Bankruptcies begin for crypto firms as “crypto winter” settles in

The recent crash in cryptocurrency prices has erased nearly $2 trillion in market value and forced three large firms into bankruptcy proceedings in the United States Bankruptcy Court for the Southern District of New York (SDNY):  Three Arrows Capital, Voyager Digital, and Celsius Network.

The cryptocurrency hedge fund Three Arrows Capital was the first domino to fall. It suffered heavy losses on trades connected to the collapse of the Terra algorithmic stablecoin, which in turn triggered margin calls and subsequent defaults on over $1 billion in loans.

Three Arrows Capital entered liquidation proceedings in the British Virgin Islands on June 29 and a chapter 15 proceeding in the SDNY on July 1, which was assigned to Judge Martin Glenn. According to the liquidator, the fund had over $3 billion of cryptocurrency assets under management before the market crash and initiated the chapter 15 proceeding to help protect assets in the United States and facilitate the foreign liquidation proceedings.

Voyager, a cryptocurrency brokerage and lending firm, was exposed to Three Arrows Capital on a $650 million loan. The company said that the Three Arrows Capital default and the general fall in the markets created a “run on the bank” scenario for its retail-facing business, resulting in a chapter 11 bankruptcy filing in the SDNY on July 5, which was assigned to Judge Michael Wiles.

In bankruptcy filings, the company declared holdings of over $1.3 billion of crypto-assets on $2.3 billion of retail deposits. The company explained that it is pursuing a two-track reorganization process. It has engaged a marketing process for a sale or financing transaction, but if it is unable to find a strategic partner, then the company plans to reorganize through an equitization plan in which Voyager’s retail customers will receive a stake in the reorganized business and/or a pro-rata payment from the company’s existing cryptocurrency holdings, plus a share of any recovery on the $650 million Three Arrows Capital loan.

Finally, Celsius, a cryptocurrency finance platform and lender based in New Jersey, filed a chapter 11 bankruptcy in the SDNY on July 13, which was assigned to Judge Martin Glenn. The company stated that its filing was not substantially caused by exposure to Three Arrows Capital, but was instead attributed to a broader collapse in loan portfolios based on market conditions.

In bankruptcy filings, the company declared holdings of $1.75 billion in cryptocurrency, $620 million in performing loans, and $700 million in cryptocurrency mining assets, against $4.2 billion in retail deposits. Unlike Voyager, Celsius did not propose a reorganization plan and instead explained that the company will be working with stakeholders to develop a path forward.

These bankruptcy cases will likely present many novel questions related to the status of cryptocurrency under federal and state law. Market participants should pay close attention to case law as it develops.

If you have any questions regarding these cases, please contact your DLA Piper relationship attorney or one of the authors.

*Camille Perral is a DLA Piper 2022 summer associate.