Judges Forced Into Legal Void by FTX and Celsius Bankruptcies With Billions at StakeTable of Contents
Judges Forced Into Legal Void by FTX and Celsius Bankruptcies With Billions at Stake
By CoinUnited
9 Feb 2023
Congress did little to regulate the booming cryptocurrency business as it produced new companies and attracted billions of dollars from investors during the height of the fever.
The aftermath is now in the hands of the courts.
Following the failures of FTX Group, Celsius Network, and Genesis Global, courts may find themselves in the position of making rules for a previously lawless business whose forefathers regarded it as a method to keep money out of the grasp of the government.
Judges will be faced with basic concerns that have high stakes for creditors who financed the firms and customers who trusted them with their money, but they will be given little to no direction in making these decisions. One of them is, "Is a token more like money or a security like a stock or bond?" To what extent should users who stored their cryptocurrency on defunct exchanges be compensated? Who is paid back first, if anyone? And how exactly can the court assign a value to debts that are not priced in dollars but rather in tokens, which are essentially simply privately created bits of digital code? All of it is murky.
According to Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency, "bankruptcy courts are doing things that the normal regulatory system is not able to give," such as instruction. For years, Congress failed to pass legislation to place the sector under the power of Washington authorities, but the precedents that emerge from the bankruptcies may have a significant impact on the direction of the business.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are left to figure out how to utilize their existing authorities over the securities and derivative sectors to crack down on any misbehavior in cryptocurrencies in the absence of a crypto-specific statute. Since regulators often need to approach a court to enforce their rules, bankruptcy decisions may have a quicker impact on the firm.
The cases are only starting out, so it will be a while before the big questions are answered. After promising its customers sky-high returns on their cryptocurrency deposits, cryptocurrency lender Celsius declared bankruptcy in July. In November, Sam Bankman-exchange, Fried's FTX, did just that. Once one of the largest crypto lenders, Genesis has only recently filed for bankruptcy.
Yet the processes themselves are beginning to hint at possible precedents.
In the instance of Celsius, which fell apart when clients began withdrawing deposits out of concern about its solvency, U.S. Bankruptcy Judge Martin Glenn recognized a key distinction on January 4.
Glenn relied on the small print of Celsius's terms-of-use disclosure in the absence of any regulatory guidance. The conclusion: despite what approximately 600,000 Celsius users may have imagined, they do not now possess the digital assets they deposited into their accounts. That is to say, they are in the same position as the rest of the creditors and will very certainly suffer a significant loss.
Celsius has proposed a proposal in which the firm emerges from bankruptcy as a new publicly listed corporation and uses a newly developed token to assist repay what is owed to creditors. The company's lawyer argued that this would result in a greater financial return than trying to raise cash by selling the company's illiquid assets, the value of which would presumably drop if they were dumped on the market.
In the Delaware bankruptcy case involving FTX, the ownership issue is considerably more pressing. If that happens, it would affect millions of consumers, which will only inflame the dispute over the deposits those customers have made. If the judge's judgment conflicts with how the finances will be handled in the Celsius case, it might further confuse the matter.
In a preemptive action, a subset of FTX customers have asked US Bankruptcy Judge John Dorsey to decide that any assets listed on the company's ledgers are theirs and not the company's. The group claimed in a court document that the FTX service agreement specifically stated that customers would maintain ownership of the assets.
However, FTX can maintain that the corporation genuinely owns the assets and is required to utilize them to pay off all creditors because they were pooled together like a bank. And according to FTX, there isn't enough money in the company to reimburse every user for their deposits on the platform.
In addition to bankruptcy cases, federal courts are also presiding over litigation that might establish precedents for the treatment of crypto assets. However, the majority of these rulings will not be made for at least a few months. The time it takes to resolve bankruptcy cases is often much shorter than that of other federal court conflicts because of the urgency with which money must be distributed to creditors.
If Congress doesn't act, the courts will define cryptocurrencies and how investors might expect to be handled if a brokerage or loan fails.
Deirdre O'Connor, managing director of bankruptcy services provider Epiq Global, said, "There is no question in my opinion that the bankruptcy courts will get to the goalposts well before the regulators."
Following the failures of FTX Group, Celsius Network, and Genesis Global, courts may find themselves in the position of making rules for a previously lawless business whose forefathers regarded it as a method to keep money out of the grasp of the government.
Judges will be faced with basic concerns that have high stakes for creditors who financed the firms and customers who trusted them with their money, but they will be given little to no direction in making these decisions. They include: A token is it more like money or a security like a stock or bond? To what extent should users who stored their cryptocurrency on defunct exchanges be compensated? Who is paid back first, if anyone? And how exactly can the court assign a value to debts that are not priced in dollars but rather in tokens, which are essentially simply privately created bits of digital code? All of it is murky.
According to Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency, "bankruptcy courts are doing things that the normal regulatory system is not able to give," such as instruction. For years, Congress failed to pass legislation to place the sector under the power of Washington authorities, but the precedents that emerge from the bankruptcies may have a significant impact on the direction of the business.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are left to figure out how to utilize their existing authorities over the securities and derivative sectors to crack down on any misbehavior in cryptocurrencies in the absence of a crypto-specific statute. Since regulators often need to approach a court to enforce their rules, bankruptcy decisions may have a quicker impact on the firm.
The cases are only starting out, so it will be a while before the big questions are answered. After promising its customers sky-high returns on their cryptocurrency deposits, cryptocurrency lender Celsius declared bankruptcy in July. In November, Sam Bankman-exchange, Fried's FTX, did just that. Once one of the largest crypto lenders, Genesis has only recently filed for bankruptcy.
Yet the processes themselves are beginning to hint at possible precedents.
In the instance of Celsius, which fell apart when clients began withdrawing deposits out of concern about its solvency, U.S. Bankruptcy Judge Martin Glenn recognized a key distinction on January 4.
Glenn relied on the small print of Celsius's terms-of-use disclosure in the absence of any regulatory guidance. The conclusion: despite what approximately 600,000 Celsius users may have imagined, they do not now possess the digital assets they deposited into their accounts. That is to say, they are in the same position as the rest of the creditors and will very certainly suffer a significant loss.
Celsius has proposed a proposal in which the firm emerges from bankruptcy as a new publicly listed corporation and uses a newly developed token to assist repay what is owed to creditors. The company's lawyer argued that this would result in a greater financial return than trying to raise cash by selling the company's illiquid assets, the value of which would presumably drop if they were dumped on the market.
In the Delaware bankruptcy case involving FTX, the ownership issue is considerably more pressing. If that happens, it would affect millions of consumers, which will only inflame the dispute over the deposits those customers have made. If the judge's judgment conflicts with how the finances will be handled in the Celsius case, it might further confuse the matter.
In a preemptive action, a subset of FTX customers have asked US Bankruptcy Judge John Dorsey to decide that any assets listed on the company's ledgers are theirs and not the company's. The group claimed in a court document that the FTX service agreement specifically stated that customers would maintain ownership of the assets.
However, FTX can maintain that the corporation genuinely owns the assets and is required to utilize them to pay off all creditors because they were pooled together like a bank. And according to FTX, there isn't enough money in the company to reimburse every user for their deposits on the platform.
In addition to bankruptcy cases, federal courts are also presiding over litigation that might establish precedents for the treatment of crypto assets. However, the majority of these rulings will not be made for at least a few months. The time it takes to resolve bankruptcy cases is often much shorter than that of other federal court conflicts because of the urgency with which money must be distributed to creditors.
If Congress doesn't act, the courts will define cryptocurrencies and how investors might expect to be handled if a brokerage or loan fails.
Deirdre O'Connor, managing director of bankruptcy services provider Epiq Global, said, "There is no question in my opinion that the bankruptcy courts will get to the goalposts well before the regulators."
The aftermath is now in the hands of the courts.
Following the failures of FTX Group, Celsius Network, and Genesis Global, courts may find themselves in the position of making rules for a previously lawless business whose forefathers regarded it as a method to keep money out of the grasp of the government.
Judges will be faced with basic concerns that have high stakes for creditors who financed the firms and customers who trusted them with their money, but they will be given little to no direction in making these decisions. One of them is, "Is a token more like money or a security like a stock or bond?" To what extent should users who stored their cryptocurrency on defunct exchanges be compensated? Who is paid back first, if anyone? And how exactly can the court assign a value to debts that are not priced in dollars but rather in tokens, which are essentially simply privately created bits of digital code? All of it is murky.
According to Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency, "bankruptcy courts are doing things that the normal regulatory system is not able to give," such as instruction. For years, Congress failed to pass legislation to place the sector under the power of Washington authorities, but the precedents that emerge from the bankruptcies may have a significant impact on the direction of the business.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are left to figure out how to utilize their existing authorities over the securities and derivative sectors to crack down on any misbehavior in cryptocurrencies in the absence of a crypto-specific statute. Since regulators often need to approach a court to enforce their rules, bankruptcy decisions may have a quicker impact on the firm.
The cases are only starting out, so it will be a while before the big questions are answered. After promising its customers sky-high returns on their cryptocurrency deposits, cryptocurrency lender Celsius declared bankruptcy in July. In November, Sam Bankman-exchange, Fried's FTX, did just that. Once one of the largest crypto lenders, Genesis has only recently filed for bankruptcy.
Yet the processes themselves are beginning to hint at possible precedents.
In the instance of Celsius, which fell apart when clients began withdrawing deposits out of concern about its solvency, U.S. Bankruptcy Judge Martin Glenn recognized a key distinction on January 4.
Glenn relied on the small print of Celsius's terms-of-use disclosure in the absence of any regulatory guidance. The conclusion: despite what approximately 600,000 Celsius users may have imagined, they do not now possess the digital assets they deposited into their accounts. That is to say, they are in the same position as the rest of the creditors and will very certainly suffer a significant loss.
Celsius has proposed a proposal in which the firm emerges from bankruptcy as a new publicly listed corporation and uses a newly developed token to assist repay what is owed to creditors. The company's lawyer argued that this would result in a greater financial return than trying to raise cash by selling the company's illiquid assets, the value of which would presumably drop if they were dumped on the market.
In the Delaware bankruptcy case involving FTX, the ownership issue is considerably more pressing. If that happens, it would affect millions of consumers, which will only inflame the dispute over the deposits those customers have made. If the judge's judgment conflicts with how the finances will be handled in the Celsius case, it might further confuse the matter.
In a preemptive action, a subset of FTX customers have asked US Bankruptcy Judge John Dorsey to decide that any assets listed on the company's ledgers are theirs and not the company's. The group claimed in a court document that the FTX service agreement specifically stated that customers would maintain ownership of the assets.
However, FTX can maintain that the corporation genuinely owns the assets and is required to utilize them to pay off all creditors because they were pooled together like a bank. And according to FTX, there isn't enough money in the company to reimburse every user for their deposits on the platform.
In addition to bankruptcy cases, federal courts are also presiding over litigation that might establish precedents for the treatment of crypto assets. However, the majority of these rulings will not be made for at least a few months. The time it takes to resolve bankruptcy cases is often much shorter than that of other federal court conflicts because of the urgency with which money must be distributed to creditors.
If Congress doesn't act, the courts will define cryptocurrencies and how investors might expect to be handled if a brokerage or loan fails.
Deirdre O'Connor, managing director of bankruptcy services provider Epiq Global, said, "There is no question in my opinion that the bankruptcy courts will get to the goalposts well before the regulators."
Following the failures of FTX Group, Celsius Network, and Genesis Global, courts may find themselves in the position of making rules for a previously lawless business whose forefathers regarded it as a method to keep money out of the grasp of the government.
Judges will be faced with basic concerns that have high stakes for creditors who financed the firms and customers who trusted them with their money, but they will be given little to no direction in making these decisions. They include: A token is it more like money or a security like a stock or bond? To what extent should users who stored their cryptocurrency on defunct exchanges be compensated? Who is paid back first, if anyone? And how exactly can the court assign a value to debts that are not priced in dollars but rather in tokens, which are essentially simply privately created bits of digital code? All of it is murky.
According to Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency, "bankruptcy courts are doing things that the normal regulatory system is not able to give," such as instruction. For years, Congress failed to pass legislation to place the sector under the power of Washington authorities, but the precedents that emerge from the bankruptcies may have a significant impact on the direction of the business.
The Securities and Exchange Commission and the Commodity Futures Trading Commission are left to figure out how to utilize their existing authorities over the securities and derivative sectors to crack down on any misbehavior in cryptocurrencies in the absence of a crypto-specific statute. Since regulators often need to approach a court to enforce their rules, bankruptcy decisions may have a quicker impact on the firm.
The cases are only starting out, so it will be a while before the big questions are answered. After promising its customers sky-high returns on their cryptocurrency deposits, cryptocurrency lender Celsius declared bankruptcy in July. In November, Sam Bankman-exchange, Fried's FTX, did just that. Once one of the largest crypto lenders, Genesis has only recently filed for bankruptcy.
Yet the processes themselves are beginning to hint at possible precedents.
In the instance of Celsius, which fell apart when clients began withdrawing deposits out of concern about its solvency, U.S. Bankruptcy Judge Martin Glenn recognized a key distinction on January 4.
Glenn relied on the small print of Celsius's terms-of-use disclosure in the absence of any regulatory guidance. The conclusion: despite what approximately 600,000 Celsius users may have imagined, they do not now possess the digital assets they deposited into their accounts. That is to say, they are in the same position as the rest of the creditors and will very certainly suffer a significant loss.
Celsius has proposed a proposal in which the firm emerges from bankruptcy as a new publicly listed corporation and uses a newly developed token to assist repay what is owed to creditors. The company's lawyer argued that this would result in a greater financial return than trying to raise cash by selling the company's illiquid assets, the value of which would presumably drop if they were dumped on the market.
In the Delaware bankruptcy case involving FTX, the ownership issue is considerably more pressing. If that happens, it would affect millions of consumers, which will only inflame the dispute over the deposits those customers have made. If the judge's judgment conflicts with how the finances will be handled in the Celsius case, it might further confuse the matter.
In a preemptive action, a subset of FTX customers have asked US Bankruptcy Judge John Dorsey to decide that any assets listed on the company's ledgers are theirs and not the company's. The group claimed in a court document that the FTX service agreement specifically stated that customers would maintain ownership of the assets.
However, FTX can maintain that the corporation genuinely owns the assets and is required to utilize them to pay off all creditors because they were pooled together like a bank. And according to FTX, there isn't enough money in the company to reimburse every user for their deposits on the platform.
In addition to bankruptcy cases, federal courts are also presiding over litigation that might establish precedents for the treatment of crypto assets. However, the majority of these rulings will not be made for at least a few months. The time it takes to resolve bankruptcy cases is often much shorter than that of other federal court conflicts because of the urgency with which money must be distributed to creditors.
If Congress doesn't act, the courts will define cryptocurrencies and how investors might expect to be handled if a brokerage or loan fails.
Deirdre O'Connor, managing director of bankruptcy services provider Epiq Global, said, "There is no question in my opinion that the bankruptcy courts will get to the goalposts well before the regulators."
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