Issue link: https://digital.shearman.com/i/1479657
Property of the Bankruptcy Estate (cont.) Cryptoassets & Insolvency 29 Some crypto exchanges may provide that their relationship with their customers is merely a bailment. A bailment is a delivery of property from one person to another for a specific purpose under a contract providing that the property will be returned when that purpose has been accomplished or the bailor reclaims the property. Examples of common bailments would be parking valets and coat checks. • Courts may sometimes refer to bailed property as being held in "trust," but a bailment is neither a fiduciary relationship nor an entrustment because a bailment does not transfer title to property. • A bailment bifurcates ownership from possession where general ownership remains with the bailor while the bailee has lawful, but limited, possession. • In the context of bankruptcy, mere possessory interests (bailments) are not sufficient to convey ownership to a bailee and, as such, bailed goods are not "property of the estate" of a bankruptcy bailee. When crypto exchanges transfer holdings into omnibus wallets controlled by the exchange, the custodial assets are commingled. The commingling of assets complicates the situation, and in some cases, the commingling of fungible assets can destroy a bailment and constitute conversion by the bailee. Courts analyzing the issue will typically look at whether the customer had an expectation of getting back the specific asset in question (which is typically a bailment) or the value of the asset or a like-kind good. However, commingling of fungible assets can make it difficult, if not impossible, to trace the specific asset. That said, the commingling of assets does not, in and of itself, prevent the assets from remaining the property of the customer. Restatement (Third) of Restitution and Unjust Enrichment § 59 provides that property interests in an asset continue even when commingled, when the interests can be traced.