Much discussion has been had recently about the fact that cryptocurrencies (tokens and coins) do not fit neatly into a generally accepted financial asset classification. The value of most cryptocurrencies is not pegged to any tangible commodity or fiat currency.
In bankruptcy parlance, the lookback period does not look good for the crypto industry. In the last 90 days, the cryptocurrency markets have suffered huge losses, and in the last 14 days, two major players have sought bankruptcy protection. During the prior 365 days, nearly three trillion dollars of value has been stripped from the digital wallets of cryptocurrency investors, and the industry has been forced to eliminate thousands of jobs.
News outlets and industry publications have been publishing information about recent “crypto winter” bankruptcies. In order to understand the impact of these bankruptcies as well as how they may impact your investments, it is important to understand what is currently known about these recent filings.
Three Arrows Capital Liquidation and Bankruptcy
The Consolidated Appropriations Act of 2021 (the CAA), which President Trump signed into law on December 27, 2020, amends several provisions of the Bankruptcy Code. While a number of the amendments are applicable only to small businesses (e.g., businesses eligible to file under the new small-business subchapter of the Bankruptcy Code and/or businesses eligible to receive PPP loans), several others have more general application, as discussed below.
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Amendments of More General Application
In the United States, in a typical plain vanilla lending arrangement, if a counterparty files for bankruptcy, an automatic stay of enforcement actions is imposed that would prevent a lender from (i) foreclosing on the property of the debtor, (ii) terminating contracts with the debtor, (iii) commencing or continuing certain enforcement actions against the debtor or its property and/or (iv) setting off amounts owed under such arrangements (in each case unless a motion is filed and granted in the related bankruptcy case).
In In re KB Toys Inc.,1 the US Court of Appeals for the Third Circuit affirmed the holdings of the lower courts that claims subject to disallowance under Section 502(d) of the Bankruptcy Code are “similarly disallowable in the hands of the subsequent transferee.” According to the Third Circuit, when a creditor owes property to the estate, until that property is returned to the estate, that creditor’s claim, regardless of who holds it, is impaired, and the subsequent sale of that c
On May 4, 2012, the Delaware bankruptcy court inIn re KB Toys, Inc., et al. (KB Toys), handed down a thoughtful decision addressing the issue of whether impairments attach to a claim or remain with its seller. The KB Toys court held that “a claim in the hands of a transferee has the same rights and disabilities as the claim had in the hands of the original claimant. Disabilities attach to and travel with the claim.”