The U.S. bankruptcy system is getting its first experience dealing with cryptocurrency businesses. It’s impossible to identify every possible novel cryptocurrency issue in bankruptcy in advance, but several are likely to arise: the treatment of custodial funds; the treatment of collateral held by cryptocurrency lenders that go bankrupt; avoidance actions; the treatment of collateralized crypto loans made to debtors; plan feasibility; and enforcement of orders against decentralized autonomous organizations. Cryptocurrency companies, particularly exchanges, often hold customer funds, both cryptocurrencies and cash. The legal capacity in which these funds are held is a matter of some uncertainty. Possible legal characterizations are a bailment, a trust or as “financial assets” governed by Article 8 of the Uniform Commercial Code — all of which would make the custodial funds customer property — or simply as property of the cryptocurrency exchange itself. Complicating this issue is that some cryptocurrency businesses rehypothecate customer funds — that is, they use customers’ funds as collateral for their own borrowings. When customer funds are rehypothecated, who has rights to the collateral, the customer or the lender? While there are well-established rules for this regarding securities and commodities, it is unclear if those rules would apply to cryptocurrency.
Read more : Looming Legal Issues in Cryptocurrency Bankruptcies.
