By Jane VanLare and Jack Massey (Cleary Gottlieb Steen & Hamilton LLP)
The past two years have seen a cluster of interrelated Chapter 11 bankruptcy cases involving five major U.S.-based cryptocurrency companies: Voyager Digital, a crypto brokerage; Celsius Network, a crypto exchange; FTX and Alameda Research (FTX), a crypto exchange and hedge fund respectively; BlockFi, a crypto lender; and Genesis Global, a crypto lender.
The domino effect that ultimately led to the filing of these five major U.S.-based crypto companies began in 2022, after the crypto market fell by approximately two-thirds in the first half of the year, and the BVI-based crypto hedge fund Three Arrows Capital (3AC) collapsed. 3AC’s failure led to losses for Voyager, Celsius, FTX, BlockFi, and Genesis, which all had significant lending exposure to 3AC. Most of the five U.S.-based companies also had significant lending exposure to each other, such that the ripple that was the 3AC collapse quickly turned into a tidal wave which led (together with other market disruptions) to the other U.S.-based crypto companies freezing withdrawals by customers and repayments to lenders and/or imposing strict trading limitations. This eventually led them to initiate Chapter 11 proceedings.
At the same time, regulatory scrutiny on each of the five U.S.-based companies increased. The U.S. Securities and Exchange Commission (SEC), U.S. Department of Justice (DOJ), Federal Trade Commission (FTC), and Commodity Futures Trading Commission (CFTC), among others, brought investigations that led in some cases to criminal charges and in all cases to substantial civil claims to be administered in the respective companies’ Chapter 11 cases.
During the reorganization of the five U.S.-based companies, crypto prices remained volatile: Bitcoin, the value of which serves as an indicator for the health of the crypto market as a whole, rose from a nadir of less than $17,000 in mid-2022 through early 2023 to approximately $44,000 in early 2024, and sits at more than $85,000 as of November 2024.
The Chapter 11 cases of these five U.S.-based crypto companies presented three major novel issues for bankruptcy courts and practitioners: issues relating to inter-debtor claims, claims by regulators and other government entities, and the Bankruptcy Code’s “dollarization” provision, each of which is described in more detail in the article.
The article, republished in Pratt’s Journal of Bankruptcy Law, is available here.