The strategy of waiting for an eventual change in the crypto climate was echoed by Vincent Indelicato, a partner at the law firm Proskauer who is focused on corporate restructurings. "Stakeholders may very well want to use the bankruptcy process to wait out the crypto winter and hibernate until it thaws a little bit so that they could then capture the upside of the rebound," Indelicato said in an interview with CoinDesk.
The high volatility of cryptocurrencies created the extreme market conditions that saw crypto lender Celsius freeze customer withdrawals in early June and later confess to a $1.2 billion hole in its balance sheet. But an equally dramatic upswing in cryptocurrency prices could conceivably happen before the case – in the U.S. Bankruptcy Court for the Southern District of New York – is concluded. The possibility of a thaw in the crypto winter was mentioned at the first bankruptcy hearing by Patrick Nash – a partner at Kirkland & Ellis, the law firm representing Celsius – who added that the majority of customers are expected to remain "long crypto."
Imagine a hypothetical account holder who has $1 million worth of bitcoin on the bankruptcy petition date of his or her exchange, Besikof suggested. In this example, if bitcoin goes down, recoveries on the claim will also likely go down. But if bitcoin doubles, would that creditor have a claim that's now worth $2 million? Could he or she recover more than $1 million? The courts will have to decide, Besikof said.
"I could see exchanges arguing that the account holder's recovery is capped at $1 million, even if the exchange is flush with cash and crypto assets from the price increases," he said. "That argument would create a potential windfall for the equity holders but would be highly detrimental to account holders. This concern could be alleviated if the plan provided for the return of some or all of the customer's crypto."
The situation is somewhat analogous to certain oil and gas companies that filed at the bottom of that market, only to become solvent later on in case oil prices increased, Besikof said. "However, in those cases, creditors were actually paid in full – the value of what they were owed did not also increase with the price of oil." It's worth highlighting ongoing legal disputes involving cryptocurrency firms, such as the now infamous customer losses associated with collapsed exchange Mt. Gox, which entered bankruptcy proceedings in Japan back in 2014. A ruling on the legal status of property of the crypto assets – approximately 200,000 BTC held by the Mt. Gox bankruptcy estate that kept appreciating in value until it eventually overtook the total legal claim value of all creditors – might have been useful. But the court punted on the issue by switching to civil rehabilitation, a type of proceeding in Japan that bears some similarity to U.S. Chapter 11 restructuring, where a debtor retains the power to continue to manage its business.
That said, Mt. Gox is only really an indication of how things have progressed within the slow-moving jurisdiction of Japan, and doesn't provide a clear indication of what will happen under the U.S. bankruptcy code, noted Thomas Braziel, the founder of 507 Capital, a firm that has purchased Mt. Gox bankruptcy claims.
A crypto-market value appreciation, should it happen while the case rumbles on, will become an important driver for customers of Celsius, who already hold conviction in the technology and who may also want to avoid tax and other unintended consequences of cashing out, said Indelicato. "This is very much uncharted territory, and because of that I think the conventional toolbox and ruleset really gets thrown out the window," Indelicato said. "Just take the playbook and rip it up. For those reasons, the Celsius and Voyager Digital cases will require innovation, creativity, and people who can think outside the box."
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