Throughout the latter half of 2022, filing for bankruptcy became a reality for many high-profile crypto firms. The resurgence of “crypto winter” has brought many crypto-related entities to their proverbial knees. Indeed, in November 2021, the total cryptocurrency market capitalization reached an all-time high of approximately $3 trillion. That figure has decreased substantially, and today hovers around $850 billion — a 70% drawdown. This contraction of capital has greatly impacted the solvency of many notable crypto companies, including Celsius Network, LLC (Celsius).
Prior to its recent implosion, Celsius provided its customers a pathway to transform their cryptocurrency holdings into yield-bearing instruments through a deposit product known as an “Earn” account. At its peak, Celsius offered high yields on Earn account deposits, such as 5% for Bitcoin and up to 10% for certain USD-pegged stablecoins. However, on June 12, 2022, Celsius issued a memo informing its customers of its decision to pause withdrawals from the platform due to “extreme market conditions.” Then, on July 13, 2022, Celsius filed voluntary petitions for relief under Chapter 11 of the bankruptcy code.
Celsius’ “first day” presentation to the court revealed Celsius’ position that cryptocurrency in the Earn accounts was property of the debtors’ estates, not property of the customers who had deposited it there. This position — which evidently came as a shock to many customers — sparked outrage, not to mention countless letters to the court and a significant amount of motion practice. But on January 4, 2023, the U.S. Bankruptcy Court for the Southern District of New York ruled that cryptocurrencies deposited into Earn accounts prior to Celsius’ bankruptcy filing — constituting $4.2 billion in aggregate Earn account value — belong to Celsius’ bankruptcy estate pursuant to the contractual terms embedded in the Earn account deposit agreement (Terms of Use). Therefore, according to the court, Celsius was permitted to pause withdrawals of Earn account deposits under the Terms of Use.
In a 45-page opinion, the court found: (1) the Terms of Use formed a valid and enforceable contract between Celsius and Earn account holders; and (2) the Terms of Use “explicitly and unambiguously” transferred title and ownership of cryptocurrencies in Earn accounts from Earn account holders to Celsius upon deposit. Notably, Celsius provided the Terms of Use to Earn account holders in the form of a “clickwrap agreement,” which required an Earn account holder to manifest assent by clicking a button confirming that the Earn account holder accepted the Terms of Use. Although terms and conditions embedded in electronic clickwrap agreements are usually not examined by those who select the “I agree” box, the court noted that the Earn account holders manifested mutual assent and an intent to be bound through their understanding that they were “assenting to a contract governed by the Terms of Use even if the Account Holders chose to read some or none of the provisions.” Further, the court reasoned that the element of consideration was present since Earn account holders received “Rewards” in the form of yield in exchange for depositing cryptocurrency on Celsius’ platform.
The crux of the court’s ruling is founded upon a widely recognized contract law theory: contracts will be enforced according to the plain meaning of their terms. The dispositive clause of the Terms of Use, in relevant part, stated as follows: “In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service . . . you grant Celsius . . . all right and title to such Eligible Digital Assets, including ownership rights . . . .” The court concluded that this provision embodied the parties’ collective intent to vest ownership of title to cryptocurrency in Earn accounts with Celsius upon deposit.
Looking Ahead
Although the court’s ruling is rooted in traditional contract principles, it is arguably at odds with the current federal and state regulatory sentiment towards offerings of interest-bearing cryptocurrency deposit accounts. Notably, almost a week after the court issued its ruling, the Securities and Exchange Commission filed a civil enforcement action against Genesis Global Capital, LLC and Gemini Trust Capital, LLC for allegedly violating federal securities laws through the companies’ collaborative offering of the “Gemini Earn” interest-bearing cryptocurrency deposit product. Only time will determine the precedential value of the bankruptcy court’s ruling, but it does not appear the ruling will deter regulatory agencies from commencing civil enforcement actions against crypto-related entities that have, or are currently offering, interest-bearing cryptocurrency deposit accounts.
