The bankruptcy court presiding over the FTX Trading bankruptcy last month issued a memorandum opinion addressing valuation of cryptocurrency-based claims and how to “calculate a reasonable discount to be applied to the Petition Date market price” for certain cryptocurrency tokens.

Introduction

The first stage in any restructuring by way of a scheme of arrangement in the Cayman Islands involves meetings of such classes of creditors or shareholders (as the case may be) to consider, and if thought fit, approve the terms of the scheme. An application to Court is required for orders to be granted for convening such meetings. If, at these meetings, the requisite statutory majorities are satisfied, the second stage involves obtaining Court sanction for the proposed scheme to become effective.

Bermuda, the British Virgin Islands and the Cayman Islands all have legislation that enables a company to present a scheme of arrangement to restructure its debts.

One of the defining features of a scheme of arrangement carried out under the relevant legislation in each jurisdiction is the ability to cram down dissenting creditors or members (or classes of them, as the case may be) if the requisite statutory majorities are satisfied and Court sanction of the proposed scheme is obtained.

Who owns cryptocurrency held by a cryptocurrency exchange? Do the cryptocurrency assets belong to the customers who deposited the crypto with the exchange, or do the cryptocurrency assets belong to the exchange itself? The answer to this question will have huge significance, both in terms of creditor recoveries as well as preferential transfer liability exposure.

In this second part of our blog exploring the various issues courts need to address in applying the Bankruptcy Code to cryptocurrency, we expand upon our roadmap.

Many authorities and commentators have considered cryptocurrencies, and the blockchains that undergird them, as a potentially disruptive force in the financial industry. Now, that disruption has made its way to a different side of finance—bankruptcy, and during the past year, the United States bankruptcy courts have had to confront many unexpected challenges involved in dealing with cryptocurrency.

A recent judgment of the United Kingdom Supreme Court in Brake & Anor v The Chedington Court Estate Ltd [2023] UKSC 29 (10 August 2023) is likely to be a welcome decision for liquidators and trustees in bankruptcy in setting clear boundaries as to who has standing to challenge their decision-making in corporate or personal insolvency contexts.

How close is too close? The answer to this question can have dire implications for people and companies involved in the cannabis industry who wish to seek bankruptcy protection.

Are bankruptcy doors now opening for cannabis companies? A decision last week from a California bankruptcy court indicates perhaps so, at least for cannabis companies that are no longer operating.

Factual Background

Last November we wrote about the Fifth Circuit Court of Appeals’ decision in Highland Capital Management, L.P., where the court reversed the bankruptcy court’s approval of a plan’s exculpation clause for non-debtors and limited the universe of parties covered by that provision. Relying on Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm.