CARRY ON KEEPING CALM – A REVIEW OF THE RECENT DEVELOPMENTS IN THE CRYPTO ASSET WORLD Authored by Hayley Çapani, Legal Director and Aadil Qureshi, Associate, and Andrew BowdenBrown, Partner, at Shoosmiths
In our previous article from June 2022, Keep Calm and Carry On - Unpicking Crypto Relationships In Any Insolvency, we discussed developments in the crypto market, the meaning of crypto assets and how insolvency practitioners and their advisors identify the owner of crypto assets on insolvency. In this follow up article we will explore how the cryptosphere has advanced since the previous article, revisit some of the predictions we made and identify key updates in the crypto market and what those updates mean for the insolvency world. Those well-versed with the crypto world will know that what we (and the wider crypto sector) referred to as the “winter of discontent” back in June 2022 proved to be exactly that and then some. At the time of writing there were some palpable insolvency concerns around Celsius Network as well as Three Arrows Capital (3AC). What has ensued in the 18 months since then was beyond predictable, with 3AC ordered to liquidate by a British Virgin Islands Court in June 2022, Celsius and Voyager filing for Chapter 11 Bankruptcy in July 2022 as well as the shockwave-inducing collapse of FTX in November 2022. A simple explanation as to the cause of the above crashes could be attributed to Bitcoin’s brutal crash from its all-time high value of $68,000 to below $20,000 in June 2022. However, applying such an explanation would be reductionist to say the least. Indeed, various other factors such as the overleveraged position of key players within the industry, the market sentiment and widespread euphoria within the crypto bubble (and the opposite when the bubble popped) and the welldocumented fraudulent actions of notable individuals (see Sam Bankman-Fried) cannot be ignored for the roles that they have played. Regardless of the cause, the effect has been misery to millions, with the “winter of discontent” wiping out $2 trillion (yes, with a T) worth of value from the total crypto market.
As ever though, the saying “every cloud has a silver lining” rings true. Whilst the above, and the general downtrend prevalent in crypto over the last eighteen months, may not have turned a profit on investment, the various collapses have meant that Courts across the world have (finally) been able to consider numerous legal points surrounding cryptocurrencies. The increased and well-publicised market turmoil has also prompted various governments and regulators to step in and create a regulatory framework for the “new asset on the block”. “Crypto is property” We discussed in our previous article that the Courts have shown a great degree of flexibility when considering crypto-related issues, including the several cases in English Courts where cryptocurrency has been recognised as property. This point was affirmed by the Southern District of New York’s Bankruptcy court, in considering the bankruptcy of Celsius. The New York court also aptly demonstrated its flexibility by ruling that the assets held by Celsius in “custody” accounts belonged to customers and those held in “interest-bearing” accounts belonged to Celsius, a finding which resulted in the Court approving a refund of $297 million in BlockFi’s bankruptcy a few months later. The distinction made by the New York Court concurs with how we predicted Courts would operate when analysing insolvency exchanges, by reviewing both the written terms and conditions as well as the day-today business practice. In turn, this provides a useful mechanism for Insolvency Practitioners to use in characterising crypto assets when dealing with an insolvent company (whether that be an exchange or a customer of an exchange). By determining where title to a crypto asset is vested, Insolvency Practitioners can either concede ownership without expending significant time and cost or embark on recovering the asset, noting first and foremost that crypto assets are just that: assets.
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