By Steven O. Weise, Wai L. Choy, and Vincent Indelicato (Proskauer Rose LLP)
Note: This post is the fifth post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose. Previous posts in the series include:
2. Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?, by Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux
3. The Public and the Private of the FTX Bankruptcy, by Diane Lourdes Dick and Christopher K. Odinet
4. Staking, Yield Farming, Liquidity Mining, Crypto Lending – What are the Customer’s Risks?, by Matthias Lehmann et al. (University of Vienna)
This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.
Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.
The cryptocurrency market has experienced significant liquidity events, accelerating an industrywide sell-off and leaving the value of cryptocurrencies at historic lows—what many call a “crypto winter.” The idea that participants in the cryptocurrency industry, namely exchanges that operate platforms that allow users to transact in cryptocurrency, may resort to chapter 11 bankruptcy has created questions as to how such assets would be handled during a bankruptcy.
In “The Treatment of Cryptocurrency Assets in Bankruptcy,” Proskauer partners Steven O. Weise, Wai Choy, and Vincent Indelicato explore the question of whether crypto assets deposited by customers in a cryptocurrency exchange may be considered property of the bankruptcy estate and therefore not recoverable by the customer. While some commentators have suggested that crypto assets might be considered property of the bankruptcy estate, existing common law, current provisions of Uniform Commercial Code (UCC) Article 8, and proposed amendments to the UCC recognize that if the arrangement and relationship between the exchange and its customers is one that is characterized as “custodial,” the crypto assets held by the exchange should remain property of the customers and, hence, not subject to dilution by general unsecured claim holders. However, the analysis of when a custodial relationship exists will depend on the agreements and other facts of a particular relationship.
Click here to read the full article.