For crypto investors, large-scale bankruptcies are just start of new era for sector

The crypto industry is facing a situation reminiscent of the “big short” experienced by the mortgage industry in the early 2000s – many crypto companies have failed in the last 18 months, and most have filed some sort of bankruptcy proceeding.

The latest bankruptcy filing was on behalf of BlockFi, Inc. and its related companies in the Bankruptcy Court in Trenton on Nov. 28.

The BlockFi bankruptcy filing follows the collapse of the UST/Luna Staple Coin Eco System, the bankruptcies of crypto currency hedge fund Three Arrows Capital and several major crypto currency brokerages and exchanges, such as Celsius Network Ltd. and Voyager Digital. Following those bankruptcies, FTX Trading Ltd. and its affiliates filed for Chapter 11 after the entire management team resigned amid allegations of wrongdoing surfaced.

Prior to the FTX bankruptcy filing, FTX had agreed to loan BlockFi $400 million and had entered into an agreement to acquire BlockFi.

While BlockFi has promised to reorganize and return to investors all of their funds, the crypto industry remains turbulent, and the future of cryptocurrency is unclear. Certain members of Congress have suggested legislation to abolish the use of cryptocurrency.

One of the emerging issues in the crypto bankruptcies is whether investors who placed their crypto with companies like FTX and BlockFi retain ownership of their crypto, or whether they are merely among the pool of general creditors of those companies. There has been no court determination of this issue as yet, although litigation on this matter has been joined in many of the crypto bankruptcies.

Other issues common in crypto bankruptcies that remain in flux include valuation of any crypto transfer and the treatment of crypto as currency or commodity.

What does this all mean: The major bankruptcies in the crypto world are just the start – not the finish – of legal issues surrounding the sector.

Donald Clarke.
Daniel Stolz.

A Genova Burns attorneys, Don Clarke and Daniel Stolz have substantive experience in a wide range of complex commercial matters concerning bankruptcy, restructuring and state court insolvency. Clarke specializes in Bankruptcy, Reorganization and Creditors Rights and Cannabis law while Stolz, is a partner and chairman of the Bankruptcy, Reorganization and Creditors’ Rights Group, is a bankruptcy lawyer of national prominence.