Crypto Winter Disputes

• Published date: 24 November 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Technology, Insolvency/Bankruptcy, Arbitration & Dispute Resolution, Fin Tech
• Law Firm: Carey Olsen
• Author: Helen Wang

The advent of a 'crypto winter' in early 2022, characterised by a sharp decline in the value of cryptocurrency assets and significant market volatility, has caused major crypto hedge funds, exchanges and lenders to experience financial distress with several entering insolvency proceedings. Since arbitration is the dispute resolution forum of choice in many crypto-related contracts, with the Hong Kong International Arbitration Centre ("HKIAC") arbitration rules being particularly popular, the coming months are likely to see an increase in the number of parties seeking to arbitrate disputes against financially distressed crypto companies. ¹

This article first provides an overview of the current state of the crypto disputes landscape, which arises at a novel intersection of crypto, arbitration and insolvency. It then looks at the type of legal and practical factors that may be relevant to a creditor in deciding on a dispute strategy when faced with a financially distressed crypto company, including in the context of arbitration and liquidation proceedings.

IMPACT OF THE 'CRYPTO WINTER' ON THE DISPUTE LANDSCAPE

In early 2022, the onset of a 'crypto winter', the equivalent of an equities' bear market, saw the financial outlook for many crypto companies rapidly deteriorate. Crypto assets, which comprise the major asset of many crypto companies, lost approximately US$ 2 trillion in value since their 2021 peak. The collapse of Terra, a high-profile USD 40 billion 'stable' cryptocurrency project, in May 2022 only compounded the negative sentiment permeating the crypto sector.

What is already clear is that the crypto winter has caused a fundamental shift in the crypto disputes landscape in 2022, with the number, variety and complexity of crypto disputes increasing as creditors scramble to recover unpaid debts and other liabilities across multiple jurisdictions. Major crypto hedge funds, exchanges, lenders and other market participants have experienced significant financial difficulties and been left teetering on the edge of insolvency. Indeed, several have already teetered over that edge.

In June, for example, liquidators were appointed in the British Virgin Islands (BVI) over Three Arrows Capital (3AC), a crypto hedge fund incorporated in the BVI with operations in Singapore, that reported assets totalling USD 18 billion earlier this year. In the same month, the crypto exchange CoinFLEX initiated a USD 84 million HKIAC claim against an individual known as "Bitcoin Jesus" for an allegedly unpaid debt arising from a margin call.² Subsequently, CoinFLEX filed for restructuring in a Seychelles court seeking to resolve the shortfall arising from that debt.³

In July, a Singapore-based trader filed a USD 2.4 billion ICDR arbitration claim against 3AC in respect of loans as well as parallel emergency arbitration proceedings requesting that unsecured funds be placed in escrow.⁴ Certain of these proceedings were then temporarily stayed following a request from 3AC's liquidators. Also in July, in what has been described as cryptocurrencies' 'Lehman Brothers moment', the cryptocurrency lender Celsius Network entered...