A Crypto Bankruptcy Can Be an Investor’s Nightmare

The latest boom in the crypto market is giving investors a painful lesson in the risks of trading digital tokens through intermediaries.

In a bankruptcy restructuring, crypto investors will navigate uncharted territory.

“It is safe to predict that there will be litigation and there will be delays,” said Adam Levitin, a law professor at Georgetown University who studies bankruptcy.

Cryptocurrency exchange and lending services offer individual investors an opportunity to market, but the cryptocurrencies that customers place on these platforms may not belong to them in court. bankruptcy, according to regulators and legal experts.

If a crypto company goes bankrupt, users’ digital assets will potentially become bankrupt assets that attorneys, financial advisors, lenders, and other creditors will divide. Customer assets can be returned when lost, instead of just being returned to the user. Even if the customers of a troubled crypto company eventually gain access to their tokens, they could still suffer massive losses if the market turns against them during the bankruptcy. take place.

Many have had an incentive to put crypto assets in degrees Celsius to earn interest rates as high as 18%. Lenders took customer deposits and put them into decentralized financial investments to recover capital or lend money to other users for a fee.

In many ways, Celsius looks like a bank. But the company lacks the protections that banks have, such as federally backed deposit insurance. Celsius and other crypto intermediaries, also not registered as broker-dealers, provide account holders with important protections in the event of bankruptcy by keeping their funds separate from broker-dealer funds. In the United States, most cryptocurrency intermediaries instead possess simple money-transfer licenses issued by state governments, open to companies like Western Union.

How Celsius’s Cryptocurrency Lending Process Works:

Celsius set customer deposit in decentralized financial investments and lending to other users (including exchanges and market makers).

Client lending money to degrees Celsius in exchange for productivity. (Actually, this is an unsecured loan).

Celsius earns one return from borrowers and investors.

Celsius set customer deposit in decentralized financial investments and lending to other users (including exchanges and market makers).

Client lending money to degrees Celsius in exchange for productivity. (Actually, this is an unsecured loan).

Celsius earns one return from borrowers and investors.

In a recent article, Mr. Levitin argued that the easiest way to protect investors is by the Consumer Financial Protection Bureau, a federal regulator that requires cryptocurrency exchanges to keep Client’s funds in the bankruptcy remote agreement to segregate funds. He said the CFPB has explicit authority from Congress to take such steps but the agency has yet to do so.

A CFPB spokesman declined to comment.

Cryptocurrency companies as trading platforms

Coinbase Global Inc.

COIN 0.33%

has sought to reassure investors in recent weeks that their crypto assets are safe.

“We have strong legal and operational safeguards in place to ensure that our customer assets are protected under any circumstances,” said Coinbase Chief Legal Officer Paul Grewal. in an emailed statement on Thursday. “This includes accounting for these assets completely separate from any corporate funds.”

Coinbase Stock Plunges following a company disclosure in May that customers could be treated as general unsecured creditors in a hypothetical bankruptcy.

Celsius also tried to reassure customers just before they froze withdrawals. A company spokesperson told The Wall Street Journal in an email on Friday that it has not had any problems responding to withdrawal requests and that it has enough ether—a popular cryptocurrency—To meet its obligations.

Celsius CEO Alex Mashinsky criticized skeptics on Twitter, who suggested on Saturday that the company was in a bind, accusing them of spreading misinformation. The company froze accounts on Sunday night. As of Wednesday afternoon, assets were still frozen, and Mr Mashinsky tweeted that the company was “working nonstop” on the matter.

WSJ’s Dion Rabouin explains why Wall Street is betting big on crypto right now and what that means for the new asset class and its future. Photo compilation: Elizabeth Smelov

In the wake of bankruptcy, much will depend on what contract depositors agreed to when they put their digital assets in. Celsius’s terms of use make it clear that the legal status of a user’s crypto holdings will be unclear if the company defaults.

Some attorneys say the type of contract between the investor and the company can make all the difference and provide some title protection in a bankruptcy case. Jonathan Cho, bankruptcy and management attorney at Allen & Overy, said the disposition of client assets may depend on whether the company holds them in a manner consistent with the client’s ownership rights. established under the relevant commercial law.

For example, many companies have adopted a holding model, available under most states’ commercial laws, that helps define what ownership should be, Cho said. Celsius also has a lending arm that offers cash loans, collateralized with people’s crypto assets.

Jim Van Horn, bankruptcy attorney at Barnes & Thornburg LLP, said a bankruptcy judge may also have to decide whether Celsius’ depositors will even be treated as unsecured creditors or merely are investors.

State laws regarding ownership of assets in custodial accounts can be helpful for depositors. But they may not even work in a bankruptcy case if a judge determines that users are merely investors, Van Horn said.

Write letter for Paul Kiernan at [email protected]Alexander Gladstone at [email protected] and Soma Biswas at [email protected]

Edit & Amplify
Lending service C Network LLC this week froze all customer withdrawals. An earlier version of this article incorrectly named the company Celsius Networks LLC. (Fixed June 17)

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