Earlier this month, the SDNY Bankruptcy Court answered one of the gating questions at the center of Celsius Network’s Chapter 11 bankruptcy regarding the ownership of the approximately $4.2 billion in crypto assets.  Celsius account holders had been demanding the return on their crypto deposits in interest-bearing accounts (“Earn Accounts”), while Celsius debtors asserted that these assets were, pursuant to Celsius’ Terms of Use, property of the Celsius bankruptcy estate. The court sided with the Celsius debtors and ruled that, according to Celsius’ unambiguous Terms of Use, these assets became the property of Celsius when they were deposited in the Earn Accounts on Celsius’ platform.

 In providing its rationale, the Court found that the Terms of Use, as amended, and accepted by 99.86% of Celsius account holders, gave Celsius “all right and title to such Eligible Digital Assets, including ownership rights”. Accordingly, any assets remaining in these accounts on the date of the bankruptcy petition became property of the bankruptcy estate and each such account holder became an unsecured creditor. The court viewed the ownership of these assets as a contract issue governed by New York law, and under New York law, when a contract’s terms are unambiguous, courts must apply them as written. This finding, while unsurprising, will have important consequences, not only in Celsius’ bankruptcy, but also for the billions of dollars in cryptocurrencies trapped on other insolvent platforms.

The simple but important takeaway is that contracts matter. Investors onboarding onto exchanges or trading platforms or entering into new trading relationships should closely review trading documentation to ensure their assets are treated as they expect. Are you lending the digital assets as a secured lender, or entering into a repurchase arrangements for digital assets where title is transferred? If and when is the exchange or counterparty permitted to rehypothecate digital assets? Are set-off rights mutual, or is only the exchange or counterparty permitted to exercise rights of set-off under the agreement? The answers to these questions may mean different treatment in a bankruptcy of the exchange or counterparty.  For distressed investors attempting to purchase claims, underwriting of the claim should include a deep dive into the trading agreements, terms of use or other documentation governing the applicable claims.