In recent years, the dynamic landscape of the financial world has witnessed the rise and fall of crypto coins, ushering in a new era of economic uncertainty and bankruptcy fillings. The fervor surrounding these digital assets has not only captivated investors but has also posed unprecedented challenges, particularly when crypto markets experienced sudden and severe collapses.
As was observed in 2023, bankruptcy judges who presided over the collapse of cryptocurrency exchanges provided answers to fundamental concerns regarding the legality of digital currency, surpassing regulators and prosecutors.
Bankruptcy judges throw SEC a curveball
In 2022, several companies, including FTX Group, Celsius Network LLC, BlockFi Inc., and Voyager Digital Holdings, filed for Chapter 11. If 2022 was the year of the crypto crash, 2023 was the year of picking through the ruins.
Despite leaving thousands of clients without ownership of assets they thought they held, the judges’ rulings might define the crypto business for years to come. The use of bankruptcy to aid in the revival of the crypto ecosystem comes at a time when Chapter 11 is being used to treat a wide range of societal evils, from the opioid crisis to asbestos exposure.
Bankruptcy courts became the major forum for finding an answer to that question. Bankruptcy judges defined the relationship between certain crypto account holders and the corporations as a result of Chapter 11 disclosures, which offered greater openness to the budding industry.
Nearly a year ago, Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York announced a decision that would reverberate throughout 2023. He ruled on January 4 that crypto assets in Celsius’ Earn accounts that accumulated income belonged to Celsius, not the clients who deposited them.
Glenn’s judgement turned thousands of consumers into unsecured creditors, thereby eliminating any hope of ever receiving their money back.
However, this does not imply that Glenn’s decision was incorrect. The court applied bankruptcy law to the facts of the Celsius case and felt he had “no choice” but to rule as he did.
According to Yadav, who co-wrote a paper on bankruptcy courts and crypto, the verdict highlights the court’s problematic position as well as the vulnerability of customers without regulatory assistance.
The Celsius decision shook the industry. Other crypto organisations rushed to reassure clients that their deposited funds are secure, and experts advised crypto users to keep their funds in accounts that work differently than Earn accounts.
The future of crypto regulations – The SEC, CFTC or courts?
In general, Chapter 11 is a transparent process that requires debtors to provide balance sheets, creditor lists, and other information. A judge can appoint an independent examiner to investigate potential wrongdoing in particularly complex or contentious situations.
A court-ordered inquiry outperformed federal prosecutors in the Celsius bankruptcy. The bankruptcy examiner accused Alex Mashinsky, the exchange’s creator, of continually providing a bright picture of the exchange’s finances while it was suffering behind the scenes.
Mashinsky was charged with fraud in an indictment that contained similar claims to those in the bankruptcy report more than five months later. He has entered a not guilty plea.
However, crypto instances have not always been completely transparent. FTX persuaded US Bankruptcy Court for the District of Delaware Judge John Dorsey to allow it to conceal the identities of its 50 largest creditors.
Traditional authorities, such as the Securities and Exchange Commission, could weigh in on reorganisation plans in bankruptcy courts.
In the case of crypto corporation Voyager, however, Judge Michael Wiles of the Southern District of New York overruled the SEC by approving a sale of the insolvent firm to Binance.US.
Judge Wiles concluded in March that the SEC failed to produce adequate evidence that the sale violated US securities laws. The SEC eventually reached an arrangement with Voyager and discontinued its opposition, but the agreement quickly broke apart.
For the time being, bankruptcy judges’ knowledge of complex financial concerns and experience with a variety of business kinds may be the best the industry can hope for.
The inconsistent regulatory environment reflects the discomfort of the bankruptcy forum and the lack of meaningful monitoring. It’s uncommon for companies like FTX, which managed a huge crypto exchange, to declare bankruptcy.
For the time being, bankruptcy judges’ knowledge of complex financial concerns and experience with a variety of business kinds may be the best the industry can hope for.
