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Business Law Today

March 2023

Trusts in a Trustless System: An Analysis of Entitlement to Digital Assets Held by Bankrupt Third Parties

Maxwell Solomons and Alec Hoy


  • 2022 was a turbulent year for the digital asset market, culminating in a multitude of crypto asset service providers (“CASPs”) filing for protection under the bankruptcy system and freezing the ability of users to withdraw assets stored on the CASPs.
  • These “withdrawal freezes” raised questions of rightful ownership to assets stored on CASPs and triggered a discussion of whether CASPs act as a trustee on behalf of users or whether users would ever be able to recover their assets.
  • Applying U.S. and Canadian bankruptcy principles and capitalizing on unique intrinsic qualities of digital assets, it may be possible for users to identify and argue for the recovery of their deposits, even where those assets have been commingled.
  • This article considers the fundamentals of trust law and the establishment of a “trust relationship” between CASPs and users amidst a discussion of how blockchain technology may present novel considerations to the constitution of a trust.
Trusts in a Trustless System: An Analysis of Entitlement to Digital Assets Held by Bankrupt Third Parties
Photo by Rodion Kutsaiev on Unsplash

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In the week of November 7th, 2022, the digital asset ecosystem experienced an unprecedented level of market instability, as billions of dollars of value seemingly disappeared from (“FTX”), an industry goliath, overnight. By the end of the week, a series of shocking revelations culminated in FTX itself and approximately 130 affiliated entities filing for bankruptcy. Earlier that year, FTX had been valued at $40 billion and was endorsed by celebrities and institutional investors alike, and its founder was coined “the next Warren Buffett” by Time magazine. The sudden collapse and disappearance of billions of dollars of value left many wondering whether users who had assets stored on FTX would be entitled to recovery of any of those assets, and more generally, how other users can protect themselves in the future when choosing to store their digital assets on these platforms.

Spurred by the former question, the discussion within this article will focus on the latter by considering whether a user’s relationship with companies offering digital asset related services (known as “Crypto Asset Service Providers” or “CASPs” in some jurisdictions) can be characterized as a “trust relationship.” This determination dictates whether, in the event of a bankruptcy, the user’s assets will be held outside of the bankrupt estate and protected from creditors, or whether the user will lose any special entitlement to the return of those specific assets and be treated as an unsecured creditor of the estate. In the interest of providing potential clarity to readers, this article will also highlight certain terms and provisions that may be included in the contractual documents that commonly govern the relationship between the CASP and the user.

Whether the relationship between users and CASPs can be established as a legal ‘trust’ is also an important consideration in restoring consumer confidence in an emerging industry that has the potential to offer numerous benefits. While the concept of a purely digitalized financial market and currency may seem like a drastic departure from traditional financial methods (or, as coined by crypto enthusiasts, “TradFi”), perhaps it shouldn’t. Rather, it may be argued that the birth and evolution of the digital asset ecosystem is another step in a transition away from traditional financial methods that has transpired over the past thirty years. This transition has arisen in the pursuit of new potentials and advantages not offered by TradFi, such as the ability to definitively trace digital assets and determine their ownership history and provenance. However, for these advantages to truly outweigh the uncertainty accompanying this transition, it must first be shown that these features can actually be realized for broader stakeholder benefit. The establishment of a trust relationship may help to significantly mitigate, if not eradicate, this uncertainty.

As the reader continues through this article, bear these thoughts in mind, with consideration of how the concepts outlined herein can provide benefits to everyone, from the CASPs all the way down to the end users. The reader should further note that the statements contained herein are intended to be purely commentative and do not provide any legal advice, opinions, or positions on any past or future scenarios.

Issues of Discussion

The considerations of this article are outlined within the context of an insolvency proceeding, and they are cumulative and twofold: (1) can the relationship between the user and the platform be structured as a trust, being among settlor, trustee, and beneficiary, whereby legal/beneficial title to the digital assets remains with the user; and, if the prior question can be answered in the affirmative, (2) in the event that a CASP enters into bankruptcy or insolvency proceedings, can the user preserve their unencumbered right to “their” digital assets? Therefore, the overarching question posited by this article is whether users retain title to digital assets that they have stored on these platforms. Put simply: who actually owns the digital assets sent by users to CASPs?

Bankruptcy Scheme

Upon bankruptcy, claims against the filing party (i.e., the “debtor”) are ranked according to a priority scheme established by the governing statute of the debtor’s jurisdiction. Typically, funds held by the debtor, including those provided by another party, are considered to constitute assets of the estate of the bankrupt debtor for distribution, regardless of whether the other party had any intention to become a creditor of the debtor. In this capacity, the “unintentional creditor” is deemed to be an unsecured creditor, usually ranking lower in priority in the distribution scheme behind secured creditors and certain specified parties, among others. This consequence often leaves the “unintentional creditor” with only a remote prospect of receiving some or all of their funds back.

However, there are certain exceptions to the above mechanism, including the “trust exception,” which provides that property held by the debtor in trust for any other person will not be divisible among the creditors, and the beneficiary of the trust will be able to recover the property held in trust for them. Under this concept, the law recognizes that the assets/funds/property held by the debtor never belonged to the debtor, were never intended for the debtor, and thus never constituted part of the estate of the bankrupt debtor. In other words, if this exception can be established on the facts, the party that provided the digital assets is able to avoid becoming a creditor of the debtor and is often entitled to the full recovery of the assets that the debtor held on their behalf.

Establishing a Trust

(a) Overview

For a party to establish that the subject property was “trust property,” it must be capable of proving that a valid trust was in existence at the date of bankruptcy. A trust may be established through several methods, including (i) by “express trust,” whereby the settlor of the trust, by express intention, takes formal steps to have the trust constituted; (ii) by “constructive trust,” whereby a trust arises by operation of law in response to a series of events; or (iii) by “resulting trust,” where the trust is imposed as an equitable remedy when the ruling court believes it is an appropriate and equitable outcome in the circumstances.

As the latter two forms may only be imposed by a court post hoc and are highly dependent on specific context, this article will solely focus on express trusts. The reader should note, however, that this demarcation does not represent the authors’ opinion that the imposition of a constructive or resulting trust may or may not be applicable in the context of a CASP insolvency.

For a valid express trust to be established, three certainties must be present: (i) certainty of intent, specifically whether it can be said that the settlor clearly intended to create a trust; (ii) certainty of subject matter, which requires that the trust property be substantially identifiable; and (iii) certainty of objects, which requires clear and definitive identification of the beneficiaries of the trust. Allcertainties must be present to establish a trust (or, at the very least, a court must be able to infer their presence to some discernable degree). The scope of the following analysis considers the former two certainties in further detail, with certainty of objects being assumed in most circumstances.

(b) Certainty of Intent

For certainty of intent to be satisfied, there must be a clearly evidenced intention that the parties sought to create a trust, and the wording of the document(s) utilized to constitute the trust must indicate that the transferee is to take the property in the capacity of a trustee. However, merely including the words “in trust” or “as trustee for” in such documents is neither solely instructive nor imperative in satisfying this certainty requirement. Nor is it required that the intention be explicitly expressed; intent may be implied based on a variety of contextual factors, including the preexisting relationship between the parties and certain commercial realities.

Courts have demonstrated a reluctance to impose a trust where its imposition would not “fit” within the context and relationship of the parties. For example, courts have typically concluded that the relationships of debtor/creditor and trustee/beneficiary are not ordinarily co-extensive; it is often either one or the other. Similarly, transfers described as a “debt” obligation may be inconsistent with rendering a relationship of trustee-beneficiary.

The concept of commingling assets further clouds a determination of whether the requisite degree of certainty is present. Where the trustee has mixed the “trust assets” with non-trust assets, it may be inferred that the settlor never truly intended their assets to be held in trust at all. From a commercial realities perspective, assuming the presence of a trust were to be argued, the very capability of a trustee to commingle, and any actual commingling, could give rise to several difficulties in administering the trust. The Supreme Court of Canada recently commented on this factor, noting that the presence of commingling is ordinarily evidence of a debt obligation rather than a trust obligation and is suggestive that the relationship is not one of a trustee and settlor. However, the ability of a trustee to commingle trust assets with non-trust assets is not dispositive on this prong of certainty. As established, courts will take a holistic approach in their analysis as to whether a trust exists, with no singular factor being a sufficient condition.

(c) Certainty of Subject Matter

Certainty of subject matter requires that the assets forming the trust property be ascertained, or at least be ascertainable, at the time that the trust was created. Additional specificity from case law provides that (i) the trust property be fixed or specified in the trust instrument, or (ii) there be a sufficiently clear method or formula for identifying the trust property.

As with intent, the presence of commingling also creates difficulty in establishing the requisite level of certainty of subject matter, as it impairs the ability of parties to ascertain which assets are trust property transferred to the would-be trust by the settlor. However, while commingling may create practical difficulties in identifying trust assets, commingling alone does not per se destroy the trust. If trust property is initially ascertained or ascertainable, the property may yet remain traceable where it has been converted into other forms or mixed with other funds.

For the purposes of this article and its discussion of whether digital assets stored on CASPs can be formulated as trust assets, the analysis of this prong of certainty takes on additional nuance. As alluded to, the novel blockchain technology upon which digital assets are based may provide stakeholders with, in some cases, arguably superior avenues for tracing and ascertainment in comparison to TradFi counterparts.


(a) Overview

Applying the trust principles outlined above, this article now considers whether, and when, users of CASPs may be able to establish that they were the beneficiary of a trust, and that the assets stored on the CASP constituted trust assets. As noted above, if a trust can be established, those digital assets a user has stored on a CASP at the time of bankruptcy can be excluded from the estate of the debtor, and the user can be afforded special protection and entitlement to the recovery of their assets.

(b) Certainty of Intent

Recall, certainty of intent requires a clearly evidenced intention, based on holistic contextual factors, that the relationship between the parties was to be one of trustee and beneficiary. It must be clearly evidenced that there was never an intention that the assets in question would belong to the debtor or constitute the property thereof. A pertinent factor for this assessment includes the relationship between the parties, as evidenced by the words and terms used in the purported “trust-documents” establishing the relationship.

The relationship between a user and CASP is commonly set out entirely within the confines of the terms of service (“TOS”) agreed to by the user before they are fully able to access the CASP’s products and services. However, the TOS are not entirely determinative, and the relationship, as set out therein, may be modified by additional considerations, such as where the performance by the parties to the relationship is contrary to that which is set out by the TOS. For example, where a CASP has exercised unilateral control over digital assets in a manner that is inconsistent with a trust or TOS purporting to form a trust, it may contribute to a finding that no such relationship existed. TOS, being a contract, are informed by contract law and principles. Absent an “entire agreement” clause stipulating that the TOS governs the whole of the relationship, oral agreements or actions by either party may effectively modify the TOS without expressly doing so in writing.

The importance of the TOS in determining the legal status of digital assets held by CASPs has recently been illustrated in an opinion issued by the U.S. Bankruptcy Court of the Southern District of New York dealing with the chapter 11 bankruptcy of Celsius Network LLC (“Celsius”). Celsius offered a variety of digital-asset-related services, including an “Earn Account” that offered users a yield on the value of digital assets deposited and held in the accounts. The TOS of the Earn Account included, among other things, provisions governing the legal ownership of digital assets deposited therein, and the rights Celsius had with respect to exercising control over those assets.

In a memorandum opinion filed January 4, 2023, Chief Judge Martin Glenn, highlighted the following two provisions in Celsius’ TOS:

  1.  “In consideration for the Rewards payable to you on the Eligible Digital Assets using the Earn Service . . . and the use of our Services, you grant Celsius . . . all right and title to such Eligible Digital Assets, including ownership rights, and the right, without further notice to you, to hold such Digital Assets in Celsius’ own Virtual Wallet or elsewhere, and to pledge, re-pledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such Digital Assets, separately or together with other property, with all attendant rights of ownership, and for any period of time, and without retaining in Celsius’ possession and/or control a like amount of Digital Assets or any other monies or assets, and to use or invest such Digital Assets in Celsius’ full discretion.”
  2.  “In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital 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.”

In light of the aforementioned provisions, and the Court’s finding that the click-to-sign TOS constituted a valid and enforceable contract, the Chief Judge ruled that “the Terms unambiguously transfer title and ownership of Earn Assets deposited into Earn Accounts from Account Holders to Celsius”, resulting in those assets forming part of Celsius’ bankrupt estate.

Though jurisprudence espouses that there are no “magic words” that create a trust relationship, the aforementioned opinion demonstrates that the TOS agreed to between a CASP and user will be a primary reference point for courts tasked with determining the legal status of transferred digital assets. While the number of decisions analyzing trust relationships between CASPs and users is lacking due to the relative novelty of the industry, the opinion indicates that relevant factors to consider include:

  1.  whether title to the assets remained with the user or was transferred to the CASP;
  2. whether the CASP was overtly granted possession, ownership, or control of the digital assets, or some combination thereof; and
  3. whether the CASP was authorized to trade, loan, encumber, hypothecate, or otherwise grant or take a secured interest in the digital assets.

For CASPs, retaining capabilities to effectively deliver their products and services is a critical issue in constructing TOS. Whether provisions transferring title to assets and rights to grant or take secured interests are required depends on specific commercial needs, but in any case, the TOS must be “clear and unambiguous” so as to clearly reflect the intent of the parties. Fundamentally, a CASP should not leave the imposition of a trust relationship to chance.

The opinion is also highly relevant for users. While there are abundant intriguing opportunities to access Web3 products and services through CASPs, users must ensure that they carefully examine the TOS before engaging. Said bluntly, read before you click “Accept”! This bears additional importance in circumstances where the user transfers digital assets from their wallet to an account or wallet governed by the CASP’s TOS. Finally, particular attention should be given to any provisions concerning title to assets transferred to the CASP, and any rights granted to the CASP regarding further transmission and hypothecation. The user will also need to provide evidence that the funds provided were not a payment to the CASP for any past or present services, or where there is a payment for the services, the user will need to be able to clearly delineate between funds that were provided as payment and any funds that were intended to be the subject matter of the trust. This delineation can similarly be grounded in the TOS.

(c) Certainty of Subject Matter

In satisfying the certainty of subject matter requirement for the purported trust assets, the unique characteristics of digital assets may allow users of CASPs to go beyond traditional approaches and more precisely identify which assets should be subject to the trust. It should be noted, however, that the ability to trace digital assets may be obfuscated in certain circumstances, including by third parties through the use of so-called “mixers” and other forms of novel technology.

When dealing with tangible items of an undifferentiated mass, the traditional approach has been to require that the assets are segregated to ensure that such assets remain sufficiently identifiable. However, it is possible that a user’s digital assets stored on a CASP may not need to be segregated to remain ascertainable. One technological nuance of digital assets is that they bear novel identifiers. For instance, ERC-20 tokens (which are an archetype for fungible digital assets native to the Ethereum blockchain) are accompanied by a unique contract address. A search for that unique contract address on “block scanners” like Etherscan provide a list of all transactions of that token that have been updated to the respective token’s native blockchain. For permissionless blockchains, each transfer of the token generates a publicly accessible transaction hash, associating the specific transfer of the token with its location in the chain’s sequence, as well as its sender and recipient.

For fungible and non-fungible digital assets (often referred to as a “Non-Fungible Token” or a “NFT”), stakeholders can find the specific time and transaction whereby the digital asset was initially transferred from a user to a CASP-controlled wallet simply by (i) pulling the user’s wallet address and (ii) searching for the particular transaction that transferred the subject asset. Whether this is sufficient in itself to make digital assets at least “initially ascertainable” has not yet been considered in a court of law and currently remains inconclusively determined. For NFTs, free-to-use contemporary technology can go even further. Each NFT carries a unique “contract address,” like the tokens discussed above. By searching the contract address, stakeholders can pull an entire record of the transfers of the NFT, including those subsequent to the initial transfer to a CASP-controlled wallet, thereby allowing the current whereabouts of the NFT to be determined with finality.

Once a fungible digital asset (e.g., ETH) is transferred to a CASP wallet, however, the ability to definitively trace after-the-fact is less certain. For example, suppose user A transferred 5 ETH to a CASP-controlled wallet, and that 5 ETH was subsequently pooled with other ETH received by the CASP from other users B and C. Utilizing free-to-use tools like Etherscan, an examiner could pull a summary of all transactions of ETH for which a CASP is sender or receiver, but may be unable to definitively state that a subsequent transfer of ETH by the CASP to another user contained any of the 5 ETH that user A had originally transferred, was from another source (users B and/or C) or was from some combination thereof. While the authors are aware of attempts to develop technology designed to permit exact tracing of digital assets through a series of transactions, it is not yet clear that such technology readily exists. However, given the availability of real-time data and the increasing proliferation of premium blockchain analytical tools, it is reasonably foreseeable that the capacity to definitively trace fungible digital assets, even following such commingling, will become readily available.

Implications drawn from technological analysis and tracing may be deemed sufficiently persuasive to demonstrate the requisite level of segregation to establish ascertainability. Legislation recognizing the legal admissibility and reliability of evidence derived from block scanners is emerging, suggesting an openness from lawmakers to recognize the admissibility of “blockchain analysis” in the courtroom. Due to this potential capability to be precisely identified through unique identifier and transaction codes, digital assets may be comparatively easier to definitively ascertain and establish certainty of subject matter for in instances of commingling, and accordingly, establish a trust relationship thereto.

Protection of Users in a Bankruptcy

Recall, where a trust relationship exists at the time of the bankruptcy, any assets that formed part of that trust are deemed to be separate and apart from the estate, entitling the beneficiary to full recovery of those assets. While the relationship between a user and CASP is determined in the same manner as with TradFi, by analyzing the factual and contractual relationship between the parties, digital assets possess the potential of being identified and ascertained through novel methods entirely unique to the digital asset ecosystem. If such capabilities can be fully realized, it may enable CASP users to insulate their assets from the remainder of the estate of the bankrupt entity and allow for the full recovery of any assets they had stored on the bankrupt CASP.


Born in the wake of the 2009 financial crisis, the digital asset industry remains nascent. While there is an immense amount of growth yet to come, users and CASPs alike should not overlook the potential advantages offered by the digital asset ecosystem that have already emerged. As this article concludes, readers should takeaway a sense of hopefulness, but additionally, a recognition that they must pay careful attention to their selection of which service providers they choose to engage with, and the terms that define their relationship therewith. Emergent CASPs, on the other hand, should reflect on the lessons provided through the fall of former industry juggernauts and perhaps, in an industry where present confidence is lacking, consider the ways that imposing a relationship of trust may protect the very users they propose to serve.