Published on Jan. 9, 2024

Updated on Jan. 31, 2024

With cryptocurrency exchanges facing a string of bankruptcies, users are learning their funds may not belong to them anymore. To resolve this issue, regulators should not resort to allowing bankruptcy courts to resolve the issue and should instead look to a solution that already exists.

By: Tyler Kraft*

I.              Introduction

            Cryptocurrency and cryptocurrency exchanges are currently in the news for all the wrong reasons.^[1]  Much of the negative attention is directed toward the executives whose recklessness led to the cryptocurrency market’s so-called crypto winter, along with individual criminal charges.^[2]  However, the market’s problems extend to retail investors of cryptocurrency as the exchanges once used to enter the cryptocurrency market find themselves embroiled in bankruptcy proceedings.^[3]  These bankruptcies have proven to be especially difficult and novel, with bankruptcy courts discovering that valuating cryptocurrency exchanges while also ensuring cryptocurrency creditor rights are not easy tasks.^[4]  However, these problems are easily avoided by following the framework used to resolve bank failures. This Note explores a solution to the string of cryptocurrency exchange bankruptcies that will ensure stability in a volatile market.

            Part II of this note describes the dearth of laws surrounding the cryptocurrency market—a  market that has grown substantially over the past decade.  Part III of this note discusses the collapse of the cryptocurrency market, and the trends that can be gleaned from the way bankruptcy courts have treated cryptocurrency exchange cases up to this point.  Part IV analyzes the problems created when traditional Chapter 11 bankruptcy principles are applied to cryptocurrency exchanges.  Finally, the Note argues that a superior solution for cryptocurrency exchange bankruptcies already exists in the form of the safety net approach utilized for centralized banks.

II.            Legal Background

            In order to understand the issues facing courts presiding over cryptocurrency exchange bankruptcies, it is necessary to understand three threshold principles: (1) what cryptocurrencies are; (2) what cryptocurrency exchanges are; and (3) the scant few laws in place to regulate cryptocurrencies and cryptocurrency exchanges.  This part will briefly examine the origins of cryptocurrencies, their exchange mechanisms, the lack of laws and regulations in place to govern the cryptocurrency market, and the intricacies of Chapter 11 bankruptcy.

A.    The Origins and Growth of Cryptocurrencies

            Cryptocurrency was born in 2008, when the cryptocurrency Bitcoin was introduced to the world.^[5]  The introduction coincided with the 2008 financial crisis, when trust in centralized banks was at an all-time low.^[6]  Bitcoin was described as a “decentralized peer-to-peer (digital) payment network.”^[7]  In practice, Bitcoin allowed users to transact with each other directly, removing the need for third-party intermediaries—like banks—to validate transfers.^[8]  Instead, Bitcoin relies on a decentralized public ledger called a “blockchain.”^[9]  

            The rise of Bitcoin inspired competing forms of cryptocurrency.^[10]  The cryptocurrency market is now worth billions of dollars and features thousands of different cryptocurrencies.^[11]  A large part of the rise in cryptocurrencies corresponds with the parallel rise of cryptocurrency exchanges, which offer users a platform to easily buy, sell, and trade cryptocurrencies in one location.^[12]  These exchanges attempt to entice potential users to invest their cryptocurrency in the particular exchange by advertising high interest returns on cryptocurrency deposits.^[13] 

            For a user to earn interest with a cryptocurrency exchange, the user must typically place their cryptocurrency in what is known as a “lending” or “earning” account.^[14]  These accounts function in a similar manner to a savings account at a centralized bank in how they earn interest.^[15]  However, there is a key difference that allows cryptocurrency exchanges to offer users much higher interest returns than their centralized banking counterparts.^[16]  In setting their interest rates, centralized banks rely on the Federal Reserve, which sets the federal funds rate.^[17]  At the time of this article’s writing, the federal funds rate was listed at just over five percent, which is considered very high when compared to recent historical trends.^[18]  In contrast, cryptocurrency exchanges set their interest rates based on market demand for cryptocurrency, with interest rates rising above eight percent.^[19]  As a result, cryptocurrency exchange users receive larger returns than the average bank users.  This appealed to users during the height of the cryptocurrency rush, as interest rates at general banks were at or near zero percent during that time.^[20]

            Despite the potential positives of utilizing a cryptocurrency exchange, there is a notable drawback when a cryptocurrency exchange fails.^[21]  When a centralized bank fails, that bank is generally insured by the Federal Deposit Insurance Corporation (“FDIC”).^[22]  As such, users of that bank are generally insured and can recover up to $250,000 of the funds deposited per account in that bank.^[23]  The same assurances cannot be said for cryptocurrency exchanges.^[24]  The FDIC does not insure cryptocurrency exchanges, nor does the Securities Investor Protection Corporation (“SPIC”) protect cryptocurrencies.^[25]  This lack of protection leaves users and their funds at the mercy of bankruptcy courts if the user’s funds are still in the cryptocurrency exchange when the exchange collapses.^[26]  The absence of a safety net has profound effects on users, especially those who have significant capital in the exchanges—capital they cannot afford to lose.^[27]

B.    Where are the Crypto Laws?

            Despite the uncertainty surrounding cryptocurrency and the potential ramifications of a cryptocurrency exchange failure, laws insulating cryptocurrency and cryptocurrency exchanges are scarce.  Currently, federal legislation regarding cryptocurrency or cryptocurrency exchanges does not exist.^[28]  However, there have been increasing efforts to establish some form of federal law to regulate the cryptocurrency market.^[29]  In the meantime, Congress has left issues created by cryptocurrency to be solved by piecemeal approaches—through federal agencies and individual state actions.^[30]

            The impasse in Congress has led federal agencies to create a fractured system in dealing with cryptocurrencies.^[31]  For instance, the IRS regards cryptocurrencies as personal property and not currency.^[32]  Meanwhile, the SEC designates some cryptocurrencies as securities, while other cryptocurrencies, like Bitcoin and Ether, are not considered securities.^[33]  The Commodity Futures Trading Commission (“CFTC”) says cryptocurrencies are commodities and not currencies.^[34]  Finally, cryptocurrencies could also simply be considered a form of currency.  Currency is defined as “something that is in circulation as a medium of exchange.”^[35]  Companies are becoming increasingly open to allowing customers to use cryptocurrency in exchange for goods and services.^[36]  As such, cryptocurrencies could fit within the definition of currency.  The distinction of whether cryptocurrencies are currency, property, securities, or commodities matters for bankruptcy claims, as each definition entails a particular date on which the cryptocurrency would be valued.^[37]

            In sum, cryptocurrency and cryptocurrency exchanges constitute a major market in the United States while also operating under minimal federal and state regulation.^[38]  The result is an unregulated market that leaves investors in precarious positions if and when the major institutions in the market collapse.^[39]

C.    A Brief Explanation of Chapter 11 Bankruptcy

            Chapter 11 bankruptcy is utilized when it is preferable for a debtor to continue to operate and reorganize or to sell its business as a going concern rather than engage in a wholesale liquidation.^[40]  Chapter 11 bankruptcies are only allowed when creditors are satisfied they will receive at least as much of a financial windfall as they would if the company was to liquidate.^[41]  Once a debtor files for bankruptcy, the bankruptcy court creates an estate composed of the debtor’s property owned at the beginning of the case.^[42]  Once the estate is established, the parties involved negotiate a reorganization plan which, if confirmed, discharges the debtor from debt arising before confirmation.^[43]  In its place, the debtor takes on new obligations as determined by the reorganization plan.^[44]

            This reorganization plan must classify all creditors into different classes based on their individual claims.^[45]  Once creditors are classified and the plan is accepted, the estate property vests in the debtor free of any claim or interest.^[46]  At this point, the debtor can use its assets to repay creditors based on the priority order.^[47]  It is possible for a plan to be approved over creditor dissent, so long as the plan does not “discriminate unfairly.”^[48]  If there are insufficient assets to pay all creditors of a particular priority class in full, the creditor must treat all creditors in that class the same and pay on a pro rata basis.^[49]  This means that unsecured claims, representing the least prioritized class, are most likely to see their claims repaid on a pro rata basis.^[50] 

III.          Recent Developments

            For years, cryptocurrency appeared to be on the rise with the valuation of various cryptocurrencies rising to billions of dollars.^[51]  Some commentators labeled the cryptocurrency market as the market for the future, as investors increasingly viewed cryptocurrency as a legitimate investment opportunity.^[52]  However, the confidence in cryptocurrency and cryptocurrency exchanges recently plummeted.^[53]  The cryptocurrency market suffered a $2 trillion loss during 2022, as illustrated by seven major cryptocurrency exchanges filing for Chapter 11 bankruptcy.^[54]  At the same time, many executives of the cryptocurrency exchanges are facing criminal charges for their roles in the collapse of the cryptocurrency market.^[55]

            While the bankruptcy cases involving the cryptocurrency exchanges are ongoing, a potential indicator of how bankruptcy courts will treat the cryptocurrency exchanges arrived through the cryptocurrency exchange Celsius’ bankruptcy filings.^[56]  Celsius, like other cryptocurrency exchanges, allows users to place their cryptocurrency in either “custody” accounts or “earn” accounts.^[57]  These accounts function in the same manner as other cryptocurrency exchange account structures, with custody accounts allowing for transferring and using cryptocurrency, and earn accounts earning interest.^[58]  According to the New York bankruptcy court’s ruling, Celsius is considered the title holder to any cryptocurrency placed in its earn accounts.^[59]  This allowed Celsius to claim title to $4.2 billion invested in its exchange by users.^[60]  Celsius won the claim, not through any particular property rights, but due to the terms and conditions it had users sign when opening an account.^[61]  When signing up for a Celsius account, users agreed to a section reading, in part:

In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable, and you may not have any legal remedies or rights in connection with Celsius’ obligations to you other than your rights as a creditor of Celsius under any applicable laws.^[62]

            In ruling for Celsius, the bankruptcy court noted that users could still potentially pursue contractual remedies to determine if the contract they signed was valid.^[63]  However, the contract as read by the court, effectively divested Celsius users of any interest in the funds place in their earn accounts.^[64]  Instead, Celsius users who placed their money in earn accounts saw their status changed to that of an unsecured creditor for the ongoing bankruptcy proceedings, making their ability to regain their funds placed in Celsius speculative.^[65]  Since the ruling, Celsius has proposed a plan to exit its bankruptcy under guidance from an asset manager.^[66]  The plan would allow users with less than $5,000 in their accounts to receive a one-time payment in cryptocurrency, resulting in around eighty-five percent of users recovering around seventy percent of the value of their deposits.^[67] 

            The Celsius case could be a precursor for many bankrupt cryptocurrency exchanges that have similarly concerning contractual provisions.^[68]  If this the floodgates of litigation open for these disputes, the overall amount of funding lost by users would be massive, given the billions of dollars placed in the crypto exchanges.^[69]

IV.         Discussion

            Bankruptcy and cryptocurrency exchanges present two distinct issues when combined.  First, given the fluctuations in value of cryptocurrency, the valuations required for bankruptcy when cryptocurrency composes a large portion of the estate poses a problem for courts and cryptocurrency exchanges alike.^[70]  Second, following the New York bankruptcy court’s ruling in In re Celsius, cryptocurrency exchange users face heightened levels of uncertainty regarding what happens to their funds if the exchange they use goes bankrupt.^[71]

            This section will discuss the aforementioned issues.  It will then propose an alternative route that the federal government can utilize to protect users and cryptocurrency exchanges alike from the problems caused when an exchange pursues Chapter 11 bankruptcy.

A.    Problems with Crypto Chapter 11 Bankruptcy: Valuation

            As discussed above, a key element for a successful Chapter 11 bankruptcy filing involves establishing an accurate valuation of a debtor’s property.^[72]  The valuation is crucial, as it determines what monetary amounts creditors will be able to recoup.^[73]  However, this valuation poses several significant challenges to ensuring the Chapter 11 bankruptcy process unfolds as intended when applied to cryptocurrency and cryptocurrency exchanges.^[74]

            First, it is necessary to understand how a bankrupt cryptocurrency exchange should be valued.  In re Celsius indicates that through provisions in user contracts, cryptocurrency exchanges are likely able to include funds deposited in earn accounts by users as property of the exchange for valuation.^[75]  However, this allowance does not immediately solve the question of  how bankruptcy courts value the property owned by cryptocurrency exchanges.^[76]  User deposits in cryptocurrency exchanges are obviously deposits of cryptocurrency.^[77]  As such, to value the deposits for Chapter 11 purposes, the bankruptcy court would need to determine the value of the cryptocurrency owned by the cryptocurrency exchange.^[78]  This valuation creates significant challenges for courts to consider, as the value of cryptocurrency swings wildly from day to day, if not minute to minute.^[79]  As such, the day on which the court determines the value of the cryptocurrency is a pivotal moment, and in no manner guarantees that the cryptocurrency exchange’s value is accurate, creating sever problems for creditors in determining an adequate reorganization plan to repay their claims.^[80]  In essence, creditors in bankruptcy cases involving a cryptocurrency exchange take a gamble when confirming a reorganization plan.  If the exchange is valued just before a cryptocurrency significantly decreases in value, then the exchange loses the ability to pay off the creditors in the manner which was expected.^[81]  On the other hand, if the cryptocurrency massively increases in value, creditors who could have potentially received full value on their claims would come up short if the plan proposed only allocated a certain percentage of their claims to them given the original allocation of the funding.^[82]

            Even worse, there is not a uniform designation bankruptcy courts can look to for determining when a cryptocurrency exchange should be valued.^[83]  As discussed, regulatory agencies do not agree on if cryptocurrencies are property, commodities, securities, or something else.^[84]  Each of these classifications entails a different date on which a bankruptcy court would determine what the cryptocurrency’s value is.^[85]  Some commentators have argued that one way to alleviate this valuation challenge is to simply valuate the cryptocurrency on the date of the bankruptcy petition’s filing.^[86]  The rationale behind this argument is that there is not a way to avoid the risk of overvaluing or undervaluing the cryptocurrency because of the constant fluctuations in its value.^[87]  Therefore, the argument pushes the need for a bright line rule applicable when bankruptcy courts should value the cryptocurrency, regardless of if that valuation is accurate or not.^[88]  However, this does not conform with the goals of Chapter 11 bankruptcy.

B.    Problems with Crypto Chapter 11 Bankruptcy: Investors

            A second challenge to using Chapter 11 proceedings for cryptocurrency exchange bankruptcies involves how much protection users receive, or the lack thereof.^[89]  The Celsius case exposes a glaring vulnerability for all cryptocurrency exchange users.^[90]  If cryptocurrency exchanges simply place language in the terms of use that a user must accept to utilize the exchange, users could be permanently subjected to the status of unsecured creditors if the exchange goes bankrupt.^[91] 

            Cryptocurrency exchange users face uncertainty when working through a Chapter 11 bankruptcy process, as they do not have a certain amount they will be able to recoup from the exchange’s default.^[92]  In fact, it is entirely possible that users would not receive any of their deposits back from a cryptocurrency exchange using Chapter 11 proceedings.^[93]  In utilizing a so-called “cram down,” a bankruptcy court could effectively allow certain classes of creditors to be excluded from the reorganization plan, increasing their potential to recoup an amount far below the amount they had deposited in the exchange.^[94]  This appears to be what could happen to the approximately fifteen percent of Celsius users that did not receive renumerations in the proposed reorganization plan for Celsius.^[95]   As such, the users who could be considered the most proficient in terms of cryptocurrency activity are effectively the group who are the most likely to be frozen out of being able to recoup their funding.^[96] 

            The possibility of being completely frozen out of deposits in a cryptocurrency exchange could lead to an even greater chilling effect on the cryptocurrency market.^[97]  As such, it is necessary to find a better solution for cryptocurrency exchange bankruptcies.

C.    A Simple Solution

            The issues facing cryptocurrency exchanges that pursue Chapter 11 bankruptcy filings are substantial, as the uncertainties facing both creditors and the exchanges run completely contrary to the stated goal of Chapter 11 bankruptcy: ensuring creditors recoup as much as they would have if the exchange were to completely liquidate.^[98]  The deficiencies created by applying Chapter 11 bankruptcy to cryptocurrency exchanges call for a new solution.  Fortunately, a potential solution already exists in the regulated banking space.^[99]

            Although speculation may lead one to believe that cryptocurrency and cryptocurrency exchanges are entirely unique entities, the similarities between the exchanges and the regulated banking system are impossible to ignore.^[100]  Both systems offer users the option to deposit funds in accounts that can be used for the exchange of currency.^[101]  Both systems also offer users the option to place their funds into accounts and garner interest.^[102]  When considered side by side, the business models of both centralized banks and cryptocurrency exchanges appear nearly identical.  While facially similar, the two systems do in fact operate very differently when they fail.^[103]  Whereas centralized bank failures have a built-in safety net in with the FDIC, cryptocurrency exchanges face substantial uncertainty when they embark on standardized Chapter 11 bankruptcy proceedings.^[104]

            For many reasons, an application of an FDIC-styled safety net to cryptocurrency exchanges would be preferable over forcing the exchanges to undergo Chapter 11 bankruptcy.  Primarily, the safety net approach provides much greater certainty for users when a financial hub collapses.^[105]  Users of banks that are FDIC insured are automatically able to collect up to $250,000 from any account they have deposited their funds in.^[106]  As such, if a safety net is made available, users could access their funds from any account and withdraw them from the failing exchange in an amount designated by the safety net organization, offering a quick and predictable solution.^[107] 

            While potentially efficient, this solution may not be easily implemented.  The most glaring drawback is the fact cryptocurrency exchanges currently lack an FDIC-style safety net.^[108]  However, the similarities between the financial landscape preceding the FDIC and the current cryptocurrency landscape are very similar.^[109]  The FDIC was created following the 1929 financial crisis that led to a lack of confidence in the American banking system.^[110]  The modern cryptocurrency market is in the midst of a similar crisis, with public confidence in cryptocurrency exchanges diminished following the collapse of several exchanges.^[111]  As such, it is feasible and even advisable that Congress create legislation similar to the Banking Act of 1933, which created the FDIC, in order to establish a safety net for cryptocurrency exchanges.^[112]  Indeed, regulating cryptocurrency already appears to be on legislators’ minds given the rise in proposed bills regarding cryptocurrency in recent years.^[113]  Therefore, while there is a current drawback to a safety net proposal in that such a solution is not readily apparent, that drawback is surmountable.

            Users who want to maintain the unregulated landscape of cryptocurrency may embody one final drawback to a safety net for cryptocurrency exchanges .^[114]  After all, the FDIC only provides banks with a safety net if they adhere to FDIC-mandated practices meant to ensure they do not engage in dangerous lending practices.^[115]  Cryptocurrency’s origins stem from the 2008 financial collapse and the idea that a peer-to-peer market outside of regulations would be beneficial to all.^[116]  Therefore, it would appear that cryptocurrency users would be fundamentally opposed to a regulatory scheme for cryptocurrency exchanges.  This argument, however, fails to recognize the current landscape of cryptocurrency.^[117]  While cryptocurrency started as a niche market, the market has grown to encompass over half of the adult American population.^[118]  It stands to reason that many of these same cryptocurrency investors are also involved in the United States banking system, given that 95.5% of the adult American population uses the American banking system.^[119]  Therefore, given how mainstream the cryptocurrency market has become, the qualms many of the original cryptocurrency users had no longer resonate with the majority of today’s cryptocurrency users.^[120]

            Furthermore, this concern seems somewhat hypocritical given what happened after the Silicon Valley Bank collapse that caused a steep drop in cryptocurrency value.^[121]  While cryptocurrency values plummeted following the Silicon Valley Bank’s collapse, cryptocurrency investors appeared reassured when they found out that cryptocurrency firms with assets in the bank would receive FDIC protection for their deposits.^[122]  As such, it would seem that cryptocurrency users do value the predictability associated with a safety net measure as opposed to the deregulated space that has led to the string of Chapter 11 bankruptcies facing the cryptocurrency exchanges.^[123]  With the negatives of a safety-net approach easily negated, it is apparent that the problems currently facing cryptocurrency exchanges pursuing Chapter 11 bankruptcy could be avoided if the exchanges followed a similar format to their bank counterparts during collapses.

V.            Conclusion

            The problems facing cryptocurrency exchanges undergoing Chapter 11 bankruptcy do not appear to be fading any time soon.^[124]  However, these problems could be easily avoided by utilizing a safety net approach similar to the one provided to banks in the form of the FDIC.  The FDIC safety net was established following a watershed financial collapse that exposed the deficiencies in an unregulated financial market.^[125]  Nearly 100 years later, the same thing has happened with another unregulated financial market in cryptocurrency.^[126]  However, despite the 100 years difference, the right solution is still the same.  Instead of seeking to go to the moon with their investments, cryptocurrency users should be advocating for a safety net to catch them when they fall.

_____________________________________

* B.J., University of Missouri, 2019; Candidate, University of Missouri School of Law, 2024; Senior Associate Editor, Missouri Law Review, 2023–2024; Associate Member, Missouri Law Review, 2022–2023.  I am thankful for the efforts of Fabian Reyher and Maura Corrigan throughout the editing process.  I am also thankful for Professor Yunsieg Kim’s help, guidance, and mentorship throughout the editing process.  I also want to thank my parents, brother, and fianceé for their support.

^[1] See e.g., Robin Kaiser-Shatzlein, Sam Bankman-Fried’s Power was Contingent on Belief, N.Y. Times (Dec. 28, 2022), https://www.nytimes.com/2022/12/28/magazine/sam-bankman-fried-ftx.html; Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.

^[2] See e.g., Fatima Hussein, FTX Founder Charged in Scheme to Defraud Crypto Investors, Associated Press (Dec. 13, 2022), https://apnews.com/article/cryptocurrency-technology-business-united-states-government-us-securities-and-exchange-commission-32d27016350e3e175c500eeefaf2aa4d.

^[3] See Reuters, Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.

^[4] See In re Celsius Network LLC., 647 B.R. 631 (Bankr. S.D.N.Y. 2023).

^[5] Larissa Lee, New Kids on the Blockchain: How Bitcoin’s Technology Could Reinvent the Stock Market, 12 Hastings Bus. L.J. 81, 83 (2016).

^[6] See Julie Pinkerton, The History of Bitcoin, the First Cryptocurrency, U.S. News (Aug. 31, 2022), https://money.usnews.com/investing/articles/the-history-of-bitcoin.

^[7] Jeffrey E. Alberts & Bertrand Fry, Is Bitcoin A Security?, 21 B.U. J. Sci. & Tech. L. 1, 2 (2015).

^[8] Id. at 3.

^[9] Id. The ledger, which does reveal the identity of the parties involved in the transaction, is visible to all computers on the Bitcoin network and ensures users transferring Bitcoin actually complete their transfers. Id.

^[10] See Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and the Trustee’s Recovery Powers, 62 B.C. L. Rev. 2013, 2014 (2021).

^[11] Id.

^[12] See Christopher Fong, Hold on for Dear Life: How a Bankruptcy of a Cryptocurrency Exchange May Affect Holders, Nixon Peabody (May 18, 2022), https://www.nixonpeabody.com/insights/alerts/2022/05/18/hold-on-for-dear-life-how-a-bankruptcy-of-a-cryptocurrency-exchange-may-affect-holders.

^[13] Wayne Duggan, How to Earn Interest on Crypto, Forbes.com (July 18, 2022), https://www.forbes.com/advisor/investing/cryptocurrency/how-to-earn-interest-on-crypto/.

^[14] Id.

^[15] See Abra Global, How Does Crypto Generate Interest, Abra (April 13, 2022), https://www.abra.com/blog/how-does-crypto-earn-interest/#:~:text=For%20crypto%20interest%20accounts%2C%20users,for%20providing%20liquidity%20to%20borrowers.

^[16] See id.

^[17] Dawn Papandrea, How Federal Interest Rates Work, U.S. News (last updated Sept. 21, 2023), https://money.usnews.com/loans/articles/how-federal-interest-rates-work.

^[18] Fed Funds Rate, Bankrate, https://www.bankrate.com/rates/interest-rates/federal-funds-rate/, (last visited Apr. 3, 2023). See Fred Economic Data, https://fred.stlouisfed.org/series/FEDFUNDS, (last visited Feb. 25, 2023).

^[19] See Abra Global, supra note 15.

^[20] Taylor Tepper, Federal Funds Rate History 1990 to 2023, Forbes (last updated July 26, 2023), https://www.forbes.com/advisor/investing/fed-funds-rate-history/.

^[21] See Fong, supra note 12.

^[22] Federal Deposit Insurance Corporation, https://www.fdic.gov/resources/deposit-insurance/ (last visited February 25, 2023).

^[23] Id.

^[24] See Christopher Fong, Hold on for Dear Life: How a Bankruptcy of a Cryptocurrency Exchange May Affect Holders, NIXON PEABODY (May 18, 2022), https://www.nixonpeabody.com/insights/alerts/2022/05/18/hold-on-for-dear-life-how-a-bankruptcy-of-a-cryptocurrency-exchange-may-affect-holders.

^[25] Id.

^[26] Id.

^[27] See Jedidajah Otte & Clea Skopeliti, “The Money is Gone:” People Who Lost Out in FTX’s Collapse, The Guardian (Nov. 19, 2022), https://www.theguardian.com/technology/2022/nov/19/the-money-is-gone-people-who-lost-out-in-ftxs-collapse.

^[28] Bloomberg Law, Cryptocurrency Laws and Regulations by State, Bloomberg Law (May 26, 2022), https://pro.bloomberglaw.com/brief/cryptocurrency-laws-and-regulations-by-state/.

^[29] Id.

^[30] Id.

^[31] See Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and the Trustee’s Recovery Powers, 62 B.C. L. Rev. 2013, 2024–26 (2021).

^[32] Id.

^[33] See id. at n. 72.

^[34] Id.

^[35] Currency, Merriam Webster, https://www.merriam-webster.com/dictionary/currency.

^[36] See Cheyenne DeVon, Nearly 75% of Retailers Plan to Accept Cryptocurrency Payments Within the Next 2 Years, CNBC.com (July 29, 2022), https://www.cnbc.com/2022/07/29/deloitte-75-percent-of-retailers-plan-to-accept-crypto-payments-in-2-years.html.

^[37] See Shawver, supra note 10, at 2026.

^[38] See Fong, supra note 12; Bloomberg Law, Cryptocurrency Laws and Regulations by State, Bloomberg Law (May 26, 2022), https://pro.bloomberglaw.com/brief/cryptocurrency-laws-and-regulations-by-state.

^[39] See Khristopher J. Brooks, Fear and Doubt Shadow Cryptocurrency Exchanges After FTX’s Collapse, CBS News (Dec. 15, 2022), https://www.cbsnews.com/news/binance-customer-withdrawls-cz-cryptocurrency-exchange/.

^[40] 7 Collier on Bankruptcy P 1100.01 (16th 2022).

^[41] 7 Collier on Bankruptcy P 1100.01 (16th 2022).  This premise creates an issue when relating to cryptocurrency, as cryptocurrency is extremely volatile.  MacKenzie Sigalos, Bitcoin’s Wild Price Moves Stem from its Design — You’ll Need Strong Nerves to Trade It, CNBC.com (May 19, 2021), https://www.cnbc.com/2021/05/19/why-is-bitcoin-so-volatile.html.  As such, there is a very real chance that a cryptocurrency exchange could be worth absolutely nothing by being allowed to continue operations, meaning creditors are never guaranteed to receive at least as much as they would if the cryptocurrency exchange were to undergo a Chapter 7 bankruptcy.  See Andrew Chow, The Real Reasons Behind the Crypto Crash, and What We Can Learn from Terra’s Fall, Time (May 17, 2022), https://time.com/6177567/terra-ust-crash-crypto/.

^[42] 11 U.S.C. § 541.

^[43] 11 U.S.C. § 1141(c), (d).

^[44] Id.

^[45] 11 U.S.C. § 1123(a)(1). These classifications, listed in order of priority, are “superiority claims,” “secured claims,” “priority claims,” and “general unsecured claims.” See 11 U.S.C. § 1129(a)(9)(A); 11 U.S.C. § 1129(a)(7)(A); 11 U.S.C. § 1129(a)(9)(A); 11 U.S.C. § 1129(b)(2)(B).

^[46] 11 U.S.C. § 1141(b), (c).

^[47] See 11 U.S.C. § 1129.

^[48] 11 U.S.C. § 1129(b)(1).

^[49] Fred Pape, The Basics of Chapter 11 Liquidating Trusts, American Bar Association (Apr. 6, 2021), https://www.americanbar.org/groups/litigation/committees/young-advocates/practice/2021/basics-of-chapter-11-liquidating-trusts/.

^[50] Id.

^[51] Teddy Wayne, Grandpa Had a Pension. This Generation Has Cryptocurrency, N.Y. Times (Aug. 3, 2017), https://www.nytimes.com/2017/08/03/style/what-is-cryptocurrency.html?searchResultPosition=1.

^[52] Id.

^[53] Cheyenne DeVon, 60% of Americans See Crypto Investing as Highly Risky—But Millennials are Still its Biggest Fans, CNBC.com (last updated Dec. 13, 2022), https://www.cnbc.com/2022/12/12/sixty-percent-of-americans-now-see-crypto-investing-as-highly-risky.html.

^[54] Id.; Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.

^[55] See Fatima Hussein, FTX Founder Charged in Scheme to Defraud Crypto Investors, Associated Press (Dec. 13, 2022), https://apnews.com/article/cryptocurrency-technology-business-united-states-government-us-securities-and-exchange-commission-32d27016350e3e175c500eeefaf2aa4d.

^[56] See In re Celsius Network LLC., 647 B.R. 631 (Bankr. S.D.N.Y. 2023).

^[57] Celsius Customer FAQ, https://support.celsius.network/hc/en-us/articles/4838161060381-Custody-FAQ (last visited Mar. 4, 2023).

^[58] Id. See Abra Global, supra note 15.

^[59] In re Celsius Network LLC., 647 B.R. 631, 660 (Bankr. S.D.N.Y. 2023).

^[60] Jacquelyn Melinek, Bankruptcy Judge Rules Celsius Network Owns Users’ Interest-Bearing Crypto Accounts, Tech Crunch (Jan. 4, 2023), https://techcrunch.com/2023/01/04/bankruptcy-judge-rules-celsius-network-owns-users-interest-bearing-crypto-accounts/?guccounter=1#:~:text=Celsius%20had%20approximately%20600%2C000%20accounts,aka%20Celsius%2C%20the%20judge%20ruled.

^[61] In re Celsius Network LLC., 647 B.R. 631, 640 (Bankr. S.D.N.Y. 2023).

^[62] Id.

^[63] Id. at 660.

^[64] Id.

^[65] Melinek, supra note 60.

^[66] Dietrich Knauth, Celsius Network Chooses NovaWulf Bid for Bankruptcy Exit, Reuters (Feb. 15, 2023), https://www.reuters.com/technology/celsius-network-chooses-novawulf-bid-bankruptcy-exit-2023-02-15/.

^[67] Id.

^[68] See In re Celsius Network LLC., 647 B.R. 631, 660 (Bankr. S.D.N.Y. 2023).

^[69] See In re Celsius Network LLC., 647 B.R. 631, 660 (Bankr. S.D.N.Y. 2023); Melinek, supra note 60.

^[70] Sigalos, supra note 41.

^[71] See In re Celsius Network LLC., 647 B.R. 631 (Bankr. S.D.N.Y. 2023).

^[72] See Jeff Risius & Jesse Ultz, Valuation: The Cornerstone of the Bankruptcy Process, Stout (May 1, 2017), https://www.stout.com/en/insights/article/sj17-valuation-the-cornerstone-of-the-bankruptcy-process.

^[73] See Knauth, supra note 66 (Creditors will receive their pro rata shares based on the valuation created through Chapter 11 bankruptcy filings).

^[74] See Sigalos, supra note 41.

^[75] In re Celsius Network LLC., 647 B.R. 631, 660 (Bankr. S.D.N.Y. 2023).

^[76] See Sigalos, supra note 41.

^[77] In re Celsius Network LLC., 647 B.R. 631, 637 (Bankr. S.D.N.Y. 2023).

^[78] See Jeff Risius & Jesse Ultz, Valuation: The Cornerstone of the Bankruptcy Process, Stout (May 1, 2017), https://www.stout.com/en/insights/article/sj17-valuation-the-cornerstone-of-the-bankruptcy-process.

^[79] See MacKenzie Sigalos, Bitcoin’s Wild Price Moves Stem from Design — You’ll Need Strong Nerves to Trade It, CNBC.com (May 19, 2021), https://www.cnbc.com/2021/05/19/why-is-bitcoin-so-volatile.html (discussing the volatility of cryptocurrency).

^[80] Due to the volatile swings in cryptocurrency values, it is entirely possible that a bankruptcy court could valuate a cryptocurrency exchange at a certain amount, and then the amount could increase or decrease by millions of dollars by the next day depending on what the actual value of the cryptocurrency shifts to be. See id. (discussing the volatility of cryptocurrency).

^[81] See 11 U.S.C. § 1129 (discussing the order in which creditors recover their claims).

^[82] See id. (discussing the order in which creditors recover their claims); Dietrich Knauth, Celsius Network Chooses Novawulf Bid for Bankruptcy Exit, Reuters (Feb. 15, 2023), https://www.reuters.com/technology/celsius-network-chooses-novawulf-bid-bankruptcy-exit-2023-02-15/ (Creditors will receive their pro rata shares based on the valuation created through Chapter 11 bankruptcy filings).

^[83] See Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and the Trustee’s Recovery Powers, 62 B.C. L. Rev. 2013, 2026 (2021) (discussing the different ways regulatory agencies classify cryptocurrency).

^[84] See id. at 2024–26.

^[85] See id. at 2026.

^[86] See id. at 2053–54.

^[87] Id. at 2054.

^[88] Id.

^[89] See In re Celsius Network LLC., 647 B.R. 631 (Bankr. S.D.N.Y. 2023) (discussing how contractual agreements between exchanges and users can severely limit what users can recover during bankruptcy proceedings).

^[90] Id. at 660.

^[91] See id. at 640 (describing to the terms of use a user must agree to prior to using Celsius).  It is important to note that the judge in the Celsius case noted that Celsius users were free to pursue contractual defenses to get out of the contract, but that those claims could not be heard in the bankruptcy court.  Id. at 652.

^[92] See Knauth, supra note 66 (detailing the proposed Celsius bankruptcy plan that would only allow certain users to recoup a portion of their funds).

^[93] See 11 U.S.C. § 1129(b)(1) (discussing “cram down” provisions allowed in Chapter 11 proceedings).

^[94] 11 U.S.C. § 1129(b)(1).

^[95] See Dietrich Knauth, Celsius Network Chooses Novawulf Bid for Bankruptcy Exit, Reuters (Feb. 15, 2023), https://www.reuters.com/technology/celsius-network-chooses-novawulf-bid-bankruptcy-exit-2023-02-15/. According to the proposal, any user with more than $5,000 worth of cryptocurrency deposited with Celsius would be placed at the back of the line in terms of being able to access the assets used to repay creditors. Id.  It is important to note that again, there are challenges to knowing which users have deposited more than $5,000 of cryptocurrency in Celsius given the volatility of cryptocurrency values. 

^[96] Id.

^[97] Paul R. La Monica, Crypto Winter has had a Chilling Effect on Coinbase and Robinhood, CNN (June 28, 2022), https://www.cnn.com/2022/06/28/investing/cryptocurrency-crash-bitcoin-coinbase-robinhood-ftx/index.html.

^[98] 7 Collier on Bankruptcy P 1100.01 (16th 2022).  It is important to note Chapter 11 also seeks to maintain the debtor’s economic viability, which can conflict with ensuring creditor’s rights.  Id.  These rights conflict in the cryptocurrency exchange context, mandating that one set of rights be prioritized.  See id.

^[99] See Federal Deposit Insurance Corporation, https://www.fdic.gov/resources/deposit-insurance/ (last visited February 25, 2023).

^[100] Compare Dawn Papandrea, How Federal Interest Rates Work, U.S. News (March 16, 2022), https://money.usnews.com/loans/articles/how-federal-interest-rates-work, with Abra Global, How Does Crypto Generate Interest, Abra (April 13, 2022), https://www.abra.com/blog/how-does-crypto-earn-interest/#:~:text=For%20crypto%20interest%20accounts%2C%20users,for%20providing%20liquidity%20to%20borrowers.

^[101] Compare U.S. Bank, usbank.com/bank-accounts/checking-account-vs-savings.html (last visited Mar. 12, 2023), with Celsius, https://support.celsius.network/hc/en-us/articles/4838161060381-Custody-FAQ (last visited Mar. 12, 2023).

^[102] Id.

^[103] See Federal Deposit Insurance Corporation, https://www.fdic.gov/resources/deposit-insurance/ (last visited February 25, 2023); Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.

^[104] See Federal Deposit Insurance Corporation, https://www.fdic.gov/resources/deposit-insurance/ (last visited February 25, 2023). See generally Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/ (identifying cryptocurrency exchanges undergoing Chapter 11 bankruptcy proceedings).

^[105] See Federal Deposit Insurance Corporation, https://www.fdic.gov/resources/deposit-insurance/ (last visited February 25, 2023).

^[106] Benji Stawski & Alexandria White, How FDIC Insurance Works, Plus a Breakdown of Coverage Limits, CNBC.com (last updated Mar. 13, 2023), https://www.cnbc.com/select/fdic-insurance/.

^[107] Funds would likely need to come in the form of the U.S. dollar, though the Federal Reserve has discussed creating a centralized digital currency, which could be beneficial when creating a cryptocurrency exchange safety net.  Board of Governers of the Federal Reserve System, Money and Payments: The U.S. Dollar in the Age of Digital Transformation, The Federal Reserve (Jan. 14, 2022), https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf.

^[108] See Elisabeth Buchwald, The FDIC has taken over Silicon Valley Bank: Here’s what that means, USA Today (last updated Mar. 13, 2023), https://www.usatoday.com/story/money/economy/2023/03/10/fdic-silicon-valley-bank-fail/11445464002/.

^[109] See id.; Cheyenne DeVon, 60% of Americans See Crypto Investing as Highly Risky—But Millennials are Still its Biggest Fans, CNBC.com (last updated Dec. 13, 2022), https://www.cnbc.com/2022/12/12/sixty-percent-of-americans-now-see-crypto-investing-as-highly-risky.html.

^[110] Elisabeth Buchwald, The FDIC has taken over Silicon Valley Bank: Here’s what that means, USA Today (last updated Mar. 13, 2023), https://www.usatoday.com/story/money/economy/2023/03/10/fdic-silicon-valley-bank-fail/11445464002/.

^[111] See Cheyenne DeVon, 60% of Americans See Crypto Investing as Highly Risky—But Millennials are Still its Biggest Fans, CNBC.com (last updated Dec. 13, 2022), https://www.cnbc.com/2022/12/12/sixty-percent-of-americans-now-see-crypto-investing-as-highly-risky.html.

^[112] See Federal Deposit Insurance Corporation, https://www.fdic.gov/about/history/#:~:text=On%20June%2016%2C%201933%2C%20President,figures%20in%20the%20bill’s%20development (last visited Mar. 12, 2023).

^[113] Bloomberg Law, Cryptocurrency Laws and Regulations by State, Bloomberg Law (May 26, 2022), https://pro.bloomberglaw.com/brief/cryptocurrency-laws-and-regulations-by-state/.

^[114] See Due.com, Why Decentralization is Crypto’s Greatest Strength and Greatest Threat, NASDAQ.com (Apr. 4, 2022), https://www.nasdaq.com/articles/why-decentralization-is-cryptos-greatest-strength-and-greatest-threat/.

^[115] See Buchwald, supra note 108.

^[116] See Pinkerton, supra note 6.

^[117] See Jack Caporal, Study: Over 46 Million Americans Likely to Buy Cryptocurrency in the Next Year, The Ascent (June 21, 2022), https://www.fool.com/the-ascent/research/study-americans-cryptocurrency/.

^[118] Id.

^[119] See id.; FDIC, Despite COVID-19 Pandemic, Record 96% of U.S. Households Were Banked in 2021, FDIC (Oct. 25, 2022), https://www.fdic.gov/news/press-releases/2022/pr22075.html.

^[120] See Jack Caporal, Study: Over 46 Million Americans Likely to Buy Cryptocurrency in the Next Year, The Ascent (June 21, 2022), https://www.fool.com/the-ascent/research/study-americans-cryptocurrency/.

^[121] See Reuters, Bitcoin, USDC Stablecoin Rally After US Intervenes on SVB, Reuters (Mar. 12, 2023), https://www.reuters.com/technology/bitcoin-usdc-stablecoin-rally-after-us-intervenes-svb-2023-03-13/.

^[122] Id.

^[123] See id.; Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.

^[124] See generally Knauth, supra note 66 (discussing the amount of time it has taken Celsius to receive and accept a reorganization proposal in its proceeding).

^[125] See Federal Deposit Insurance Corporation, https://www.fdic.gov/about/history/#:~:text=On%20June%2016%2C%201933%2C%20President,figures%20in%20the%20bill’s%20development (last visited Mar. 12, 2023).

^[126] See Reuters, Factbox: Crypto’s String of Bankruptcies, Reuters (Jan. 20, 2023), https://www.reuters.com/business/finance/cryptos-string-bankruptcies-2023-01-20/.