The crypto winter has brought a flurry of bankruptcy filings into the digital asset space. As pioneering cryptocurrency platforms collide with the Bankruptcy Code, unprecedented questions of law have left customers asking a fundamental question: who owns my crypto?
This question is especially prevalent in cases where the debtor company’s platform offered custodial accounts to customers. Digital asset custodial accounts have unusual attributes that have revealed cracks in customer protection when custodians have filed for bankruptcy.
Highlights
Counterparties should continue to follow their current contractual obligations
Silicon Valley Bank’s parent company bankruptcy filing will not impact contractual rights
Counterparties should be vigilant and consider alternate financing arrangements
The FDIC receiverships of Silicon Valley Bank and Signature Bank have caused certain early-stage companies to face potentially crippling near-term liquidity issues. These liquidity issues may result in a company becoming insolvent. Therefore, boards of directors of such companies need to consider their fiduciary duties as well as steps that can be taken to mitigate risks.
Fiduciary duties are typically owed to the company for the benefit of its owners.
This FAQ has been updated to take account of developments through March 15, 2023.
US governmental authorities, including the US Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, took actions to provide both insured and uninsured depositors of Silicon Valley Bank (SVB) (as well as Signature Bank) access to their deposits beginning Monday, March 13. However, despite these actions, many customers are still dealing with the aftermath of an uncertain weekend, and practical questions remain to be answered.
The recent failures of Silicon Valley Bank (“SVB”) and Signature Bank have dominated news headlines for the last several days. The seemingly abrupt failure of two large financial institutions and the subsequent revelations that some businesses could lose a substantial amount of deposits have a lot of business owners concerned about the security of their funds. However, recent actions by the Federal Reserve Board (“FRB”) and United States Treasury Department have substantially reduced the risk that depositors will lose deposits.
After depositors rushed to withdraw funds from Silicon Valley Bank (SVB), on Friday, March 10, 2023, the US bank was closed by the California Department of Financial Protection and Innovation (DFPI), and the Federal Deposit Insurance Corporation (FDIC) was named receiver of the closed bank.
You represent the unsecured creditors committee in a complex Chapter 11 case, where you have reason to believe that the debtor’s officers and directors have, and continue to, engage in self-dealing and are breaching their fiduciary duties by not advancing a plan in the best interest of creditors. So, the committee asks you to seek the appointment of an examiner to investigate.
This alert provides background on the failure of Silicon Valley Bank and explains significant recent developments, including the subsequent failure of Signature Bank and the U.S. government’s announcement that the Federal Deposit Insurance Corporation (FDIC) will make whole all depositors of both institutions. This alert also describes the new program simultaneously announced by the Federal Reserve to provide additional liquidity to the banking industry.
Run on Silicon Valley Bank
Following the collapse of Silicon Valley Bank (SVB), there are many questions being asked across the financial and tech space: what caused the bank to collapse? Could it have been prevented? What could the bank itself and indeed its 40,000 customers - mostly in tech – done differently to mitigate risk and minimise impact.
Given SVB’s involvement in funding many fledgling tech start-ups and scale-ups, we look into what the Bank’s failure could have spelled for the viability of these businesses, and indeed the customers they supply into.