The collapse of FTX, one of the world's largest cryptocurrency exchanges, has reignited the need for effective regulation in the industry. Founded in 2019, FTX was advertised as being a safe and easy option for investors and had received capital from high-profile investment firms. However, the exchange filed for bankruptcy in November 2022 and its founder Sam Bankman-Fried was accused of engineering “one of the biggest financial frauds in American history” with misappropriation of customer funds. As a result, provisional liquidators were appointed by The Supreme Court of The Bahamas to oversee FTX’s assets. To protect these assets, crypto wallets belonging to FTX were transferred to Bahamian government-controlled wallets. In addition, a Chapter 15 suit was filed in the Southern District of New York requesting recognition of the Bahamian liquidation as a foreign main proceeding under Chapter 11 and appointment of the JPLs as FTX Digital’s foreign representatives. Chapter 15 provides both debtors and creditors with powerful tools to protect assets located inside and outside of the US while providing an orderly climate for claims resolution.

3AC was the first major crypto firm to go bankrupt in 2022, after the collapse of Terra Luna triggered a ripple effect. 3AC, a BVI incorporated investment firm, filed for bankruptcy in both the BVI and New York under Chapter 15. Liquidators were appointed by the court to liquidate the assets of 3AC, although no mismanagement claims have been filed against its founders. The liquidators sought assistance from the US Bankruptcy Court to authorise subpoenas for discovery purposes. One of the related casualties from this collapse is Voyager Digital, who was unable to receive repayment from 3AC totalling US$670 million and filed for Chapter 11 bankruptcy protection. Additionally, Much Wow Limited was assigned to the Honourable Chief Justice Margaret Ramsay-Hale in voluntary liquidation proceedings pending in the Cayman Islands and owed approximately US€25.2m to 3AC. In conclusion, these events created an unfortunate domino effect that harmed many individuals and companies alike due to their interconnectivity.

In July 2022, Celsius Network, one of the world's largest and most sophisticated crypto lenders, filed for Chapter 11 bankruptcy protection due to a liquidity crisis. The filing resulted in an automatic stay which prevents creditors from taking pre-petition action against the debtor or its property. This provides breathing room for the debtor to implement a reorganisation plan. The company has been accused of misusing customer funds and running a Ponzi scheme. A complaint was filed against Celsius by Jason Stone and KeyFi, Inc., who were managing billions of dollars in digital asset investments for Celsius. The complaint accuses Celsius of disorganisation, mismanagement and fraud. Celsius responded with a claim that it was Stone who was misusing customer funds by stealing millions of coins from Celsius wallets. A motion by Stone and KeyFi to dismiss the causes of action brought by Celsius has recently been denied and both lawsuits continue to run alongside the Chapter 11 proceedings.

There is an expanding web of legal proceedings resulting from the current contagion in the digital assets sector, and while many of these proceedings are currently in the early stages, the far-reaching effects are already evident. As the above digital assets crossborder insolvencies run their courses, we expect that they will tackle some of the novel issues relating to the nature and location of assets, discovery and identification of relevant parties and we anticipate many more digital assets related filings in the Cayman courts.

The above is a condensed version of an article first published in ThoughtLeaders4 FIRE Magazine. Read the full article here.