Weathering The Crypto Winter: Tools For Insolvency Practitioners

• Published date: 21 October 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Technology, Insolvency/Bankruptcy, Fin Tech
• Law Firm: Katten Muchin Rosenman LLP
• Author: Prav Reddy, Sonya Van de Graaff, Neil Robson, Daniel J. Davis, Mark Johnson and Ethan Trotz

Cryptoassets are particularly unique assets that are sources of deep and rapid innovation in global financial markets. Given the volatility of the crypto market, their value can dramatically rise and fall. Insolvency practitioners (IPs) seeking to restructure or rescue crypto firms in distress or otherwise dealing with virtual assets face a unique set of challenges. These have been brought to the fore by the global crypto market crash earlier this year and the so-called 'crypto winter'. We discuss below recent crypto insolvencies and issues for IPs to consider when locating, recovering and realising cryptoassets.

Origins of the Storm

The description 'crypto winter' suggests that an extended period of trouble may (again) be settling over the crypto market, with prices likely to contract and remain low for some time. This is not the first crypto storm, a downward cycle having taken place between January 2018 and December 2020 when Bitcoin (and other cryptocurrencies including Ether and Litecoin) fell sharply. 2021 then saw strong growth for cryptocurrencies until, in May 2022, the stablecoin TerraUSD and its sister token Luna collapsed, triggering a domino effect of crypto insolvencies.

The collapse contributed to the crash of Singapore-based crypto hedge fund Three Arrows Capital (3AC) (who had heavily invested in Luna). 3AC defaulted on its obligations to its lenders in late June 2022, certain of which exercised rights to liquidate over $400 million of 3AC's cryptocurrency positions. Distress for other crypto firms followed, including 3AC's lenders, with some filing for bankruptcy in July 2022.

Financial distress in this crypto winter has been more significant and widespread than previously. Various factors have contributed. Participation in crypto markets has increased. With the rise of decentralised finance (DeFi) markets and lending platforms since 2018, there has been a broader range of debt and leverage. Crypto funds and lenders have been able to take on high levels of debt from retail customers, offering high yield returns (for example, Celsius was offering yields of up to 18 percent on cryptoassets deposited with them in early 2022). Financial interdependency between firms has increased, causing the 'domino effect'. The current economic climate, with ever-increasing inflation, will also have played a role and will continue to.

So, how can IPs navigate the storm?

Locating, Recovering and Realising Cryptoassets in Insolvency Processes

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