Points of Focus

• CLARITY could keep qualifying customer crypto outside bankruptcy estates.
• Celsius Earn users became unsecured creditors after transferring ownership.
• Crypto lending products may fall outside the bill’s protections.

The CLARITY Act has recently been discussed as a fight over how the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) should divide their crypto regulations, alongside disputes over ethics and anti-money laundering (AML) rules. Senator Cynthia Lummis is emphasizing her own issue: what happens to customer crypto when a platform collapses?

In a July 20 X post, Lummis said customer deposits at Celsius and Voyager became part of a bankruptcy pool contested by other creditors.

“The CLARITY Act changes the rule so your crypto stays yours, even if the company fails,” she wrote.

Her claim speaks to a base fear shared in any all-digital ecosystem: what happens when the digital provider disappears due to bankruptcy or some other reason? And does the balance displayed in your exchange app mean you legally own the funds? That answer seems to vary based on platform.

Celsius showed how account terms decide ownership

Celsius is the clearest example of this problem. In January 2023, a federal bankruptcy court ruled that cryptocurrency deposited into its Earn program belonged to Celsius’s bankruptcy estate. Around 600,000 accounts held about $4.2 billion in crypto when Celsius filed.

The Earn contract wording is the reason for this, with Celsius’ terms transferring ownership of deposited crypto to the company. This left users as “unsecured creditors” whose recoveries depended on the bankruptcy payback process.

Lummis placed Voyager on the same level, though the legal treatment of customer funds can vary by product, platform terms, asset type, and more. A custody account where a company only holds customer assets differs from a lending product that transfers title in exchange for yield.

What the CLARITY Act would change

The updated Senate draft, released on July 22, would amend Chapter 7 bankruptcy rules so qualifying ancillary assets and digital commodities “held for customers” are treated as customer property.

Other sections would require covered digital commodity exchanges, brokers, and dealers to treat customer assets as, well, belonging to customers. This would entail accounting for customer assets separately from company funds, and preventing the use of customer assets to support another user’s trades without authorization.

To continue with the Celsius example, CLARITY would likely clarify when customer crypto would remain separate from a platform’s bankruptcy estate and when it wouldn’t.

The protection still has limits

“Your crypto stays yours” is an ambitious claim, no doubt, but the bill’s current state still has limitations. Section 10701 covers ancillary assets and digital commodities held for customers in specified Chapter 7 liquidations. Protection may depend on how an asset is classified, among other policies.

The bill also says customer property must be distributed under the Bankruptcy Code. It would not guarantee instant withdrawals or a full return, rather give qualifying customers stronger ownership rights and reduce the chance that properly custodied crypto is treated as company property. 

Either way, the bill is not yet law. Senate Banking advanced CLARITY 15-9 in May, and lawmakers released the merged Banking and Agriculture text this week. It still needs Senate approval and reconciliation with the House version, leaving its bankruptcy protections open to even more changes.