Latest News

Crypto bankruptcies could put some customers at the ‘bottom of the totem pole’

S&P 500




Dow 30








Russell 2000




Crude Oil
















10-Yr Bond
















CMC Crypto 200




FTSE 100




Nikkei 225




For the first time in the short life of cryptocurrency, major crypto platforms have turned to US bankruptcy law to salvage their insolvent businesses. Now it’s largely up to bankruptcy courts to determine how to divvy up customers’ frozen crypto assets.

So far this year, crypto platforms Celsius and Voyager Digital filed for bankruptcy and in doing so stripped millions of crypto holders of assets they once controlled. The bankruptcies follow the November 2020 filing by crypto lending platform Cred about two years after the company’s 2018 debut.

All three platforms filed under Chapter 11, which is designed to help debt-laden companies legally shed a bulk of their financial obligations, reshuffle business operations, and emerge with a stable business.

Those claims have triggered major questions about whether customers can recoup their frozen funds. Bankruptcy lawyers who spoke with Yahoo Finance say the answer depends on a variety of unsolved legal issues, as well as how bankruptcy judges apply long-established rules to a relatively new business. The stakes are high for customers who entrusted significant sums of money in now-bankrupt businesses.

Thad Wilson, a partner with King & Spalding, explains that crypto holders designated as unsecured creditors might never recoup their crypto. “You’re at the bottom of the totem pole,” he said of unsecured creditors.

Currently, there’s no precedent for categorizing cryptocurrency as an asset in bankruptcy, Elie Worenklein, a corporate restructuring attorney with Debevoise & Plimpton, told Yahoo Finance. Still, judges presiding over such cases will first determine if crypto assets belong to the bankruptcy estate. If they do belong to the bankruptcy estate, the judge will rank them among a hierarchy of creditors.

“Different crypto customers may have different rights against different crypto entities,” Worenklein said. “It’s not necessarily going to be the same answer for different entities that filed for bankruptcy.”

What’s the best-case scenario for crypto holders? Howard University law professor Matthew Bruckner says arrangements that clearly segregate a customer’s crypto from the platform’s own assets benefit crypto holders the most. In that case, the crypto assets must be set aside from the bankruptcy estate and returned.

Stephen Ehrlich, CEO and Co-Founder Voyager Digital Ltd., speaks during the Piper Sandler Global Exchange and FinTech Conference in New York City, U.S., June 8, 2022. REUTERS/Brendan McDermid

“So the major issue facing any crypto holder that had assets on a now bankrupt platform is: How are their assets being held by the platform?” Bruckner said.

Bankruptcy judges will make those decisions based on the terms laid out in each platform’s customer agreements, and the intentions they reveal between the platforms and their customers. Some agreements pool together customer crypto, controlling assets in a common account. Other agreements show that platforms act as custodians of crypto held in a dedicated account on behalf of a customer.

Pooled assets are more vulnerable than assets in a customer-dedicated or segregated account, Bruckner explains, because judges will likely treat them as part of the bankruptcy estate. And among the hierarchy of creditors, those assets likely qualify as general unsecured debt — a category that ranks far from the top of the creditor food chain.

U.S. Corporate Bankruptcy Hierarchy of Creditors

“So if the [crypto assets] are mixed into a pool of assets…in a big account, then they’re likely treated as a general unsecured creditor which is bad for crypto holders,” Bruckner said.

That’s what happened in the bankruptcy proceedings for crypto lending platform Cred. Unbeknownst to many of its customers, the company’s user agreements specified that crypto deposited in exchange for interest on the idle funds was neither segregated nor collateralized, and a bankruptcy court designated their claims as unsecured debt. Voyager made a similar argument, telling a bankruptcy judge that it considered its customers’ crypto as pooled assets that it could use on the customer’s behalf, and that those assets should become part of the bankruptcy estate.

However, Wilson points out that some crypto holders may be able to prove their assets remained segregated from a bankrupt platform’s assets, or those of fellow customers.

“Unlike cash where you can literally commingle it in a bank account, with crypto you have the ability to trace on the blockchain,” Wilson said. In the Celsius bankruptcy, he says, the creditors’ committee hired a forensic crypto analytics firm to trace the debtors’ crypto holdings over time, and the debtors recently agreed to a court-appointed examiner who will investigate similar issues.

However, for cryptocurrency holders designated as unsecured creditors, there’s no guarantee of any payout at all. They’ll stand in line for what, if anything, is left of the bankruptcy estate, behind post-bankruptcy vendors and administrative expenses, employees, bankruptcy lawyers, bankers and other advisers, and secured creditors that hold collateral against the company’s assets.

Inevitable fluctuations in cryptocurrency prices add to that uncertainty, along with unsettled lawsuits, and the possibility that a bidder could buy up the bankruptcy estate — all of which could leave more or less crypto to go around.

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.

Find live stock market quotes and the latest business and finance news

For tutorials and information on investing and trading stocks, check out Cashay



Women in Crypto Q&A: Roshni Cox Likens Web3 to ‘Inception’

Roshni Cox is the COO at Hellebore Broadcasting Company, an NFT-powered play-to-earn sports prediction game and minting ecommerce marketplace. Cox — who held previous roles with The Walt Disney…


Binance Hired Compliance SVP From Rival Crypto Exchange Kraken

Cryptocurrency exchange Binance hired Steven Christie as its senior vice president (SVP) of compliance from rival Kraken in May, according to a Wall Street Journal (WSJ) report Friday.


Canada records C$6.33 billion budget surplus over first four months of 2022/23

Canada recorded a C$6.33 billion ($4.67 billion) budget surplus for the first four months of the 2022/23 fiscal year, helped by higher tax revenues and the ending of coronavirus support measures, the finance ministry said on Friday. Program expenses were 20.1% lower, largely reflecting lower transfers to individuals and businesses as COVID support wound down, the finance ministry said. On a monthly basis, Canada posted a deficit of C$3.87 billion in July, compared to the C$10.86 billion deficit recorded a year ago.


Russia’s SWIFT alternative expanding quickly this year, says central bank

The reach of Russia’s alternative to the SWIFT international messaging system has grown at record pace this year, the central bank said on Friday, as Moscow ramps up efforts to resolve financial shortcomings wrought by sanctions. Sweeping Western sanctions on many of Russia’s top banks in the wake of Russia sending tens of thousands of troops into Ukraine have sorely limited lenders’ access to the global financial system. Alla Bakina, director of the central bank’s national payment system department, said 50 new entities had joined Russia’s alternative system this year, taking the total number to 440, of which more than 100 are non-residents.


Estate Planning: 16 Things to Do Before You Die

Estate planning goes beyond drafting a will. Use this pre-death checklist to account for your assets and ensure they are dispersed as you wish,

Yahoo Sports

Bo Nix leads No. 15 Oregon to thrilling comeback win over Washington State

Bo Nix is never boring. He threw for 428 yards and three touchdowns in Oregon’s win over Washington State.

Yahoo Sports

Mexico-Peru friendly result: Hirving Lozano’s late goal secures 1-0 win

Mexico got the confidence boost it needed Saturday in front of 62,729 fans at Rose Bowl in Pasadena, California.

Target, Walmart, Amazon All Have the Same Big Idea

After multiple retailers struggled with excess inventory, they are now pushing to get a taste of the holiday shopping frenzy early. Inventory management proved to be disastrous earlier this year as Walmart suffered from an excess of bad inventory through the summer. Target also dealt with inventory that wasn’t selling during the same period.

Motley Fool

Why Is Everyone Talking About Nvidia?

Sales have taken hits due to changes in crypto mining, U.S. legislation, and broad shifts in consumer spending.

Yahoo Finance

How to survive the worst bear market of all time

Today, with the stock market in meltdown mode, it’s natural to look back at other times of financial woe. The market environment in the 1970s can be particularly instructive.


IRS Could Change Your Tax Bracket To Fight Inflation

There are no reasons to be thankful for high inflation. However, unexpected — but not necessarily unfortunate — consequences of this year’s persistently high inflation rate will be…

You may also like

Leave a reply

Your email address will not be published. Required fields are marked *

More in Latest News