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The Crypto Burrito (Volume IV): Understanding 2022’s Crypto Bankruptcy Filings

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2023-01-20
The Crypto Burrito (Volume IV): Understanding 2022’s Crypto Bankruptcy Filings

2022 was the year that saw an unprecedented number of bankruptcy filings from crypto and blockchain companies due to exposure to one another. In the first half of the year, Terra's fall from grace triggered the bankruptcy of Three Arrows Capital, Voyager Digital, and Celsius Network. BlockFi was also not in a good place after this event, but this crypto lender and Voyager Digital received financial support from FTX so they escaped bankruptcy by a hair's breadth. Then in November, FTX and Alameda collapsed in one fell swoop. As a result, the ones who barely escaped death just a few months ago then had to face their inevitable demise.

A lot fell and filed for bankruptcy, but not all deaths were the same. Suddenly, a whole host of bankruptcy options are known by the average crypto users, because how a firm applies for bankruptcy affects the possibility of recouping funds for retail investors. This is a not-so-quick guide to the different bankruptcy filings of crypto firms in 2022.

The Crypto Burrito (Volume I): Ethereum Merge

The Crypto Burrito (Volume II): Terra’s Fall From Grace

The Crypto Burrito (Volume III): The Never-Ending Saga of FTX

The Crypto Burrito (Volume IV): Understanding 2022’s Crypto Bankruptcy Filings

Chapter 15 Bankruptcy Code

The one bankruptcy case that deviates markedly from the majority is that of the disgraceful Three Arrows Capital (3AC). Teneo, the appointed 3AC liquidators, chose to file for the Chapter 15 Bankruptcy in a U.S. federal bankruptcy court in the Southern District of New York before moving on with the primary proceeding that took place in the British Virgin Islands (BVI). How is that so?

Originally registered in Singapore for the ‘fund management business’ and later moved its headquarters to BVI but 3AC funding activities involved global investors and interested parties, a large portion of whom are domestic U.S. companies. Chapter 15 Bankruptcy is intended to simplify the coordination between the U.S. courts and authorities of foreign countries dealing with a foreign insolvent firm. More importantly, 3AC liquidators can ‘afford protection and maximization of the value of their assets’, meaning that the U.S. creditors can’t lay a finger on the collapsed hedge fund’s holdings in the country. Similarly, Teneo also applied for permission from the Singapore High Court and was granted the right to 3AC’s assets in Singapore.

In short, creditors in the U.S. and in Singapore cannot access 3AC remaining assets, and by ‘creditors’, we are referring to secured creditors only, i.e. issuers of a loan or credit backed by collateral. In general, retail investors are considered unsecured creditors, thus will be the last in line to receive distributions from the liquidation process, if any. The five entities to be disclosed as members of the creditor committee are Voyager Digital, Digital Currency Group, CoinList. Blockchain.com. Below are some of the loans 3AC defaulted on:
• Deribit: 1,300 Bitcoin and 15,000 Ethereum at 2.5% interest rate p.a. plus 0.15% per day if 3AC failed to maintain the minimum balance of the borrowed coins in their account;

• Voyager: 15,250 Bitcoin and 350,000,000 USDC at undisclosed interest rate;

• Celsius: 50,226,027.40 USDC and 25,118,150.68 USDC at undisclosed interest rate;

• Genesis Asia: US$2,360,302,065 at undisclosed interest rate;

• Moonbeam Foundation: 200,000 MOVR and 10,000,000 GLMR at undisclosed interest rate;

• HashKey: 444,196.08 USDT at an undisclosed interest rate;

• CoinList: 350,000,000 USDC vat undisclosed interest rate

There are at least 32 creditors according to Kyles Davis’ affidavit, who lended US$3,145,294,314.91 in capital and stablecoins, 18,194 Bitcoin and 17,231 Ethereum.

The progress so far? Eh.

Teneo mentioned ‘limited cooperation’ from the co-founders of 3AC, therefore the liquidator is still working on collecting information regarding the fund’s financial records and relevant information. The only liquidation as of now, according to the official document by Teneo, is the Starry Night NFT Collection. Teneo had to make an unprecedented move towards Zhu and Davis, that is, to serve Davis a subpoena via Twitter - after the email subpoenas without any reply. Please refer to this website for updates on the 3AC proceeding.

Chapter 11 Bankruptcy Code

First, what is Chapter 11 of the United States Bankruptcy Code?

When an institution is unable to pay its creditors, it can file for bankruptcy under Chapter 11 which allows for a reorganization with jurisdiction from the court while being in operation. This type of bankruptcy filing is very complicated, requiring a lot of court hearings and being notoriously time and resource intensive; only the rich ones going bankrupt can afford to go through these proceedings. However, not all institutions filing for Chapter 11 can be reorganized. Some cases may be converted to Chapter 7 (also known as liquidation bankruptcy) or may end up being dismissed.

For Chapter 11 Bankruptcy Code, there is a clear hierarchy of who is prioritized to get paid first. Unfortunately, retail investors are almost the last in line to expect any recovery of their money, unless they are proven to be the victims in a lawsuit against the debtor.

In 2022, the crypto firms filing for Chapter 11 were Celsius Network, FTX, Alameda Research, Voyager Digital, and BlockFi.

Celsius Network

The ruling of the Celsius case already came in; but it doesn’t rule in the favor of Celsius’ Earn account holders. Per the Terms and Conditions of Celsius Earn, the title and ownership of Earn Assets deposited into Earn Accounts are ‘unambiguously transferred’ from account holders to Celsius. That does not only highlight the ‘not your key, not your coin’ motto, but also the ‘not your bank, not your insured deposit’ as introduced by The Block.

Voyager Digital

Voyager was hit hard by 3AC. It took them only half a month to announce their exposure to the hedge fund, secure a loan from Alameda and proceed with the Chapter 11 Bankruptcy. All customer activities on Voyager have been suspended temporarily since July 1, 2022, which remains under Chapter 11 protection. However, cash (in US-Dollar) is available for withdrawal immediately after the Court approved Voyager to release the funds in custody in their Metropolitan Commercial Bank account. Regarding the asset bid, Voyager announced in December 2022 that the highest bid was made by Binance.US at US$1.022 billion. If the creditors agree on the implementation of this bid, the distribution of their assets will later take place via Binance.US in the cryptocurrencies customers had on Voyager as of July 05, 2022.

Updates on Voyager’s proceedings can be found here.

FTX and Alameda Research

At the beginning of November, FTX and Alameda were rumored to have improbable financial reports that massively inflated their balance sheets and evaluation. Thus, users created a bank run, causing FTX to halt withdrawals altogether due to $8 billion of fund deficit. Unable to call for enough money in time, FTX, FTX.US, and Alameda Research filed for Chapter 11 Bankruptcy. John Jay Ray III, an attorney specializing in corporate restructuring who managed the Enron case, took the CEO position of FTX. Even though he had more than 40 years of experience, John said that the FTX case was the worst he had ever seen. The case is still unfolding and the next court hearing is scheduled to happen in October 2023.

As aforementioned, retail investors are likely the last in line to be able to recoup their money from FTX. That's why they instigated legal proceedings against Sam Bankman-Fried in an attempt to have repayment priority over other creditors. It's unsure whether retail investors can win in this case.

Those Who Barely Escaped LUNA Were Ultimately Rekt by FTX

BlockFi and Voyager Digital were the two firms that were extremely affected by the meltdown of LUNA in June. The exposure of the collapse wiped out $650 million from Voyager and an undisclosed number from BlockFi.

Voyager filed for bankruptcy under Chapter 11 in July 2022 and was bought by FTX in September. After FTX fell, Voyager had to look for another buyer and Binance.US won the bid in December.

Different from Voyager, BlockFi struggled but did not go bankrupt after the LUNA incident. Though it didn't technically file for bankruptcy, without FTX buying back and Alameda's credits, it was unlikely that the crypto lender could continue operation for much longer. However, doom was inexorable. Only three months after FTX extended its money for help, BlockFi had to apply for Chapter 11 following FTX's example.

These are two unfortunate cases that narrowly escaped doom from the LUNA's fiasco, but in the end, couldn't get away from what seemed to be a predestined demise.

Genesis suffered greatly from two incidents too. In June, it was reported that Genesis lost hundreds of millions USD, and in November, following FTX's downfall, the firm had to suspend customer redemptions. While the exact amount of loss was not published, it is highly likely that Genesis was among the hardest hit. The crypto company denied bankruptcy possibility ever since, but has just filed for Chapter 11 Bankruptcy in the Southern District of New York.

As FTX and Alameda were among the biggest crypto firms, their collapse led to a domino effect on other companies. The full effect may not be apparent just yet, because many struggling institutions and individuals are hanging on and waiting for official court rulings.

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