Cryptocurrency Brings Disruption To Bankruptcy Courts'What Parties Can Expect And The Open Issues Still To Be Resolved (Part One)

• Jurisdiction: United States,Federal
• Law Firm: Squire Patton Boggs LLP
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Technology, Insolvency/Bankruptcy, Fin Tech
• Author: Mr Mark A. Salzberg and Justin Cloyd
• Published date: 10 October 2023

Many authorities and commentators have considered cryptocurrencies, and the blockchains that undergird them, as a potentially disruptive force in the financial industry. Now, that disruption has made its way to a different side of finance'bankruptcy, and during the past year, the United States bankruptcy courts have had to confront many unexpected challenges involved in dealing with cryptocurrency.

The Bankruptcy Code is a tool to create order out of chaos. However, when it comes to bankruptcy law, cryptocurrency appears to be an oddly shaped peg without a hole. This multi-party blog post aims to give a roadmap of the issues that the courts will need to address, and the challenges that parties will face, in the inevitable clash of cryptocurrency and bankruptcy. In this first post, we address whether cryptocurrency is property of the bankruptcy estate, perfection of security interests in cryptocurrency and how the fluctuating value of cryptocurrency can impact a bankruptcy case.

Key Concepts Underlying Cryptocurrency

Cryptocurrencies rely heavily on a technology called blockchain, which is a system for keeping a chronology of transactions without the need for third-party oversight. Contracts can be programmed onto the blockchain, allowing for two parties to create self-executing deals; these contracts are called smart contracts. Smart contracts allow for decentralized finance loans, commonly referred to as DeFi loans. DeFi loans make use of smart contracts and blockchains to allow for financial transactions without the need for a bank or some other middleman. A crypto "wallet" is a form of digital storage by which the cryptocurrency assets can be accessed. A stablecoin is a type of cryptocurrency designed to be tied or pegged to another currency, commodity, or financial instrument.

Is Cryptocurrency Property of the Estate?

Whether cryptocurrency held on debtor platforms is property of the bankruptcy estate is a key issue that has arisen when cryptocurrency exchanges have filed bankruptcy.¹ The most recent court to face this issue is the Bankruptcy Court for the Southern District of New York ( see our coverage here).²

Celsius Network LLC and affiliates (collectively, "Celsius") ran a cryptocurrency finance platform. Faced with extreme turbulence in the cryptocurrency markets, Celsius filed Chapter 11 petitions on July 13, 2022. As part of their regular business, Celsius had allowed customers to both deposit cryptocurrency digital assets on their platform and earn a percentage yield, as well as take out loans by pledging their cryptocurrencies as security. One specific program offered by Celsius was the "Earn" program, under which customers could transfer certain cryptocurrencies to Celsius and earn "rewards" in the form of payment...