¶ 1001
Overview
Scope of the chapter. When a customer delivers digital assets to an exchange, a custodian, a lending platform or a broker, the law must decide what the customer has afterward. The customer may remain the owner, with the intermediary holding as bailee, trustee or agent. The customer may hold a security entitlement under Article 8 of the Uniform Commercial Code, which carries a statutory property interest in a pool. Or the customer may have parted with ownership altogether and hold only a contract claim against the intermediary for the return of equivalent assets. This chapter examines each of those characterizations, the tests that decide among them, the decisions that have applied those tests in the failures of 2022 and 2023, the law of tracing when customer assets have been pooled or misused, the regulatory instruments that now press custodians toward one characterization, and the drafting of custody agreements that will hold up in an insolvency.
Why the question matters. The characterization of the relationship decides almost everything a customer cares about when the intermediary fails. If the customer owns the assets, they are excluded from the intermediary's bankruptcy estate and may be returned in kind. If the customer is a creditor, the assets belong to the estate, the customer shares pro rata with other unsecured creditors, and the claim is ordinarily fixed in dollars as of the petition date. The difference in the large exchange and lender failures was measured in billions of dollars and in recovery percentages that ranged from full return to a fraction of the claim. The same question arises outside insolvency: in a creditor's levy against the intermediary, in a dispute over forked or airdropped tokens, in the tax treatment of a transfer to a platform, and in a fiduciary's duty to safeguard assets placed with a custodian.
The governing principle. Property interests in a bankruptcy are created and defined by state law, unless some federal interest requires a different result. Butner v. United States, 440 U.S. 48, 55 (1979). The estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C. § 541(a)(1), and property in which the debtor holds only legal title enters the estate "only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold," id. § 541(d). Whether a customer's assets leave the estate therefore turns on the nonbankruptcy law of property, trusts, bailment and commercial law, applied to the agreement between customer and intermediary and to the facts of how the assets were held.
The deciding instrument. The decisions examined in this chapter share one feature. In each, the court began and largely ended with the customer agreement. A clause transferring "all right and title" to the platform, joined with a broad right to lend and rehypothecate, led the Celsius court to hold that the deposited assets belonged to the estate (¶ 1040). Segregated custody wallets held under different terms led the same court to the opposite result for a different program (¶ 1060). Agreements that disclaimed any fiduciary relationship and permitted pooling led a Hong Kong court to find no trust, while terms and conduct consistent with a custodial purpose led a New Zealand court to find a trust for each currency (¶ 1030). The terms of service are the first place to look and, where they are clear, usually the last.
The facts that test the terms. The terms do not decide the question alone. Courts examine whether the assets were in fact segregated, whether the intermediary used them for its own purposes, whether its books treated them as its own assets and liabilities, and whether a shortfall prevents every customer from being made whole in kind. An agreement that promises segregation and title to the customer will not protect a customer whose assets were commingled and spent, because the remedies for that breach run through tracing rules that rarely favor the individual claimant (¶ 1070).
Relation to other chapters. The property characterization of digital assets is treated in ch. 3 (United States) and ch. 4 (the common-law world). Custody models and their control features are examined in ch. 9. Qualified custodians, trust companies and chartered institutions are treated in ch. 11, and staking, lending and rehypothecation in ch. 12. Security interests, including the Celsius and BlockFi lending decisions, are examined in ch. 7. The treatment of customer claims in bankruptcy and the major exchange and lender failures are examined in chs. 27 and 28. This chapter supplies the private-law analysis those chapters assume.
Plan of the chapter. Paragraph 1010 sets out the possible characterizations and the order in which a court analyzes them. Paragraphs 1020 through 1050 examine bailment, trust, debt, agency and the Article 8 and Article 12 routes in turn. Paragraph 1060 examines the terms of service in the Celsius, BlockFi, Voyager and FTX cases. Paragraph 1070 addresses segregation, commingling and tracing. Paragraph 1080 reviews the regulatory instruments that shape custodial terms. Paragraph 1090 sets out drafting guidance, model provisions and a checklist.