Crypto Bankruptcies

In 2022, several crypto firms underwent bankruptcy proceedings, resulting in the freezing of investors’ digital assets. These crypto bankruptcies led to legal actions against entities such as FTX Group, Gemini Trust, and Genesis Global Capital, highlighting a tumultuous phase in the crypto industry. The bankruptcy filings and associated turmoil contributed to a significant contraction in the crypto market, with a decline of more than $2 trillion in the total value of digital assets.

2022 Crypto Bankruptcies

In 2022, a series of crypto bankruptcies introduced what industry experts referred to as a “crypto winter,” signifying an extended phase of pricing fragility within the crypto market. This turbulent period led to the crypto market shedding more than $2 trillion in value, with bankruptcy filings resulting in the freezing of many investors’ digital assets.

By the end of December 2022, notable digital currencies such as Dogecoin, Bitcoin, and Terra saw a depreciation in value ranging from 55% to 100%, as reported by a number of financial news outlets. The instability in the crypto market can be traced back to the difficulties encountered by Terraform Labs and its associated digital asset, TerraUSD, in May 2022.

The challenges faced by Terraform Labs foreshadowed the collapse of several crypto lenders, encompassing firms such as Voyager Digital, Celsius Network, and Three Arrows Capital. This wave of crypto industry setbacks reached its climax with the bankruptcy of the FTX crypto exchange and its correlated hedge fund, Alameda Research, in December 2022.

Prior to these events, investors who were prohibited from executing customer withdrawals in bankrupt crypto firms went on to initiate cryptocurrency bankruptcy lawsuits. These legal measures are aimed at securing the return of their frozen funds, emphasizing the complexity of bankruptcy proceedings, customer assets, and the rights of unsecured creditors within the broader context of the digital asset landscape in the United States. 

The events have also drawn attention to the security and regulation of crypto holders’ assets, leading to increased scrutiny of the bankruptcy code and its application to crypto companies and crypto exchanges.

Companies and Exchanges Affected by Crypto Bankruptcy

The list of crypto bankruptcies involves crypto exchanges and lending entities like Genesis Global Capital and FTX Group. Several crypto companies sought chapter 11 bankruptcy protection following the insolvency of their firms, resulting in several defaulted loans. 

FTX

In November 2022, the crypto exchange FTX Group sought bankruptcy protection, and the connected hedge fund Alameda Research simultaneously filed for bankruptcy. This marked the first major crypto exchange to enter bankruptcy proceedings. Some account holders remain hindered from accessing their funds, and FTX’s investors included notable entities, including Canada’s largest pension plan.

The U.S. Securities and Exchange Commission initiated legal action against the firms’ owner, Sam Bankman Fried, who is facing criminal charges of fraud and conspiracy. Bankman Fried entered a plea of not guilty.

Following FTX’s financial collapse, more than one million depositors faced the loss of their assets, as per an FTX lawsuit lodged by Stephen Pierce. Several investors have since initiated additional FTX lawsuits to reclaim their funds.

BlockFi

Shortly following the collapse of FTX Group, crypto lender BlockFi filed for bankruptcy. BlockFi attributed its financial distress to a liquidity crisis, stemming from its reliance on a $400 million credit line from FTX, which had become essential to maintain its operations.

Genesis Global Capital

In January 2023, Genesis Global Capital initiated bankruptcy proceedings in the U.S. Bankruptcy Court in the Southern District of New York. Prior to the bankruptcy filing, the crypto lender imposed restrictions on customer withdrawals, effectively freezing customer assets.

The crypto firm, a subsidiary of Digital Currency Group, disclosed both assets and liabilities within the range of $1 billion to $10 billion. Genesis further estimated its obligations extended to more than 100,000 creditors. 

Gemini Trust

Gemini Trust, a key player in the crypto industry, became entangled in the cryptocurrency bankruptcy lawsuits, despite not having filed for bankruptcy itself. Nearly 340,000 investors in its lending program, Gemini Earn, incurred significant losses, amounting to hundreds of millions of dollars when Genesis Global Capital, a related entity, filed for bankruptcy. In response, Gemini Trust has subsequently reduced its workforce and suspended customer withdrawals from its Gemini Earn program.

The crypto company, along with founders, Cameron and Tyler Winklevoss (commonly referred to as the Winklevii or Winklevoss twins) is facing class-action lawsuits from investors. These plaintiffs, similar to those in lawsuits against other crypto entities, like FTX Group and Genesis Global Capital, have accused Gemini Trust of offering unsecured securities, further complicating matters within the crypto market and unsecured creditor rights.

Three Arrows Capital and Voyager Digital

In July 2022, crypto lender and broker Voyager Digital filed for bankruptcy protection, a decision that followed closely after hedge fund Three Arrows Capital’s own bankruptcy filing. Both firms restricted customer withdrawals immediately preceding their bankruptcy filings.

These financial struggles were exacerbated by the collapse of digital assets TerraUSD and Luna. Voyager’s bankruptcy proceedings revealed more than 100,000 creditors and estimated assets and liabilities ranging between $1 billion and $10 billion. 

Celsius Network

Celsius Network, a prominent crypto lender, filed for bankruptcy protection in July 2022 following financial challenges triggered by the collapse of digital assets TerraUSD and Luna. Once offering yields of up to 30% to crypto holders, the firm faced significant scrutiny.

In June 2022, the crypto company halted withdrawals for hundreds of thousands of account holders. The crypto firm has been embroiled in fraud investigations, facing allegations of mismanagement of customer funds and privacy, among other serious concerns.

Why Did the Cryptocurrency Bankruptcies Happen? 

The wave of crypto bankruptcies in 2022 is rooted in intricate financial dynamics, generally stemming from the collapse of TerraUSD and FTX. The interconnected nature of crypto exchanges and lenders creates a complex web where each company’s liquidity relies on investments and loans from other firms within the crypto industry.

FTX’s collapse occurred after it allegedly used customer funds in risky ventures with Alameda Research, subsequently facing a mass customer withdrawal of approximately $6 billion within a 72-hour window. This event, in conjunction with the collapse of Three Arrows, prompted the bankruptcy of Genesis Global Capital, as Genesis had funds entangled with both companies, ultimately losing them in subsequent bankruptcy filings.

BlockFi’s demise followed FTX’s bankruptcy filing, as FTX could no longer extend loans to the struggling firm. Furthermore, the bankruptcy filings of other crypto firms, such as Celsius, Three Arrows, and Voyager Digital, were precipitated by the collapse of TerraUSD and its associated digital currency, Luna, reflecting the volatile and interdependent nature of the crypto market.

How do Crypto Bankruptcies Impact Investors? 

The wave of crypto bankruptcies in 2022 had profound implications for investors, as a number of crypto lenders and exchanges froze customer assets shortly before filing for bankruptcy protection. This action resulted in several million customers losing access to billions of dollars, with many feeling that their legal rights were violated, as these funds often constituted life savings.

The repercussions extended into the 2023 tax season, where those who lost money in crypto bankruptcies faced obstacles in filing for losses. According to Bloomberg, the IRS foreclosed on the option for taxpayers to claim losses under tax code Section 165 if they suffered a substantial devaluation, making the process of claiming frozen assets in crypto bankruptcies particularly challenging.

Navigating bankruptcy proceedings as a creditor can be a complex process, leading some investors to file crypto bankruptcy lawsuits to recuperate their funds instead. For investors considering this path, hiring a crypto bankruptcy lawyer as soon as possible is essential for preserving your right to file, given the specific deadlines and legal intricacies involved in bankruptcy filings within the crypto industry.

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