Categories
Uncategorized

Depositing Cryptocurrency Assets: A Cautionary Tale on Clickwrap Agreements

Depositing Cryptocurrency Assets: A Cautionary Tale on Clickwrap Agreements

Mike Richardson

Share Post:

Earlier this year, a bankruptcy court in the Southern District of New York issued a startling ruling in the bankruptcy case of In re Celsius Network LLC, et al., Case No. 22-10964 (MG).  The dispute involved cryptocurrency owners who deposited their assets (such as stablecoins, non-fungible tokens (NFTs), central bank currencies, and security tokens) into Celsius’s “Earn Accounts” that allowed Celsius to use those funds to generate yields across various “on-chain” and “off-chain” investment strategies.  At the time Celsius filed bankruptcy, there were more than 600,000 Earn Account holders affected. Their assets totaled approximately $4.2 billion. 

A large-scale dispute arose over who could claim the assets in the Earn Accounts as their property.  If the bankruptcy court rules that they are the account holders’ property, then those individuals and entities will fare quite well in the bankruptcy proceedings from a distribution standpoint.  If they are not the account holders’ property, then they are Celsius’s property (and its bankruptcy estate).  As property of the estate, assets are used to pay creditors at the front of the priority line – which does not include the account holders.  Rather, that account holders are general unsecured creditors, which often means pennies on the dollar (or less) of the claim amount.   

On January 4, 2022, the bankruptcy court issued a ruling that held, in part, that the Earn Accounts were property of Celsius’s bankruptcy estate, and therefore Celsius could sell those assets to pay for administrative expenses, like legal fees.  In making this ruling, the bankruptcy court analyzed the enforceability of so-called “clickwrap” agreements in which users manifest assent by clicking a button confirming that they accept the terms.  Clickwrap agreements do not necessarily require the account holder to actually view the terms.  In most jurisdictions, clickwrap agreements are valid and enforceable contracts.

Celsius’s account holders were required to click through Terms of Use that included the following language:

In consideration for the rewards earned on your Account and the use of our Services, you grant Celsius the right, subject to applicable law, without further notice to you, to hold the Digital Assets available in your account in Celsius’ name or in another name, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Assets, separately or together with other property, with all attendant rights of ownership.

***

In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any [Assets] used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.

There are a multitude of colorable arguments supporting a determination that these clauses are unenforceable as a matter of state and federal law, including that (i) they lack consideration, (ii) they are unconscionable; (iii) they are ambiguous because they use terms like “loans” or “lending”; (iv) Celsius failed to uphold its fiduciary duties under the contract; (v) account holders lacked the requisite intent to transfer ownership; (vi) Celsius fraudulently misrepresented its product and finances; and (vii) Celsius operated illegally by violating the securities laws of several states.  Nonetheless, the bankruptcy court disagreed and held that these terms unambiguously transferred title and ownership of the Earn Accounts from account holders to Celsius, and that the account holders should have been aware that they were being bound by those terms.

It appears that disputes like this will play out again and again and the issue of who owns deposits in cryptocurrency accounts is unsettled.  What is clear from this initial ruling is that, in the cryptocurrency context, a bankruptcy court will enforce clickwrap agreements that may be unenforceable in other circumstances.  

ABOUT THE AUTHOR

PARTNER

Mike Richardson joined Milgrom & Daskam as a Partner in May 2022.  His practice focuses on litigation and bankruptcy matters.  He has represented parties on either side of real estate disputes, breach of contract actions, oil and gas disputes, fraudulent transfer claims, and breach of fiduciary duty claims.  Mike has also represented debtors, chapter 7 bankruptcy trustees, and other matters involving financially distressed parties reorganizing under chapter 11 of the U.S. Bankruptcy Code.

More Articles

Uncategorized

Depositing Cryptocurrency Assets: A Cautionary Tale on Clickwrap Agreements

Earlier this year, a bankruptcy court in the Southern District of New York issued a startling ruling in the bankruptcy case of In re Celsius Network LLC, et al., Case No. 22-10964 (MG). The dispute involved cryptocurrency owners who deposited their assets (such as stablecoins, non-fungible tokens (NFTs), central bank currencies, and security tokens) into Celsius’s “Earn Accounts” that allowed Celsius to use those funds to generate yields across various “on-chain” and “off-chain” investment strategies. At the time Celsius filed bankruptcy, there were more than 600,000 Earn Account holders affected. Their assets totaled approximately $4.2 billion.

Read More »
Artificial Intelligence

Will Artificial Intelligence Kill All the Lawyers?

A recent article in the New York Times reminded me that more than ten years ago, lawyers were considered an endangered occupational species as our livelihoods were the most at risk from advances in artificial intelligence (AI).
Has AI been reading Shakespeare’s Henry VI, Part 2, Act IV, Scene 2 and trying to kill us?
Maybe. But I confidently predict that many of us will survive.

Read More »
Business & Corporate Law

We Can See Your Priva…cy Policy

Just about every business client that we counsel maintains an active website. These help drive user engagement, deliver news and updates on interesting products, and drive significant new business. Depending on how the website is curated, however, that extra business may end up being for us greedy lawyers and not for our well-intentioned client.

Read More »
Categories
Real Estate Law Uncategorized

1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

1031 Exchange: Tax Deferral in Commercial Real Estate Transactions

John Daskam

Share Post:

For commercial real estate owners, selling assets which have been fully depreciated, fully stabilized, or held long term, can be an attractive option given certain market conditions, or over-saturation of the given asset type within an investor’s portfolio.

Regardless of the reason, a 1031 exchange may be a good option to consider for the sale proceeds which may allow the investor to defer tax on the gain. A prospective seller may wish to continue to invest the proceeds from the sale, and may do so, while deferring the tax consequences, through a like-kind exchange, taking advantage of Section 1031 of the Internal Revenue Code.

By exchanging the proceeds from the sale, an investor may swap the investment property for another, and defer the capital gains tax that otherwise would have to be paid as a result of the sale.

There are a number of rules governing a transaction where 1031 exchange proceeds are being used to purchase a property or where the buyer is using such proceeds to fund a future acquisition. These rules relate to, among other things, the time during which an investor must identify the replacement property, how the sale proceeds must be held (i.e. through a qualified intermediary), the buyer’s corporate form before and after the sale occurs, and the types of property that qualify for an exchange.

The 1031 exchange can provide significant value to real estate investors and should be considered in any commercial real estate transaction. For questions about how to take advantage of this mechanism, reach out to the real estate team at M&D.

ABOUT THE AUTHOR

PARTNER

John Daskam joined Milgrom & Daskam as a Partner in January 2019. He focuses his law practice on real estate and corporate law. His real estate practice includes acquisitions and dispositions, landlord-tenant matters, leasing, financing, development, and contract preparation and negotiation.

More Articles

Intellectual Property

Intellectual Property Ownership Issues and Considerations 

Intellectual property ownership issues are quite common. Such ownership issues often arise when proper agreements are not in place from the very beginning of a business engagement. Without a written agreement, a third-party contractor or an individual hired to perform certain services may own intellectual property rights in any resulting work product. For this reason, it is important to have such agreements in place when engaging others to perform services on your behalf. The discussion below highlights common ownership issues and considerations for the various forms of intellectual property.

Read More »
Business & Corporate Law

Recent Crypto Enforcement Actions and the Brewing Battle Between Regulators for Jurisdiction Over Digital Assets

Readers of my last, irresistibly juicy blog post, “First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security,” know that the Securities and Exchange Commission (“SEC”) recently landed a blow against blockchain-based media company LBRY when a district court in New Hampshire held that LBRY’s native “utility token,” LBC, was an unregistered security.

Read More »
Entrepreneur & Startup

Entity Selection: How QSBS Could Save You Millions in Taxes

I often work with entrepreneurs starting new ventures. While there are multiple considerations for new businesses, the first important item to address is entity formation, governance, and finance/ownership. This is the starting point to get your venture headed in the right direction.

Read More »
Categories
Uncategorized

DON’T GET NFTEASED

DON’T GET NFTEASED

Jared Stipelman

Share Post:

It’s 2022, and everyone from Snoop Dogg to the cashier at your local supermarket is creating or sponsoring their own NFT project, including many of our Firm’s clients. NFTs (non-fungible tokens) might be a revolutionary way for artists and collectors to control their work, but they are currently a Wild West. Before you get rich quick on this “21st Century Gold Rush”,[1] consider some of the lessons we have learned through our practice.

YOUR NFT IS SUBJECT TO COPYRIGHT – U.S. copyright laws protects any “creative” works that is “fixed” in a tangible form by its “author”. It also allows the author to control the creation of new works that are “derivative” of their original work, whether because such new work shows the original work in a different medium, or because it uses the essence of the original work as the base for its new additions. Thus, for example, I could not make and sell a Spongebob Squarepants Halloween costume that was based off the TV cartoon (same idea different medium) without likely infringing on the copyright for Spongebob Squarepants. I could not take the Spongebob Squarepants cartoon and then commercialize my own Anemonephil Triangleshirt cartoon. AND I cannot take someone else’s artwork and make it into an NFT without their permission without committing copyright infringement. Each individual copyright infringed upon (and we find that NFT projects often contain hundreds of potentially derivative works) could in theory subject the infringer to $30,000-$150,000 in “statutory damages” under US copyright law.

OUR ADVICE: Before you issue your project, make sure you own your art. If you have purchased it from someone else, make sure that they owned the art they are selling you, make sure they officially sell you the rights to use the art, and make sure that the seller is not going to disappear anonymously into the night right after making the sale.

MIND YOUR OFFERINGS – Chances are that if you are starting an NFT project, you are intrigued by the promise of profit margins that dwarf those of traditional investments. Alas, the reason that NFT projects can promise pots of gold at the end of rainbow, while stocks cannot, is that many NFT projects are unregulated securities. A “security” is basically any tradeable financial instrument that holds or represents any kind of value, like a stock, or a purchase option, and where that value can change depending on trading or market activity. Many NFT projects, which truthfully might fall a bit short of the Mona Lisa in their merits as art, focus their promotional materials and marketing much more on the financial side benefits of ownership and trading (such as percentages of future sales, first access to new NFT projects, issuance of rarer NFTs, and so forth). These financial incentives increase the value of the project, which in turn makes the projects’ owners or creators a profit when the project is sold. This process is similar to how stock markets work—stocks are bought and sold to create value for those in their market, and the stocks increase in value by offering benefits to owners (such as service perks, or yearly distributions) and through heavy trading volume. The difference is that publicly traded stocks must follow many rules meant to safeguard the average consumer, and NFTs do not. The US Securities and Exchange Commission has recently stated that it will begin evaluating whether certain NFTs are actually subject to (and generally not following) securities laws. Given that the SEC has been staffing up with specialists in this field, we can predict a wave of SEC investigations and new rules in the NFT space.

OUR ADVICE: Before you issue your project, speak with a securities specialist to ensure that your project structure is either (i) not a security, or (ii) complies with securities laws.

YOU ARE LESS ANONYMOUS THAN YOU THINK – We have seen numerous clients shrug off these concerns on the grounds that the client is anonymous and thus basically immune to investigation. Unless you have married your NFT project with spy-level operational security, this is simply not true. Certain exchanges or wallets hold some of your information to comply with international banking rules. Email addresses are not necessarily anonymous, IP addresses are often traceable, and anonymous transaction histories can be linked to real-life purchases. Your Discord conversations can unwittingly reveal personal details, your smart contracts likely contain traceable information, and each of your business partners is a potential canary.

OUR ADVICE:  If you believe your project might raise legal issues, don’t assume you can hide from them.

 MILGROM AND DASKAM IS A FULL-SERVICE CORPORATE LAW FIRM THAT SPECIALIZES IN ISSUES RELATING TO EMERGING TECHNOLOGIES. PLEASE CONTACT ME OR THE FIRM WITH ANY QUESTIONS YOU MIGHT HAVE ABOUT YOUR NFT PROJECT (AND PLEASE, DO IT BEFORE YOU START 😊)


[1] The NFT Gold Rush: How Cryptoartists Kick-Started a Boom – The New York Times (nytimes.com)

ABOUT THE AUTHOR

OF COUNSEL

Jared is a New York corporate attorney specializing in regulatory compliance. While active in several fields, Jared focuses his practice on employee benefits, trademark prosecution, and business acquisitions, particularly in the fields of e-commerce and health and beauty. He also provides pro bono counsel to charities devoted to animal welfare and responsible land use and has published writings on matters ranging from anti-counterfeiting operations to the trademark doctrine of foreign equivalents.

Jared graduated cum laude from Hamilton College in 2008, and cum laude from The George Washington University Law School in 2014, where he was the recipient of the 2013 Finnegan Prize. Jared is also an inventor who owns or is in the process of securing several US patents on certain medical and storage technologies.

More Articles

Business & Corporate Law

Do Colorado Courts Still Enforce Liquidated Damages Provisions?

Do Colorado courts still enforce liquidated damages provisions? When are such provisions enforceable? As a litigator, I notice this is a frequent topic of conversation among my transactional attorney friends when they are drafting contracts with no real consensus. So, what does Colorado law say?

Read More »
Business & Corporate Law

The Importance of Morality Clauses in Contracts with Public Figures

In the age of social media and the 24-hour news cycle, opportunities for public figures to be called to the mat and canceled over their statements and behavior are plentiful. Whether looking at Kanye West, aka Ye, with his antisemitic statements on Twitter, “White Lives Matter” t-shirt at Paris Fashion Week, and a myriad of other public offenses, T.J. Holmes and Amy Robach’s affair, or Try Guys’ Ned Fulmer’s affair with an employee, when the transgressions become public, so do the calls from the public for the brands and companies they work with to cut them loose.

Read More »
Employment Law

U.S. Supreme Court Hears Oral Arguments on Colorado Business’s First Amendment Speech Rights

The U.S. Supreme Court heard oral arguments last month in a case challenging the Colorado Anti-Discrimination Act (CADA) in a scenario similar to the Masterpiece Cakeshop decision of 2018. 303 Creative LLC, a Colorado based graphic design service is seeking to provide wedding website design services but only for opposite-sex weddings due to the owner’s religious beliefs that preclude her from providing the same services for same-sex couples.

Read More »