964 (MG) Bankr. S.D.N.Y. (Jan. 4, 2023) at 5.
2 Id. at 10-11 (emphasis added by the court).
3 Id. at 18-19.
5 Id. at 32-33, citing Meyer v. Uber Techs., Inc., 868 F.3d 66 at 75 (2d Cir. 2017) (“Courts routinely uphold clickwrap agreements for the principal reason that the Account Holder has affirmatively assented to the terms of agreement by clicking ‘I agree.’”) and Restatement (Second) of Contracts, § 211 cmt. b.
6 Id. at 35-36, citing Uber Techs., 868 F.3d at 74–75.
7 Id. at 37.
8 Id. at 38-43.
9 Id. at 39. In addition, the court noted that to perfect a security interest in cryptocurrency, non-fungible tokens (NFTs), and other digital assets, one must file a financing statement in the digital assets as a general intangible. Id. at 40-41. Because no Account Holders provided such a financing statement, the court found arguments regarding the interpretation of the term “loan” were moot.
Copyright © 2023, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume XIII, Number 20