Notwithstanding that cryptocurrency is generally in the cloud, crypto purists will say that cryptocurrency is as valuable as dollar bills. However, the recent bankruptcy filings of five major crypto companies, including Celcius Network LLC (a lender) and FTX Trading Ltd. (an exchange), may bring to light the real nature of cryptocurrency; whether it’s an investment, a currency, a digital asset or something else.
In the recent bankruptcy of Celcius, Judge Glenn (presiding) decided last week that the cryptocurrency deposited by customers with Celcius was not an asset of the customers, despite what they believed it to be, but rather transferred ownership of the cryptocurrency to Celcius to do with as it pleased.
Judge Glenn found that crypto is not under the current definition a currency, because it is not a medium of exchange created, authorized, or adopted by a domestic or foreign government, or by an intergovernmental organization or by agreement between two or more countries. So, when customers deposited crypto with Celcius pre-bankruptcy, they were depositing something closer to a digital asset, which Celcius could then invest or transfer.
The FTX case brings to light how easily it was to transfer customer deposits of digital assets to other investment vehicles and even politicians. Now, everyone is just waiting for the FTX bankruptcy estate to claw back many of these transfers, as leading to the demise of FTX. Claw backs generally are authorized under state and federal fraudulent transfer laws, when an insolvent company makes transfers without receiving reasonably equivalent value in return. At first blush, many of the prebankruptcy transfers made by FTX certainly seem like they can come back to FTX.
While clawing back transfers to noncustomers (who did not provide equivalent value in return) may seem intuitive, if, as Judge Glenn found, the customers transferred their ownership rights in their deposited digital assets, will bankruptcy courts in these crypto cases also start finding that customers who were able to withdraw their crypto prior to the bankruptcy also received transfers that can be clawed back? It’s too early to tell, but that would certainly add insult to injury.
What does this all do to the remaining field in the crypto industry? Everyone knows that the crypto industry is not heavily regulated by the SEC, because crypto purists have, thus far, convinced the SEC that cryptocurrency is not an investment or security. However, without regulation, one can see how customers can easily be duped into believing that they are doing one thing (depositing currency), when, in fact, they are depositing a digital asset that may be further invested, which may lead to a rise or collapse in value of the asset.
Maybe it’s time to place some oversight on the “wild west” environment in which this crypto industry has operated? Customers certainly should not have to wait until the president of a crypto company is arrested to find out that they have lost their digital asset. In the meantime, maybe we should stop calling it “cryptocurrency” and start calling it what it really is: cryptic currency.