SEPTEMBER 2022 Turnarounds & Workouts 2
Crypto Winter , from page 1
that it dealt in . Gayda and Matott anticipate that Voyager ’ s filing , as well as any subsequent bankruptcy filings in the crypto space , will place untested issues front and center , including how cryptoassets held on behalf of customers of a bankrupt crypto platform are treated .
In May 2022 , Coinbase , the largest U . S . crypto exchange , disclosed in an SEC filing that “ in the event of a bankruptcy , the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors .” While the inclusion of this language in its SEC filing was the result of an accounting comment by the SEC staff , Gayda and Matott point out this highlighted the fact customer assets held in omnibus , non-segregated accounts — which generally include all assets held in client accounts — could , in the event of an insolvency , be treated as Coinbase ’ s property ( rather than property of customers ). Ultimately , those assets could be liquidated and shared pro rata among all customers , subject to the priority scheme of the bankruptcy laws , with no guarantee that there would be assets sufficient to pay all customers in full .
“ This disclosure sent Coinbase ’ s stock tumbling and forced their customers , and the customers of other crypto platforms , to contemplate a potential result that they had likely never considered . Although Coinbase ’ s CEO soon after asserted that any bankruptcy risk is mitigated because its customer assets are held in segregated accounts , the public disclosure highlighted the uncharted waters that crypto-companies face in the event of a bankruptcy filing ,” Gayda says .
Boom and Bust Cycle
Bracewell LLP ’ s Mark E . Dendinger , Anne M . Termine and Robert G . Burns see the Voyager and Celsius filings could be the beginning of a series of bankruptcies by major cryptocurrency companies . They explain that as global financial markets worsen and investors withdraw their assets — particularly in the riskier field of cryptocurrency — more companies may be forced to seek refuge in bankruptcy . They also note that the “ crypto winter ” may linger for some time as companies may continue to be plagued by liquidity issues .
For Tad Davidson and J . R . Smith of Hunton Andrews Kurth , crypto currencies are another version of the boom and bust cycle attributable to any speculative investment . With virtually no rules , accountability or transparency , corporate ( and individual ) failures and bankruptcies were inevitable and will persist until the industry achieves a better balance between innovation and transparency , the latter comprising of legal and regulatory certainty , Davidson says .
Dendinger is a managing partner of Bracewell ’ s Connecticut office
“ With virtually no rules , accountability or transparency , corporate ( and individual ) failures and bankruptcies were inevitable and will persist until the industry achieves a better balance between innovation and transparency , the latter comprising of legal and regulatory certainty .”
and a financial restructuring partner focusing on all aspects of corporate restructuring , bankruptcy and insolvency proceedings . Termine leads Bracewell ’ s Cryptocurrency & Blockchain practice . Burns concentrates his practice on U . S . and international corporate restructurings and insolvency matters .
Davidson is the co-leader of Hunton Andrews Kurth ’ s Bankruptcy / Restructuring practice group , and Smith is a restructuring and corporate www . TurnaroundsWorkouts . com