About a week after William K. Harrington, United States Trustee for Region 2, intervened in the Chapter 11 case of crypto firm Celsius, the Trustee has filed an objection to Celsius’ cash management plans.

On August 24, 2022, the US Trustee filed his objection to the debtors’ motion seeking an entry of orders (I) Authorizing the Debtors to (a) Continue to Operate Their Cash Management System, (b) Honor Certain Prepetition Obligations Related Thereto, (c) Maintain Existing Business Forms, and (d) Continue to Perform Intercompany Transactions, (II) Granting Superpriority Administrative Expense Status to Postpetition Intercompany Balances, and (III) Granting Related Relief.

The Trustee argues that the debtors need to comply with Section 345 of the Bankruptcy Code.

The most common way that debtors comply with Section 345(b) is to have their accounts at banks (a) insured by the Federal Deposit Insurance Corporation (FDIC), which protects funds up to $250,000, and (b) which have signed Uniform Depository Agreement (“UDA”) with the United States Trustee’s office, which requires the signatory bank to post a bond to protect all of the debtor’s funds at a bank insured by the FDIC, regardless of amount.

With the enactment of the Bankruptcy Code in 1978 and the creation of the United States Trustee Program, many of the Bankruptcy Court’s duties to oversee the investment of estate funds devolved to the United States Trustee.

Accordingly, to ensure that trustees and debtors in possession meet their responsibilities to safeguard funds in accordance with section 345, the United States Trustee monitors fiduciaries and depositories and requires that chapter 11 estate assets be held in accounts at “authorized depositories,” i.e., those that have entered into UDA with the United States Trustee.

The UDA requires the depository to maintain collateral, unless an order of the bankruptcy court provides otherwise, in an amount of no less than 115 percent of the aggregate bankruptcy funds on deposit in each bankruptcy estate that exceeds the FDIC insurance limit. Pursuant to the UDA, each authorized depository is required to provide quarterly reports for all bankruptcy estate accounts on deposit at all branches of the depository within the district.

The Manual also states that should a chapter 11 debtor, trustee, or examiner establish accounts in financial institutions or depositories outside the United States, it is required to seek prior approval of the United States Trustee or the bankruptcy court.

The Trustee argues that the Celsius Chapter 11 case presents an issue of first impression regarding the requirements of Section 345 and its application to cryptocurrency and other digital assets. On its face, Section 345 appears to deal with only the deposit or investment of the “money of the estate.” 11 U.S.C. 345(a). Traditionally, Section 345 deals with the fiat or government issued currency. However, the Bankruptcy Code does not define the term “money.” Similarly, bankruptcy courts or other courts have had limited opportunity to determine whether cryptocurrency is money.

In contrast to fiat currency, cryptocurrencies are not controlled by a central authority (e.g., a central bank) and are not FDIC-insured or held on deposit in accounts at traditional banks that have executed a uniform depository agreement with the United States Trustee.

Regardless of whether cryptocurrency is characterized as digital money or property, it has value, and the issue is what should be done to protect the Debtors’, and by extension its creditors’, risk with respect to the handling of the same under the circumstances.

The United States Trustee leaves the Debtors to their burden to demonstrate that the requirements of 11 U.S.C. § 345, as applicable, are satisfied with respect to their handling of the Debtors’ “money” which may or may not include cryptocurrency.

Accordingly, the United States Trustee requests that a final order on Debtors’ Cash Management be denied until the Debtors establish either that they have satisfied Section 345, that they have “cause” for waiving its requirements, or that Section 345 does not apply to cryptocurrency.