SEPTEMBER 2022 Turnarounds & Workouts 3
Crypto Winter , from page 2
finance attorney at the firm , and former managing partner of the firm ’ s Tokyo office . Hunton Andrews Kurth is involved in a number of the crypto cases on behalf of creditors . “ We are particularly involved in advising FinTech and other intermediaries on evolving blockchain technology and the related growing legal and regulatory framework in the U . S .,” Smith shares .
Novel Issues
According to Davidson and Smith , some of the gating issues involving crypto cases may include :
( A ) Property of the estate . A fundamental question regarding customer crypto held in a crypto lender exchange that files for bankruptcy is whether such crypto is property of the debtor , and therefore subject to the debtor ’ s bankruptcy , or is being held by such debtor as a custodian . Custodial property , assuming it can be traced , is not property of the estate subject to competing claims of creditors and should be returned to the customer . Non-custodial property is debtor-owned property subject to competing creditor claims and bankruptcy distribution hierarchy .
( B ) Secured / unsecured creditor status . Some crypto lenders promote themselves as asset- or dollar-backed
— “ stable ” coins . That is , some exchanges claim to back such crypto with fiat or hard assets ( such as gold or U . S . dollars ) with the aim of reducing price volatility . This appeals to customers because it makes them feel like “ stable ” coin is less risky than other types of crypto currency . Yet asset-backed is different than legally having a security interest over collateral . Assuming customer crypto on deposit is “ property of the estate ,” customers then have unsecured claims with payouts typically pennies on the dollar . Moreover , there is minimal transparency concerning “ stable ” coins . Customers have accused some exchanges of hiding losses or misleading customers about the extent of crypto actually backed by other assets . In the event of an insolvency , a trustee or other fiduciary would need to investigate such issues .
( C ) Valuation . Many bankruptcy rules are keyed off of asset valuation as of a particular moment , often the bankruptcy petition date , to determine party rights . Reminiscent of the markto-market difficulties for financial assets during the Great Recession ( 2008 ), crypto has valuation issues on steroids . Crypto exchanges have emerged to promote valuations through trading and an indication of value , albeit imperfect due to the character of the asset . Unsurprisingly , crypto valuations fluctuate wildly because it is a nascent asset class in an easily traded electronic form . In the event of substantial diminished liquidity , such assets could become difficult to accurately value .
( D ) Asset type . Ubiquitously called “ virtual currencies ,” a growing
Reminiscent of the markto-market difficulties for financial assets during the Great Recession ( 2008 ), crypto has valuation issues on steroids .
body of law and regulation treats crypto ( and NFTs and other virtual assets ) as securities or property . The Diamond Fortress Technologies case in the Delaware Chancery Court is a leading and informative case on this point , holding that crypto currencies are securities , subject to the Securities Act of 1933 and the Exchange Act of 1934 ( i . e ., Securities Exchange Commission and other regulatory oversight ). Indeed , the Internal Revenue Service has issued a ruling following this approach , requiring reporting and imposing capital gains taxation on global profit realized from crypto assets .
Matthew Gold and Dov Kleiner , partners at Kleinberg , Kaplan , Wolff & Cohen , P . C ., believe the integrity of www . TurnaroundsWorkouts . com