Key Takeaways
- • Loeb & Loeb LLP warns that customers holding crypto on exchanges may be treated as unsecured creditors in bankruptcy and could recover "just cents on the dollar," a risk underscored by the filings of Three Arrows Capital, Voyager Digital, Celsius Networks, FTX and BlockFi.
- • Whether crypto assets are estate property or customer property is the pivotal question; terms of use and state customer-protection statutes will largely determine the outcome, and the Celsius cases are expected to provide guidance.
- • Withdrawals made in the 90 days before a bankruptcy filing may be subject to preference clawback claims, a theory never yet tested against a crypto exchange or custodian, leaving the law unsettled.
- • Loeb & Loeb recommends reviewing exchange terms, moving assets to a different custodian or cold storage promptly if insolvency is a concern, and maintaining succession plans, since lost private keys may mean permanently lost crypto.
- • With the total crypto market capitalization cited at nearly $900 million, down from nearly $3 trillion in November 2021, trustees should weigh whether crypto investments are consistent with their fiduciary duties.
Summary
A Loeb & Loeb LLP family office feature examines the bankruptcy and estate planning issues raised by crypto assets following a wave of insolvencies, including Three Arrows Capital, Voyager Digital, Celsius Networks, FTX and, most recently, BlockFi. The firm notes that FTX, once a major source of capital and bailouts for other crypto businesses, collapsed suddenly. Investors holding assets on a failed exchange face the prospect that they will be treated as unsecured creditors and recover only a fraction of their holdings.
The central legal question is whether crypto held in a debtor's custody is property of the bankruptcy estate or customer property. Estate property makes the depositing customer a generally unsecured creditor, while customer property should be recoverable in full if the exchange still maintains the assets. According to the analysis, exchange terms of use are decisive: terms that transfer ownership to the exchange point toward estate property, while terms that keep title with the customer, particularly where assets are held in segregated accounts, point the other way. Applicable state law also matters, since some states impose customer-protection statutes requiring assets to be held in trust or require custodians to post surety bonds. Money transmitter laws may also be relevant. The Celsius litigation is highlighted as a likely source of precedent.
Customers also face potential clawback exposure. Trustees may seek to recover transfers made in the 90 days before filing as preferences, but the firm notes these claims have never been asserted against a crypto exchange or custodian. Several defenses are available, including that withdrawn assets were not debtor property, that the debtor was solvent (a presumption of insolvency applies but can be rebutted, though volatility complicates the analysis), the ordinary course of business defense, which customers will argue applies to on-demand withdrawals, the subsequent new value defense, and securities safe harbors, whose applicability to crypto assets remains an open question.
For risk mitigation, the authors recommend that customers review terms of use, withdraw assets or transfer them to a safer custodian if insolvency is a concern, and consider hardware wallets or other cold storage, while acknowledging the trade-off of reduced convenience and the risk of losing a device or private key. On the estate side, the firm argues trustees should consider whether crypto investments are consistent with fiduciary duty, noting that stablecoins differ materially from volatile assets such as bitcoin, ethereum and meme coins. Trustees who invest must also secure storage capabilities. Finally, successful succession planning requires heirs to receive both the hardware and access instructions for encrypted private keys, and without such a plan, the firm warns, crypto assets will likely be lost.
The central legal question is whether crypto held in a debtor's custody is property of the bankruptcy estate or customer property. Estate property makes the depositing customer a generally unsecured creditor, while customer property should be recoverable in full if the exchange still maintains the assets. According to the analysis, exchange terms of use are decisive: terms that transfer ownership to the exchange point toward estate property, while terms that keep title with the customer, particularly where assets are held in segregated accounts, point the other way. Applicable state law also matters, since some states impose customer-protection statutes requiring assets to be held in trust or require custodians to post surety bonds. Money transmitter laws may also be relevant. The Celsius litigation is highlighted as a likely source of precedent.
Customers also face potential clawback exposure. Trustees may seek to recover transfers made in the 90 days before filing as preferences, but the firm notes these claims have never been asserted against a crypto exchange or custodian. Several defenses are available, including that withdrawn assets were not debtor property, that the debtor was solvent (a presumption of insolvency applies but can be rebutted, though volatility complicates the analysis), the ordinary course of business defense, which customers will argue applies to on-demand withdrawals, the subsequent new value defense, and securities safe harbors, whose applicability to crypto assets remains an open question.
For risk mitigation, the authors recommend that customers review terms of use, withdraw assets or transfer them to a safer custodian if insolvency is a concern, and consider hardware wallets or other cold storage, while acknowledging the trade-off of reduced convenience and the risk of losing a device or private key. On the estate side, the firm argues trustees should consider whether crypto investments are consistent with fiduciary duty, noting that stablecoins differ materially from volatile assets such as bitcoin, ethereum and meme coins. Trustees who invest must also secure storage capabilities. Finally, successful succession planning requires heirs to receive both the hardware and access instructions for encrypted private keys, and without such a plan, the firm warns, crypto assets will likely be lost.
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