Deirdre O’Connor, Epiq: How Will Bankruptcy Courts Shape Crypto Regulation?


Extract from Deirdre O’Connor’s article “How Will Bankruptcy Courts Shape Crypto Regulation?”

Last year’s cryptocurrency market crash a/k/a “the crypto winter” did not cause trembles in the U.S. economy, but it caused enormous losses to its investors. The near collapse of this decentralized currency market resulted in bankruptcy filings by several cryptocurrency exchanges. Creditors have been waiting with bated breath to see how the courts will decide key questions such as how will the tussle between the US courts and the Bahamian authorities play out; what assets are allocated to which entity; what will recoveries look like for creditors; and would criminal restitution against founders and directors be part of the US bankruptcy? How judges rule on these issues will certainly provide crucial insolvency guidance for the owners, investors, and regulators of crypto assets.

Given recent governmental actions in this sector, it appears that 2023 will be the year of crypto regulation. As the issuer of the dominant global fiat currency, the U.S. would be the most likely venue for devising a global crypto regulatory framework.  Cryptocurrency currently lacks a centralized framework of trust aka “intermediaries” and its “trust” relies solely on the verification methodology with the blockchain for those transactions.  The absence of regulation has certainly made it possible for the rapid growth of exchanges but unfortunately for investors has also allowed undetected fraud. The U.S. system of a centralized finance is credited with protecting consumers and investors, ensuring financial institution stability, curbing illicit finance, and maintaining economic competitiveness. Not surprisingly, the U.S. bankruptcy courts are the first official tribunal confronted with issues of first impression with respect to debtor and creditor rights. The decisions made by bankruptcy judges in these initial cryptocurrency cases will guide the course of regulatory framework and compliance protocols for this new asset class. Current and future crypto investors need to monitor these court decisions along with regulatory activity that will likely occur this year.

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