Crypto is facing down the bankruptcy question
Good morning, and welcome to Protocol Fintech. This Friday: crypto bankruptcy questions, Revolut’s new Reader and OpenSea layoffs.
Off the chain
Revolut isn’t content with being a consumer super app. It wants to be a business super app, too. That’s the apparent rationale behind introducing Revolut Reader, a competitor to Square’s card-reading hardware. Apple’s Tap to Pay promises to make such hardware obsolete, but that’s going to take a while to roll out, and in the meantime, there’s payment-processing money to be made. I wonder if Block will take the threat seriously and double down on its international expansion, or just continue to indulge its CEO’s bitcoin fixation.
Liquidation takes coordination
The first day in bankruptcy court for crypto lender Voyager Digital came with a warning, from the company's own attorney, that this could get tricky. “I think for many of us, this is unchartered territory,” said Joshua Sussberg, an attorney with Kirkland & Ellis. “There will be many potential legal issues of first impression.”
The U.S. bankruptcy courts have never dealt with an insolvency proceeding of a crypto company on the scale of Voyager Digital or Celsius. Both companies, which operate lending businesses, are entering Chapter 11 bankruptcy with billions in both assets and liabilities. The filings came just a week apart: Voyager on July 6 and Celsius on July 13.
The proceedings will be watched closely. Policymakers, industry executives and customers eager to get their crypto back will all have questions.
- There are established rules and insurance for customer funds if a broker-dealer or bank goes under. Crypto doesn’t have anything like that.
- The only real precedent came almost a decade ago, on another continent. Customers of Mt. Gox are just now preparing to get some of their crypto back, eight years after the exchange collapsed into bankruptcy and lost 850,000 bitcoins total, valued at $500 million at the time. While the bitcoin customers receive back will be worth significantly more than when it was stolen, creditors are receiving only a fraction of their initial claims.
- Bankruptcies can be years-long proceedings, said Nizan Geslevich Packin, a professor of law at the Baruch College Zicklin School of Business. One major question, said Packin, is the priority of the creditors: who gets paid back, how much and in what order.
Crypto customers don’t have special protection. That’s becoming clearer and clearer.
- Coinbase sent a scare into the crypto world in May by warning in an SEC filing that customers could be considered unsecured creditors if the exchange went bankrupt. CEO Brian Armstrong quickly assured customers that Coinbase was not at risk of bankruptcy and the company was only following new federal guidance with the disclosure. But he acknowledged that a court could pool customers' funds as part of the bankruptcy estate, whereas customer accounts have to be kept separate in a stockbroker bankruptcy.
- In a smaller-scale crypto bankruptcy case, the lending platform Cred classified its customers as unsecured creditors in its November 2020 Chapter 11 filing, where it reported liabilities in excess of $160 million. The court approved a liquidation plan for the company that started last year.
Regulation is coming. But it likely won’t arrive soon enough to provide relief in the Voyager or Celsius cases.
- The crypto regulation bill from Sens. Cynthia Lummis and Kirsten Gillibrand includes a section that aims to safeguard customer assets in the case of a crypto bankruptcy and treat digital assets similar to commodities in proceedings.
- SEC Chair Gary Gensler indicated on Thursday in an interview with Yahoo Finance that the agency has authority to tailor parts of securities law to help bring crypto companies into compliance, potentially increasing investor protections in the process.
The current crash should leave more crypto companies open to accepting stronger oversight and regulation, said Diogo Mónica, co-founder and president of Anchorage Digital, the first federally chartered crypto bank. "People are going to remember this: What happens if the company fails? How are you running risk management?" Mónica said. "All of a sudden those questions are being asked again that, to some extent, get forgotten during bull markets.”
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On the money
On Protocol: The crypto market shed $2 trillion in seven months. Here’s everything you need to know about the crypto market crash, from layoffs to bankruptcies, and its effect on consumers, investors, employees and regulators.
The CFTC added 34 firms onto its Registration Deficient List. Putting the number of firms on the RED List at just over 200, 34 unregistered foreign entities, many of them crypto firms, were added to the list of firms acting in a capability that requires registration with the CFTC and failing to do so.
Also on Protocol: OpenSea announced Thursday that it was laying off 20% of its workforce due to "an unprecedented combination of crypto winter and broad macroeconomic instability” to prepare for the “possibility of a prolonged downturn.”
Celsius acknowledged a $1.2 billion gap on its balance sheet. The troubled crypto lender holds $4.3 billion in assets and $5.5 billion in liabilities, according to a recent court filing. FTX had reportedly passed on a deal to acquire Celsius due to the gap.
Coinbase’s global market share dropped to 2.9%. The crypto exchange had peaked at about 8-9% in November last year, and is now reportedly ranked 14th in average trading volume by dollars, down from 4th last year.
The Bank of England’s Deputy Governor John Cunliffe wants to make sure everyone understands the urgency of crypto regulation, so he came up with an analogy. “To be successful and sustainable, innovation has to happen within a framework in which risks are managed: People don’t fly for long in unsafe aeroplanes,” he said in a speech.
Daniela Brozzoni started working as a bitcoin developer straight out of high school, landing an internship at Blockstream. Why bitcoin? It’s different from other types of crypto, she says. “With other coins, you have a rich CEO who just wants to get richer. With bitcoin, there is no CEO, and I really like that,” she told CoinDesk.The chief executive of the U.K.’s Financial Conduct Authority, Nikhil Rathi, thinks there’s a need for global cooperation on crypto regulation, and is ready to link arms across the Atlantic with U.S. regulators. “I don’t think there’s any fundamental sort of divergence of view or approach,” he said.
Yuga Labs, the creator of the Bored Ape Yacht Club, has a lock on the top NFT collections following its acquisition of Larva Labs’ properties. Over the last 30 days, four of the top five collections by trading volume were managed by Yuga.
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Thanks for reading — see you Monday!