In July 2022, in the wake of the now-infamous Terra-Luna crash and collapse of crypto-focused hedge fund Three Arrows Capital, Celsius filed for chapter 11 protection to stave off a “run on the bank” by retail customers. Prominent among the many unknowns identified at the outset of the cases (a number of which are legal issues of first impression) was the question of who owned cryptocurrency assets deposited by customers in connection with Celsius’ various products, which included traditional deposit accounts, rewards programs, and more exotic products like swaps and other derivatives.
Of particular importance to retail customers was the ownership of crypto deposited in Celsius’ “Earn” rewards program (“Earn” or the “Earn Program”), which enabled customers to receive “Rewards” on deposited crypto in the form of yield paid-in-kind (i.e., BTC earned yield denominated in BTC, ETH earned yield denominated in ETH) or in Celsius’ proprietary token. Earn was far and away Celsius’ most popular retail product, constituting of 77% of assets on the platform, with a market value of approximately $4.2 billion as of the bankruptcy filing.
Among the assets deposited in Earn were approximately $23 million of “stablecoins”—crypto tokens, the value of which is pegged to a “stable” asset class like fiat currency, gold, or other commodities. In September 2022, facing a projected liquidity crunch, the Debtors filed a motion seeking the Court’s authority to sell approximately $18 million of stablecoins to fund the administration of the bankruptcy cases. That motion was opposed by multiple parties in interest (including the United States Trustee, various states, and numerous customers), which required the Court to decide, among other things, whether crypto in the Earn accounts belonged to the Celsius estate.
The Bankruptcy Court’s Decision
Nonetheless, the Court noted that the objecting customers and states had raised issues, such as fraudulent inducement to contract, unconscionability, and securities law violations, that could constitute “colorable defenses to contract formation as individuals and as a group.” However, the opinion notes that, “[e]ven valid contract defenses would not necessarily give rise to Account Holders claims [sic] to ownership of the cryptocurrency assets they deposited.” The Court specified that such defenses were reserved for the claims resolution process, through which individual customers’ rights vis-à-vis the Debtors will be determined.
One immediately obvious impact of this decision is that it checks off one of the boxes necessary to avoid as preferences withdrawals from the Earn program in the 90 days prior to the bankruptcy: namely, that the withdrawn crypto assets constituted property of the Celsius bankruptcy estate. However, as we’ve discussed previously, a number of other obstacles may frustrate trustees seeking avoidance of crypto withdrawals.
The potential for avoidance actions aside, it is otherwise unclear how the Court’s decision will impact customer recoveries, both in the Celsius case and in other crypto platform bankruptcies.
With respect to Celsius, as the Court notes, there were insufficient crypto assets held by the Debtors as of the petition date to satisfy the claims of all Earn customers in full; accordingly, irrespective of the Court’s decision, customer claims were likely to be subject to haircuts. In addition, and as previously noted, this decision did not fully dispose of any particular customer’s claim; rather, the Court only found a presumption that assets in the Earn program are estate property, which presumption remains subject to any defenses that might be raised by individual customers. Further, the decision only dealt with crypto held in the Earn Program; while those assets constituted the bulk of crypto on the platform, there were as of the petition date hundreds of millions of dollars’ worth of crypto deposited by customers in Celsius’ other programs, which will need to be dealt with by the Court in due course.
As to the broader crypto universe, while the decision is a helpful guidepost as to the legal issues and analyses likely to arise in other bankruptcies, the result in Celsius is unlikely to be outcome-determinative in any future case. As the Court’s decision makes clear, analyzing who holds title to crypto assets held on platform is fact-intensive, and the answer will depend upon the precise terms, conditions, and circumstances at issue in each case.
 Memorandum Opinion and Order Regarding Ownership of Earn Account Assets, In re Celsius Network LLC, No. 22-10964 (MG) (Bankr. S.D.N.Y. Jan. 4, 2023), ECF No. 1822 (the “Opinion”).
 Tr. of Hrg., In re Celsius Network LLC, No. 22-109640-MG (Bankr. S.D.N.Y. Jul. 18, 2022), at 37:21–22; Opinion at 5.
 Opinion at 5.
 See Opinion at 18–21.
 Opinion at 31–34.
 Opinion at 27.
 Opinion at 6.
 Opinion at 38.
 Opinion at 39.
 Opinion at 39, 40.
 Opinion at 43.
 Opinion at 6.