Due to the cascading effects of a stablecoin collapse and the biggest crypto hedge fund defaulting, companies such as Celisus Network and Voyager have filed for Chapter 11 bankruptcy and have frozen withdrawal of customer assets in Summer of 2022. If you deposited cryptocurrency onto these high-yield earning sites, you might be unable to withdraw your assets. Even worse, both companies have now filed for Chapter 11 bankruptcy, where they will argue that the average investor who had their assets in their care have given them ownership of said assets. The companies claim that customer crypto assets became property of the companies once transferred over into their custody.
Federal courts have weighed in on a similar matter dealing with securities in the case, In re Joliet-Will County Community Action Agency. The Seventh Circuit Court decided when an asset belonged to a company and when an asset was client property in bankruptcy proceedings. If the asset was given by a client to the company for its control and use, it was likely to be considered company property. However, if the company had a limited role and only held assets for a client, it was more likely to be client property.
Using the reasoning from In re Joliet-Will and applying it to Celsius Network, some deposited assets may be part of the bankruptcy estate while other assets may be property of the customers. The Celsius Network is a cryptocurrency brokerage that provides high yield to customers that desposit cryptocurrency to its fund. The deposited cryptocurrencies are lent out by Celsius to individual and institutional borrowers. There are two types of accounts on Celsius, a “Custody” account that does not generate rewards and an “Earn” account which generates yield for the customer when Celsius lends out the assets. The former account type only holds the customer assets. In contrast, the latter type allows Celsius to control and reinvest the cryptocurrency the customer receives high percentage yield from their deposit.
If Celsius and clients agreed that the company had the power to use the client’s deposit into the Earn account for investments, then property rights to the currency may belong to Celsius’ bankruptcy estate. In contrast, Custody accounts that merely possess customer property are arguably customer property in a Chapter 11 bankruptcy.
Depending on what type of account you have on cryptocurrency lending brokerages such as Celsius Network, you may or may not have property rights that survive bankruptcy proceedings.
