This summer, Weil wrote here about how the Celsius bankruptcy and other crypto insolvencies will help shape the legal and regulatory landscape for the cryptocurrency industry. Judge Glenn’s ruling on a novel legal issue represents one such development. And, as the Crypto Winter shows little sign of thawing, similar developments may further shape the space.
Celsius’s Earn Program
Prior to its bankruptcy filing, Celsius maintained different types of customer accounts at various times, including the Earn Program, the Custody Program, and the Withhold Program.2 Each account type provided a different mechanism by which Celsius held crypto assets on behalf of customers, and the Court may ultimately rule differently as to whether customer deposits in the Custody Program and Withhold Program are property of the estate.
Celsius’s flagship “Earn Program” enabled customers to deposit crypto assets in an online account, which Celsius would then intermingle with other customers’ assets and collectively deploy to generate revenue.3 Celsius would reward customers with “interest” on deposited amounts by sharing with them the proceeds of these deployments, which included lending, hypothecating, selling or otherwise monetizing the crypto assets. Id.
Beginning in May 2021, multiple state securities regulators and the SEC initiated investigations of the Earn Program as an unregistered securities offering. These investigations, combined with a similar investigation and settlement related to competitor BlockFi, prompted Celsius to stop offering its Earn Program to unaccredited investors.4
As of Celsius’s July 13, 2022 petition date, the Earn Program included more than 600,000 users, and assets deposited in the program totaled more than $4.2 billion in value.5
Debtors’ Position: Earn Program Assets Are Property of the Estate
More than forty separate parties—many of them individual customers filing pro-se—objected to the Debtors’ motion to sell stablecoins, and by extension, any conclusion that Earn Program assets are property of the estate.
In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service . . . and the use of our Services, 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 . . . . 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.10
After conducting a hearing on December 5, 2022, the Court ruled on January 4, 2023, that the Earn Program assets are property of the Celsius bankruptcy estate and largely adopted the Debtors’ reasoning.
The Court further clarified that customers’ defenses to contract formation and claims for breach of contract would be reserved for the claims resolution process.16 If, for example, certain customers wish to argue that CEO Alex Mashinsky’s representations fraudulently induced them to enter into their contracts with Celsius, they may ultimately do so.17 But any such argument would require the Court to first address the threshold issue that a valid contract existed between customers and Celsius.18
For these reasons, Judge Glenn ultimately held: