Part 1 – Celsius Bankruptcy The Celsius Network was conceptualized as an alternative to conventional banking, offering its customers return rates of up to 20% on deposits of digital assets, and providing digital asset-collateralized loans. Celsius also promoted to customers its enhanced transparency and security in comparison to traditional banks. Because of this, many users were left shocked when, on June 12, 2022, Celsius abruptly froze all withdrawals from customer accounts. One month later, on July 13, 2022, Celsius filed for bankruptcy. As of the time of this writing, customers remain unable to withdraw from their Celsius wallets, though Celsius has filed an unresolved motion seeking to return a portion of assets to certain customers. In the wake of this filing, dozens if not hundreds of outraged customers have submitted letters to the Honorable Martin Glenn, who is presiding over the Celsius bankruptcy proceeding in the Southern District of New York. These letters have been primarily aimed at pushing back against Celsius’ intention to treat all customers as unsecured creditors, an intention which has been recorded in court filings made by Celsius.[1] Pointing to its terms of use, Celsius asserts that its customers had transferred legal and beneficial ownership of their cryptocurrency assets to Celsius, in consideration for the returns payable to customers and for the company’s participation in secured loan transactions.[2] The key question is whether the relevant digital assets remained the property of customers when they were deposited with Celsius or whether these assets became the property of Celsius when they were placed in the custody of the company. If the assets remained the property of customers, held by Celsius in a custody or trust relationship, the assets will not constitute property of the Celsius estate and generally speaking, the administration of these assets will not be subject to the jurisdiction of the Bankruptcy Court in the Celsius Chapter 11 bankruptcy proceeding. In contrast, if, as Celsius contends, customers did transfer legal and beneficial ownership of the assets to Celsius upon depositing them with Celsius, the funds constitute property of the Celsius bankruptcy estate, and their administration is governed by the provisions of the Bankruptcy Code. Customers’ rights to recover from Celsius will be as unsecured creditors of Celsius and so will be dependent upon its overall financial condition. It appears very possible that Celsius will fail to repay its creditors in full, as while it managed $25 billion in assets in October of 2021, it held only $167 million in "cash on hand"[3] and showed over $1.15 billion in liabilities[4] at the time of its bankruptcy filing. This collision of interests has led to questions regarding how cryptocurrency and other digital assets should be treated under bankruptcy law. While 21% of American adults have invested in, traded, or used cryptocurrency in some capacity[5], the law around how to treat this popular new class of asset remains unclear, as evidenced by the uncertainty of how the courts will treat the digital assets in the Celsius Chapter 11 bankruptcy. In light of the complex litigation looming in this case over the recovery of assets, holders of cryptocurrency and other digital assets should evaluate accessibility of those assets in case of a platform’s bankruptcy when maintaining existing investments and making future investments. Celsius has indicated that its terms and conditions do not guarantee the return of user funds in the event of insolvency. The terms and conditions of Celsius and other digital asset platforms are subject to change on a regular basis and holders of digital assets should expect that the specific terms which govern the platform and the relationship of the customers to the platform to have a significant impact on customers’ rights to recover in potential bankruptcies or restructurings in the future. To ensure that assets can be recovered in unforeseen circumstances, an understanding of legal control over deposited assets is key. To understand that legal control, we will next examine the shifting legal and regulatory landscape of this new class of assets. Part 2 – UCC Amendments’ Impact on Crypto Bankruptcies In July of this year, after Celsius filed for bankruptcy, the Uniform Law Commission and American Law Institute approved amendments to the Uniform Commercial Code (the “UCC”) regarding emerging technologies. These new rules regarding the perfection of security interests in cryptocurrency are particularly relevant to situations like in the instant Celsius case, as the perfection of a security interest grants a creditor rights against other secured creditors whose interests are unperfected when it comes to recovering collateral from a bankrupt debtor. The guidance that these amendments provide, including the creation of an entirely new UCC Article 12,[6] may have had a significant impact on the current position of Celsius’ users had the amendments been in place at the time of Celsius’ bankruptcy (and adopted into law). Celsius’ users would have had a government-defined framework to formulate an argument that they are entitled to recover their deposited assets, on the basis that they had perfected their security interests in the deposited digital assets through control over those assets. However, much like the facts behind Celsius’ bankruptcy itself, these amendments are also untested within the courts, and there remains much uncertainty as to how courts will interpret and apply these new provisions. The new UCC provisions allow holders of "controllable electronic records" (a category that includes Ether, Bitcoin, and NFTs, among other digital assets, but excludes fiat currency, investment property, chattel paper in electronic form and certain other types of assets) to perfect their security interests through control of those controllable electronic records. Section 12-105(a) of the UCC states that control is present where a person has 1) the power to enjoy substantially all of the benefit from the record, 2) the exclusive power to prevent others enjoying the benefit of the record, and 3) the exclusive power to transfer control of the record to another person, or to cause another person to obtain control of another record as a result of the transfer of a record. In addition to these requirements, establishing control also requires that a person be able to readily identify themselves as having the elements of control listed here, through methods such as name, identifying number, cryptographic key, office, or account number. Digital asset holders should seek to ensure that their assets are being held on platforms where control of the asset remains with the user, rather than the platform. The effect of these UCC amendments will roll out as individual state legislatures decide on whether or not to adopt the amendments. Early adopters of the amendments include Iowa, Indiana, Nebraska, and New Hampshire.[7] The ultimate scale of impact of these amendments hinges on whether the amendments are widely adopted.  The recent amendments to the UCC are not the only government guidance being developed, as the White House continues to develop its framework for the development of digital assets.[8] This framework is the product of President Biden’s March 9 executive order, which aims to achieve, among other goals, an improvement in consumer protections with respect to digital assets. Though we cannot predict what form these consumer protections will take, it is important to analyze how these developments will shape cryptocurrency bankruptcies going forward, including asset classification, acceptable practices for managing user assets, and creditor priority. Though these UCC amendments were not in place in time to have a direct impact on Celsius’ bankruptcy process, they may have had a significant impact had they come into place earlier. These provisions could have allowed Celsius users to argue that they had established control through exclusive possession of their assets, which would have theoretically given them the ability to recover all or most of their assets through bankruptcy court as secured creditors who had not forfeited control of their assets to Celsius. At the same time, Celsius’ model arguably requires, by its very nature, that Celsius possess some degree of control over the transfer of customer assets. How can Celsius lend out cryptocurrencies if it does not have the authority to transfer its treasury of assets?  And if Celsius were to have permission to make those transfers, how could it be argued that users have exclusive power over transfers of those assets? Now that these UCC amendments have received final approval from the UCC co-sponsors, the American Law Institute and the Uniform Law Commission, and are being considered for adoption by the states and other U.S. jurisdictions, various cryptocurrency platforms will likely face pressure to amend their terms of service, or even the way their platforms operate, in order to allow their customers to retain the type of control that the UCC amendments contemplate. However, changing how digital asset platforms are structured and operate is often a complex, time consuming, and expensive undertaking. There are likely to be many platforms that either cannot or will not alter their structure in a way that lets users retain control over their deposited assets. Users should recognize and weigh these risks associated with retrievability of their digital assets when analyzing potential cryptocurrency platforms. Important questions about whether a platform leaves legal control of deposited assets in the user’s hands include the following: Will the platform allow other users to use or enjoy the assets? What measures are available to ensure that ownership of the asset is not transferred against the user’s wishes? What measures does the platform have available to transfer user assets? Can the asset be transferred upon the user’s request? These questions are taking on increased importance as the digital asset industry continues to experience turbulence.  Celsius is not the only major bankruptcy in the cryptocurrency sphere, as the cryptocurrency exchange FTX also filed for Chapter 11 bankruptcy on November 11, 2022. FTX has joined Celsius as one of the many businesses suffering from the ongoing liquidity crisis in cryptocurrency. Those logging onto the exchange’s main website are now met with a warning that users are unable to make withdrawals, and are strongly advised against making further deposits.  FTX’s own court filings indicate that they may have over one million creditors as part of its bankruptcy proceedings. With FTX taking up the mantle as the most recently filed major crypto bankruptcy, any lessons learned by users and regulators from the Celsius case are likely to influence FTX’s now ongoing Chapter 11 Bankruptcy proceeding. If we are indeed entering a crypto winter (or blizzard), as many in the media have postulated and as these bankruptcy cases evidence, now is the time for users to make sure they are aware of the level and nature of control they hold over their cryptocurrency assets, lest those assets become as difficult to retrieve as they were in the case of Celsius or FTX. Increased sources of government guidance may prove to be timely, if platforms continue to experience distress. We at Sullivan are here to provide clients with the combination of technological and legal expertise needed to demystify these proceedings and comply with ever-evolving governmental and regulatory guidance and laws in the digital asset space. Please feel free to contact us with any questions or if we can be of assistance. [1] https://www.forbes.com/sites/haileylennon/2022/08/01/bankrupt-crypto-lender-celsius-could-leave-customers-last-in-line-to-get-paid/?sh=27f039905fde. [2] https://celsius.network/terms-of-use. [3] https://www.businesswire.com/news/home/20220713005911/en/Celsius-Network-Initiates-Financial-Restructuring-to-Stabilize-Business-and-Maximize-Value-for-All-Stakeholders. [4] https://cases.stretto.com/public/x191/11749/PLEADINGS/1174910062280000000017.pdf [5] https://www.cnbc.com/2022/03/31/cryptocurrency-news-21percent-of-adults-have-traded-or-used-crypto-nbc-poll-shows.html. [6] https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=36a12016-c502-2458-d6a0-0dbe3fddaff7&forceDialog=0. [7] https://content.next.westlaw.com/practical-law/document/I10a8b85c11b811ed9f24ec7b211d8087/States-Begin-to-Adopt-UCC-Article-12-Covering-Digital-Assets?viewType=FullText&transitionType=Default&contextData=(sc.Default). [8] https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-framework-for-responsible-development-of-digital-assets/.

Jennifer Behrens authored the article, "Second Circuit Could Upend Syndicated Loan and CLO Markets," published by Bloomberg Law on September 13, 2022. The article examines the implications of a Second Circuit appeals court decision that syndicated bank loans are securities. Such a ruling, she says, could jeopardize the markets for such loans and the collateralized loan obligations.