Crypto Bankruptcy Proceedings Highlight Regulatory Shortcomings

Celsius, BlockFi and Voyager were among crypto’s biggest players to file for bankruptcy in 2022, legal expert says

article-image

Source: Shutterstock / JRRieger, modified by Blockworks

share

Celsius, BlockFi, Voyager and, most recently, FTX — plus its roughly 100 affiliated companies — all in 2022 tapped the US bankruptcy code’s Chapter 11 provision in an effort to reorganize their distressed business lines. Three Arrows Capital, meanwhile, filed under Chapter 15 in an effort to deal with insolvency and creditors on an international level. 

As courts continue to determine the most efficient and cost-effective means to restructure — and, ideally, make creditors whole — regulators are set to watch the end results closely, according to Joe Acosta, a partner at the law firm Dorsey and Whitney.

“The recent bankruptcy filings of five major crypto companies, including Celsius, a lender, and FTX, an exchange, may bring to light the real nature of cryptocurrency: whether it’s an investment, a currency, digital asset or something else,” Acosta said.

What’s especially relevant is not only the outcome of the individual cases, but also the potential for precedent-setting judgements that could provide a legal and regulatory framework for the industry more broadly. Acosta said there have already been notable instances. 

Celsius, once one of crypto’s most prominent lenders, filed for bankruptcy in July 2022 after halting withdrawals the month before, citing “extreme market conditions.” Earlier this month, the presiding judge ruled that tokens deposited in interest-bearing accounts belong to Celsius, not the customers. It could set the stage for the future of token classification and ownership regulation going forward, Acosta said. 

“[Celsius’ bankruptcy] Judge [Martin] Glenn found that crypto is not — by the standing definition — a currency, because it is not a medium of exchange created, authorized or adopted by a domestic or foreign government, or by an intergovernmental organization or by agreement between two or more countries,” Acosta said.

When customers deposited crypto with the company before its bankruptcy, they were handing over something closer to a “digital asset,” the judge ruled, which the lender could then invest or transfer. 

When it comes to FTX, the criminal proceedings against its former chief executive, Sam Bankman-Fried, add an extra layer of complexity, Acosta said. The allegations that customer funds were transferred to other investment vehicles, individuals and even politicians, according to Acosta, means recipients of FTX funds ought to now be on notice

“Everyone is just waiting for the FTX bankruptcy estate to claw back many of these transfers,” Acosta said. “Claw backs generally are authorized under state and federal law, when an insolvent company makes transfers without receiving equivalent value. Many of the transfers made by FTX certainly seem like they can come back to FTX.”

It would not be the first time the clawback strategy has been used to make creditors whole. Marc Powers, a former securities law practice leader at Baker & Hostetler, said his firm was able to help recover $14.5 billion of the total losses stemming from Bernie Madoff’s Ponzi scheme, which totaled somewhere in the neighborhood of $18 to $20 billion. 

“I do think [the Madoff case] is a similar situation to here,” Powers told Blockworks last month. “And I do think they will use the same sort of playbook utilizing US Bankruptcy Code clawbacks.”

Either way, the industry’s meltdown has only provided even more fuel to the fire for regulators that had already been advocating for more stringent oversight, Acosta said. 

“Everyone knows that the crypto industry is not heavily regulated by the SEC, because crypto purists have, thus far, convinced the SEC that cryptocurrency is not an investment or security,” he said. “However, without regulation, you can see how customers can easily be duped.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

Research Report Templates (6).png

Research

In recent months, a number of highly accretive developments were implemented across the protocol to improve fee capture, expand product functionality, and ultimately drive value accrual to the RUNE token, with more upgrades on the immediate horizon. These developments include hiking the minimum swap fee parameter to increase revenue, adding a Burn System Income Lever to reduce the RUNE supply, the addition of COSM-WASM smart contracting and IBC to enable an application layer, new chain integrations, and more.

article-image

Former IRS agent and Binance executive Tigran Gambaryan will remain imprisoned in Nigeria’s Kuje prison

article-image

When Permissionless III wraps on Friday, there will be 26 days left until the 2024 presidential election

article-image

Plus, an update from the ground in Salt Lake City at Permissionless III

article-image

The US regulator accused the crypto market-making firm of acting as an unregistered dealer

article-image

Customers can pay merchants in USDC or USDP on Ethereum, Solana, and Polygon, while US-based merchants are paid in dollars