CLARITY in Bankruptcy

June 22, 2026

The recoveries customers actually received from FTX, Celsius, Voyager, and Genesis depended on bankruptcy doctrines that were never designed to deal with digital assets and that produced results customers would not have predicted. In re Celsius Network LLC, 647 B.R. 631 (Bankr. S.D.N.Y. 2023), held that customer assets held in the Earn program were property of the estate rather than customer property, because the Earn terms of service granted Celsius title to the assets. Custody customers, by contrast, retained property interests in their assets and were not subject to the pro-rata distribution that applied to general unsecured creditors. The 70-cents-on-the-dollar recovery in FTX‘s subsequent reorganization plan, In re FTX Trading Ltd., 1:22-bk-11068 (Bankr. D. Del.), was a function of dollar-denominated claims valuation at the November 11, 2022 petition date, against a recovering crypto market that produced substantial value appreciation during the case. In re Voyager Digital Holdings, Inc., 1:22-bk-10943 (Bankr. S.D.N.Y.), and In re Genesis Global Capital, LLC, 1:23-bk-10063 (Bankr. S.D.N.Y.), produced similar outcomes through similar mechanics. The cumulative lesson was that digital-asset intermediary bankruptcies were governed by ordinary Chapter 7 and Chapter 11 distributional rules rather than by the customer-property protections that apply to securities broker-dealer liquidations under Subchapter III or to commodity broker liquidations under Subchapter IV.

§701 of CLARITY would change that. It amends 11 U.S.C. § 741 to define “ancillary asset” and “digital commodity” by reference to the CLARITY Act §2 definitions, expands the “customer” and “customer property” definitions in §741 to include positions in those assets, and updates §746(b) on the extent of customer claims to cover ancillary assets and digital commodities alongside cash and securities. §701(d) makes the architectural point explicit. In any Subchapter III or IV proceeding, the §701 provisions are to be construed to treat ancillary assets and digital commodities held for customers as customer property required to be distributed according to title 11. §702 supplements §701 by treating digital-commodity transactions as commodity contracts for purposes of the safe-harbor netting and setoff provisions. The combined effect is to extend the customer-property doctrine that has structured securities and commodity broker-dealer bankruptcies for forty years to digital-asset intermediaries, prospectively.

The §741 Amendments

§701(a)(1) is the principal operative provision. It amends 11 U.S.C. § 741 in seven structurally distinct ways.

First, the existing paragraph numbering in § 741 is reorganized to make room for two new definitions. Existing paragraphs (5) through (9) become (7) through (11); existing paragraphs (1) through (4) become (2) through (5). The reorganization creates space for “ancillary asset” at the new (1) and “digital commodity” at the new (6). Both definitions are pulled by cross-reference from §2 of CLARITY.
Second, the §701(a)(1)(D) amendments to redesignated § 741(3), which defines “customer,” add a new subparagraph (B) to capture entities that hold a claim against the broker-dealer on account of a digital commodity or ancillary asset received, acquired, or held by the broker-dealer for the customer’s securities account. The existing subparagraph (A) lists six purpose categories under which a holding produces customer status. The new subparagraph (B) extends customer status to ancillary-asset and digital-commodity holdings for any of those six purposes. The structural effect is that an ancillary-asset or digital-commodity holding for one of the six purposes (purchase, sale, loan, pledge, custody, or related transaction) produces customer status with respect to that holding, on the same terms as a securities holding.
Third, the §701(a)(1)(D)(iv) amendments to the catch-all in redesignated § 741(3)(C) sweep ancillary assets and digital commodities into the residual category of holdings that produce customer status. The amendments insert “ancillary asset, or digital commodity” after “security” in clause (i) and “an ancillary asset, a digital commodity,” after “a security,” in clause (ii). The residual covers holdings not enumerated in subparagraph (A) but that nonetheless qualify, on the broker-dealer’s books or otherwise, as broker-dealer customer holdings.
Fourth, the §701(a)(1)(E) amendments to redesignated § 741(5), defining “customer property,” add ancillary assets and digital commodities to the list of property types that constitute customer property. The amendments insert “ancillary asset, digital commodity,” after “cash, security,” in the preamble. The structural effect is that customer property includes not only cash and securities held for customers (as under existing law) but also ancillary assets and digital commodities so held.
Fifth, §701(a)(1)(F) adds the §741(6) digital-commodity definition by cross-reference.
Sixth, §701(a)(1)(G) amends redesignated § 741(8), defining “net equity,” to include ancillary-asset positions and digital-commodity positions alongside securities positions in the net-equity calculation. Net equity is the calculation that determines a customer’s share of the customer-property pool, and the §741(8) amendment ensures that ancillary-asset and digital-commodity holdings are valued and aggregated with securities holdings for distribution purposes.
Seventh, §701(b) amends 11 U.S.C. § 746(b), which addresses the extent of customer claims, to cover ancillary assets and digital commodities alongside cash and securities. The §746(b) provision is the operative one for determining the amount a customer can claim in a Subchapter III proceeding.

The cumulative effect of these amendments is to treat ancillary-asset and digital-commodity holdings, for Subchapter III stockbroker-liquidation purposes, the same way securities holdings have been treated since the Subchapter III framework was enacted. The customer-property pool includes ancillary assets and digital commodities. The customer-property distribution under § 766 runs pro-rata across the entire pool, with each customer receiving a pro-rata share based on net equity. The estate-property residue (assets not part of the customer-property pool) is available to general unsecured creditors after customer-property claims are satisfied.

The §746(b) Extent of Claims

§701(b) is short but doctrinally important. § 746(b) governs the extent of a customer’s claim in a Subchapter III liquidation. The existing language limits customer claims to “cash or a security.” The amendment expands the formulation to “cash, a security, an ancillary asset, or a digital commodity.” The result is that customer claims would extend to the digital-asset positions held by the broker-dealer for the customer, on the same terms as cash and securities.

The structural significance is that customer claims are valued by reference to the asset class. A customer who held 10 ETH at the broker-dealer has a claim for 10 ETH (or its cash equivalent, depending on the trustee’s election under § 766). The pre-CLARITY position, exemplified by the FTX claim-valuation methodology, was to value claims in dollars at the petition date, with the customer bearing the upside and downside risk of the underlying asset’s price movement during the case. The post-§701 position is closer to the SIPC net-equity methodology established in SIPC v. Bernard L. Madoff Inv. Sec. LLC, 522 B.R. 41 (Bankr. S.D.N.Y. 2014), which valued customer claims by reference to actual securities holdings rather than fictitious account balances. The asset-denominated claim formulation is more protective of customers in a recovering market and less protective in a declining one.

The §766 distribution mechanic continues to operate. The trustee distributes customer property to customers in proportion to net equity, with any shortfall in customer property satisfied by general estate property up to the extent of net equity, and any surplus in customer property returned to the estate for general distribution. The asset-denominated claim valuation creates the possibility of asset-denominated distributions, which is structurally consistent with the customer’s underlying expectation of receiving the asset rather than its dollar equivalent.

§701(c) Technical Amendments to the Safe-Harbor Provisions

§701(c) makes technical amendments to §§ 546(e), 561, and 752(c) of title 11 to update cross-references following the §741 paragraph renumbering. The substantive change is in §701(c)(1), which amends § 546(e) to reference § 741 generally rather than § 741(7) specifically. § 546(e) is the safe-harbor provision that protects settlement payments from avoidance as preferential or fraudulent transfers. The existing language cross-references § 741(7), which defines “settlement payment.” The post-§701 language references § 741 generally, picking up the updated definitions of customer property, ancillary asset, digital commodity, and net equity.

§701(c)(2) makes parallel amendments to § 561 (which addresses netting under master netting agreements) and §701(c)(3) updates § 752(c)’s cross-reference. The structural effect is to ensure that the safe-harbor framework operates consistently across the updated §741 definitions and the new ancillary-asset and digital-commodity classifications.

§701(d) Clarifications

§701(d) is the architectural clarifier. Three points are made explicit.

§701(d)(1) preserves the existing SIPA framework. Securities and cash held by a broker-dealer continue to be governed by SIPA, 15 U.S.C. §§ 78aaa et seq. The §701 amendments do not displace SIPA coverage for securities and cash. A broker-dealer that holds both securities and digital commodities for customers will see SIPA coverage continue to apply to the securities-and-cash component and the §701 customer-property framework apply to the digital-commodity-and-ancillary-asset component.
§701(d)(2) preserves the existing bank-deposit and commodity-contract frameworks. Deposits held by a bank are not affected. Commodity contracts (covered by Subchapter IV of Chapter 7) continue to be governed by the existing commodity-broker framework. The cross-reference to §702, which adds digital-commodity transactions to the commodity-contract safe-harbor framework, is the bridge.
§701(d)(3) is the operative architectural commitment. In any Subchapter III or IV proceeding, the §701 provisions are to be construed to treat ancillary assets and digital commodities held for customers as customer property required to be distributed according to title 11. This is the no-take-back provision. The customer-property treatment cannot be defeated by clever drafting of customer agreements, terms of service, or omnibus account arrangements that purport to convert customer-asset holdings into estate property. The §701(d)(3) construction directive ensures that, regardless of how the broker-dealer characterized the customer relationship pre-bankruptcy, the customer-property treatment applies in the Subchapter III or IV proceeding.

The Earn-versus-Custody distinction from Celsius survives in modified form. A customer agreement that grants the broker-dealer title to the assets is still a customer agreement that does that. But the consequence is different. Under §701(d)(3), even an Earn-style title-transfer arrangement does not defeat customer-property treatment, because the §701 amendments are construed to require customer-property treatment in any Subchapter III or IV proceeding. The structural choice is to override clever customer-agreement drafting in favor of customer-property protection. This is the post-FTX policy commitment, written into the bill.

§702: Commodity-Contract Treatment

§702 addresses the digital-asset side of the safe-harbor architecture. Subsection (b) provides that a purchase, sale, loan, margin loan, extension of credit, repurchase, reverse repurchase, or other transaction involving a unit of a digital commodity, occurring with a commodity broker, stockbroker, financial institution, financial participant, or securities clearing agency, is deemed to be a commodity contract for purposes of:

(A) the bankruptcy safe-harbor provisions in §§ 362(b)(6), 362(o), 546(e), 553, 556, 561, and 562 of title 11. These provisions cover the automatic-stay exception for commodity-contract terminations and offsets, the safe-harbor protections from preference and fraudulent-transfer avoidance, and the contractual setoff and netting rights that commodity-contract counterparties have historically enjoyed.
(B) § 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821), which addresses FDIC receivership treatment of qualified financial contracts. The §702 amendment extends qualified-financial-contract status to digital-commodity transactions, with the consequence that close-out netting and offset rights are preserved in bank FDIC receiverships involving digital-commodity counterparties.
(C) § 210 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390), which addresses orderly-liquidation-authority treatment of qualified financial contracts. The §702 amendment provides parallel treatment under the FDIC’s orderly-liquidation-authority framework for systemically important institutions.
(D) § 5(b)(2)(C) of SIPA (15 U.S.C. 78eee(b)(2)(C)), which addresses SIPC liquidation treatment of qualified financial contracts. The §702 amendment extends qualified-financial-contract status under SIPA for digital-commodity transactions, which is operationally significant for SIPC-protected broker-dealers that also handle digital commodities.

§702(b)(2) provides that digital-commodity transactions are deemed margin payments for purposes of § 548(d)(2)(B) of title 11. The margin-payment safe harbor under § 548(d)(2)(B) protects transferees of margin payments from fraudulent-transfer avoidance, with the consequence that legitimate margin-call payments in digital-commodity transactions cannot be clawed back as constructive fraudulent transfers.

The structural significance of §702 is that digital-commodity derivatives, repurchase agreements, and securities-lending arrangements receive the same bankruptcy and FDIC-receivership treatment as commodity contracts under the existing framework. The position under current law is uncertain, with the FTX bankruptcy litigation generating substantial commentary on whether digital-commodity derivatives qualified for safe-harbor treatment under § 546(e) and related provisions. §702 would resolve the question by statute.

The Earn-versus-Custody Distinction Revisited

The single most important pre-CLARITY bankruptcy ruling in the digital-asset space was the Celsius Earn-versus-Custody decision. The court held that customer assets held in Celsius’s Earn program were property of the estate because the Earn terms of service granted Celsius title, while customer assets held in the Celsius Custody program retained customer-property status because the Custody terms preserved customer ownership.

The §701 framework treats this distinction in a structurally different way. Under §701(d)(3)’s construction directive, ancillary assets and digital commodities held for customers in a Subchapter III or IV proceeding are customer property regardless of how the customer agreement characterizes the relationship. The implication is that an Earn-style title-transfer arrangement does not defeat customer-property treatment for ancillary-asset or digital-commodity holdings if the broker-dealer is liquidated under Subchapter III or IV. The customer-property pool includes the Earn-program assets, and the pro-rata distribution under § 766 covers Earn customers on the same terms as Custody customers.

The practical consequence is that the Celsius Earn customers, in a hypothetical post-§701 reorganization, would have received pro-rata distributions from a customer-property pool that included the assets they deposited in Earn. The dollar value of that recovery would have been substantially higher than the 30-cents-on-the-dollar general-unsecured-creditor recovery they actually received. The asymmetry between Earn and Custody customers, which produced substantial litigation and customer dissatisfaction in the Celsius case, would be eliminated prospectively.

The §701 framework does not, however, override pre-CLARITY customer agreements or pre-CLARITY bankruptcy proceedings. The Celsius confirmed plan, the Voyager confirmed plan, and the Genesis confirmed plan are not affected. The §701 framework applies prospectively to digital-asset intermediary bankruptcies that begin after the effective date. The §906 effective-date provision is therefore important: §701 applies to cases commenced on or after enactment, and §701’s customer-property treatment is operative for those cases.

Operational Consequences for Intermediaries

If §701 becomes law, the operational consequences for digital-asset intermediaries run in five directions.

First, customer-agreement drafting changes. Pre-CLARITY, the dominant drafting approach was to either preserve customer title (the Custody model) or transfer title with a yield-promise (the Earn model). The §701(d)(3) construction directive means that the latter would no longer produce estate-property treatment in a Subchapter III or IV liquidation. The customer-agreement choice would matter less for bankruptcy-distribution purposes, though it still matters for the §404 yield prohibition covered in Post #11 and for the SEC’s analysis of the underlying product structure under §4B and §301.
Second, account-segregation requirements take on new importance. The §701 framework presumes that the broker-dealer maintains records and physical or logical segregation sufficient to identify customer assets. A broker-dealer that comingles customer assets with proprietary assets, or that fails to maintain adequate records of customer holdings, will face the same allocation problems in a Subchapter III liquidation that securities broker-dealers face under SIPA. The Madoff-style fictitious-account-balance problem is avoidable only through rigorous segregation and recordkeeping.
Third, the §401(g)(1) and §401(g)(2) bank-permitted custody activities discussed in Post #9 take on additional significance. A bank-conducted digital-asset custody operation that satisfies the bank’s existing fiduciary and segregation standards is structurally well-positioned for §701 customer-property treatment in the event of bank failure. The interaction with the FDIC receivership framework, governed by § 11 of the FDI Act as amended by §702, is favorable to customers.
Fourth, the §702 safe-harbor treatment for digital-commodity transactions is operationally significant for derivatives counterparties. Bilateral digital-commodity derivatives, repurchase transactions, and securities-lending arrangements receive close-out netting and offset protection in the counterparty’s bankruptcy. The structural change reduces counterparty credit risk for digital-commodity derivatives and supports the development of bilateral derivatives markets in digital assets.
Fifth, the §402 portfolio-margining framework (covered in Post #9) interacts with §701 and §702 in important ways. A customer account that holds both securities positions and digital-commodity positions, with cross-margining authorized by the §402 rulemaking, will face Subchapter III treatment for the entire account in the event of broker-dealer failure. The customer-property framework will need to accommodate the cross-margined positions, and the §402 rulemaking will need to specify how customer-property allocation works across asset classes.

The structural lesson is that, under §701, the U.S. bankruptcy framework for digital-asset intermediaries would line up with the framework for securities broker-dealers and commodity brokers. Customer-property protection becomes the default. The Subchapter III and Subchapter IV procedural mechanics become operative. The pre-CLARITY uncertainty that produced Celsius Earn outcomes and Voyager creditor disputes would be resolved. The remaining policy fight is around the SIPC analog for digital assets: §110 of the bill and the §804 SIPC-consultation framework. But the architectural commitment to customer-property treatment is in the bill text, and the next round of digital-asset intermediary failures under this framework would produce customer recoveries materially more aligned with customer expectations than the post-2022 cycle produced.

Written by David Lopez Kurtz

Crypto Practice Blog