Classification of Creditors in Digital Asset Bankruptcy Cases – Insolvency/Bankruptcy

As digital asset markets continue to struggle and multiple digital asset platforms seek refuge in Chapter 11 proceedings, courts will face several new issues.

A previous article discussed how traditional bankruptcy recovery mechanisms work when the recoverable assets are digital assets recorded on a blockchain. This article discusses another critical issue: how customers of digital assets will be classified under the Bankruptcy Code. Resolving this thorny issue will have a significant impact on the extent to which clients can recover assets from failed digital asset companies.

Priority of Claims in Chapter 11 Proceedings

The classification of creditors in a Chapter 11 case determines the likelihood of recovery in bankruptcy. The Bankruptcy Code provides at least four levels of recovery for creditors. Each level can have subgroups or classes:

Secured creditors. The first group to recover from a Chapter 11 estate are secured creditors, whose claims are secured by a lien on the debtor’s property (ie, collateral). If a secured creditor’s claim exceeds the value of the collateral, the claim may be divided into a secured claim—up to the value of the collateral—and an unsecured claim for the balance.

Creditors with administrative claims. Next come creditors with administrative claims. Pursuant to Section 503 of the Bankruptcy Code, claims for actual and necessary costs and expenses in conducting the bankruptcy are administrative claims. These costs include professional fees and salaries, wages and commissions for post-petition services rendered to the debtor.

Unsecured Real Estate Claims.In the third line for collection, there are unsecured priority claims. Section 507 of the Bankruptcy Code provides that prior claims include: certain salaries of the debtor’s employees, up to $15,150 for each individual; certain contributions to an employee benefit plan; and certain unsecured tax claims.

Unsecured creditors. Last in line are the unsecured creditors, who typically get their pro-rated share of the remaining funds after all creditors above them have been paid off. When senior creditors in a bankruptcy case get pennies on the dollar for the value of their claims, junior creditors often get nothing. If the previous four classes are fully satisfied, the participations can benefit from a recovery.

Insolvency of traditional banks and brokers

Banks cannot file for bankruptcy, but their holding companies can. In the event of a bank failure, the Federal Deposit Insurance Corporation (FDIC) generally facilitates the purchase and assumption of the failing bank’s insured deposits by a sound bank. Up to $250,000 is insured for each customer of an FDIC-insured bank. A customer would retain an unsecured claim in the event of insolvency for any amount greater than $250,000 that had been deposited with the insolvent bank.

Pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934, also known as the “Client Protection Rule”, broker-dealers in the United States must segregate client cash and securities from their own assets. Similarly, under Rule 15c3-1 of the Exchange Act, brokers must maintain minimum capital amounts in order to satisfy customer claims in the event of a liquidation.

The policy behind these rules is to ensure that, if a broker becomes insolvent, it will hold sufficient assets to satisfy customer claims and, generally, to allow the government to transfer all customer accounts to a financially solvent broker. . If client accounts cannot be transferred and the insolvent broker does not have sufficient cash or securities available to reimburse clients, clients may file claims in the insolvency of their clearing broker. The Securities Investor Protection Corporation (SIPC) will then calculate each claiming client’s “net equity”, or the amount of that client’s claim on the cash and securities in the segregated client accounts, net of any amount the client owed the broker.

SIPC will then allocate the assets of the segregated client accounts on a pro rata basis among the clients, up to their respective equity. Finally, the SIPC will compensate for any shortfall, up to $500,000 in cash and securities for each individual trader who has invested in the broker.

Bankruptcy of digital asset companies

Given the novelty and lack of regulation of digital asset companies and exchanges, there is currently no corresponding safety net to protect digital asset investors as there is in traditional cases. insolvency of banks or brokers. Indeed, in recent months, the FDIC has issued statements emphasizing that digital asset firms must remain transparent with their customers about the non-applicability of FDIC insurance.

Recent Chapter 11 filings by Voyager Digital Holdings Inc. and Celsius Network LLC, and their respective debtor affiliates, present two case studies of handling customer claims in the area of ​​digital assets.


Voyager has historically operated three main lines of business. First, Voyager operates a trading platform that caters to retail investors. Second, Voyager offers custodial services whereby digital currencies are deposited and stored on the Voyager platform, as opposed to individual wallets or trust accounts, in exchange for interest payments. Finally, Voyager operates a lending business.

In a typical commerce, the Voyager app allows a customer to purchase digital assets by transferring funds from a customer’s personal bank account to one of two major bank accounts “for the benefit of” customers controlled by Voyager. At this point, Voyager would execute the customer’s desired purchase and retain the digital assets. Voyager does not provide an individual digital wallet for each customer. Instead, all digital assets are shuffled and swept from the company’s shuffled wallet to a third-party custodial account.

During Voyager’s first-day hearing, Judge Wiles asked the debtor’s attorney whether the company was a custodian of the clients’ assets or whether the relationship between Voyager and its clients was analogous to a trust agreement. This series of questions is important for digital asset clients because it demonstrates that bankruptcy judges are questioning whether digital assets are even the property of the estate in the first instance.

Voyager’s attorney responded that the $350 million in bank accounts “for the benefit of” clients was the property of the clients over which Voyager had no claim of ownership. Therefore, these assets would not be owned by the estate. Voyager’s attorney further stated that the remaining $100 million in cash and digital assets co-mingled on the platform were the property of the estate, presumably available for distribution to all creditors in their order of priority.

The plan currently offered by Voyager is that customers will receive their money currently in customer accounts “for the benefit of”. After that, customers will be entitled to an unsecured claim for their pro rata share of the platform’s digital assets. In practice, this means that customer claims on digital assets will take priority after administrative claims and unsecured real estate claims. Fortunately for the customers, Voyager claimed in court that it has no known secured creditors.


In addition to offering an institutional lending program and no-return custody service, Celsius’ core business model allows customers to transfer digital assets to Celsius, either as collateral for fiat currency loans or to earn rewards by allowing Celsius to pool their digital assets. with those of other clients and, thanks to this economy of scale, “staking” the assets.

Staking refers to a mechanism not generally available to most retail investors, whereby digital assets are effectively locked for a period of time on the blockchain to verify other transactions taking place on the blockchain. in exchange for a reward. Notably, the Securities and Exchange Commission has suggested that certain forms of staking may constitute offerings of securities.

While Celsius operated in the same way as a traditional bank by holding or reinvesting customer deposits, Celsius has continually made it clear in its terms of service as well as in its “day one” statement that Celsius accounts are not bank accounts, deposit accounts, savings accounts, checking accounts. , or any other type of asset accounts. Although Customers retain ownership of Digital Assets held by Celsius through its Custodian Service, all such User Assets are co-mingled, meaning that under Celsius’s Terms of Service, Custodian Users do not have right to the return of their specific digital assets, but rather to the return of the same type of digital asset.

On the other hand, customers who have transferred digital assets to Celsius, either as collateral or for the purpose of earning rewards, have also transferred “all rights and title” to those assets “including ownership rights” and the right to “pledge, re-pledge, mortgage, re-mortgage, sell, lend or otherwise transfer or use any amount of ‘these digital assets’.

In the Celsius bankruptcy case, the debtors suggested that their customers should be treated as unsecured creditors. Celsius claimed in court that it has liabilities of $5.5 billion, assets of $4.3 billion and secured debt of $23 million. This means that most of Celsius’ 1.7 million retail customers will end up behind secured creditors, administrative claimants and senior unsecured claims.


Case law continues to evolve in the area of ​​digital assets. It remains to be seen how or if the bankruptcy courts will come to a consensus on this issue. As different approaches are taken by different courts, it will be critical to closely monitor this space, as client classification could impact demand for digital investments across the industry.

Read the previous article here.

This article was originally published in Bloomberg Law. Reprinted with permission. The views expressed in this article are not those of Winston & Strawn or its clients. The opinions expressed in this article are solely the opinions of the author.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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