“Everyone’s learning crypto bankruptcy right now, and I think there’s a lot of work that will be there for how to deal with crypto bankruptcy.”

Long after the dust has settled over the sudden collapse of FTX—which was, up until their November 2022 bankruptcy filing, the world’s second-largest cryptocurrency exchange—business schools will be studying just exactly how it was that highly sophisticated investment bankers could be hoodwinked out of a staggering $32 billion (quite possibly more) in the blink of an eye.

But even before the discussion reaches the halls of academia, it is already being debated, analyzed, and briefed by lawyers who are being called upon to represent billions of dollars worth of investors—and defendants—as they learn the art of crypto bankruptcy. And if the crypto pundits are right, bankruptcy lawyers are just getting started.

Better in the Bahamas?

Think ‘Bahamas’ and your mind’s eye immediately pieces together a picture of sun, sand, and surf. But crypto swingling? Hardly. Yet, this past November, it was revealed that the founder and CEO of Bahamas-based cryptocurrency exchange FTX allegedly engaged in widespread wire fraud, securities fraud, and other offenses arising out of his handling of FTX funds and an affiliated crypto hedge fund, Alameda Research. Regardless of the mechanics of the dealings, it is estimated that FTX’s bankruptcy filing could affect more than one million individual investors and businesses who went for a classic ‘run on the bank’ following rumors of doubtful balance sheets and regulators’ investigations but abruptly found themselves unable to withdraw their investments.

Crash Course in Crypto Crashes

Not only will the FTX bankruptcy drag on for years—rivaling that of Enron and other financial house-of-cards insolvencies—but it is also anticipated that other cryptocurrency exchanges will likely follow suit. Industry observers noted the recent crypto market history of last May when other exchange leaders, Voyager Digital, Celsius Network, and Three Arrows Capital, all experienced a crash within a short period of time. That scenario kicked off a rush by traditional bankruptcy lawyers to bone up on cryptocurrency bankruptcies, which, like cryptocurrency investments themselves, are the same—yet different.

FTX’s failure is expected to be contagious, reverberating throughout the cryptocurrency market and threatening the stability of that investment vehicle—if it ever had any. If such predictions come true, it will mean a windfall for law firms that will be called upon to handle what could be the biggest bankruptcies in history. Given the relatively uncharted waters of cryptocurrency bankruptcy law, the FTX bankruptcy and those it spawns will amount to a crash course in cryptocurrency bankruptcy practice for hundreds of firms. And, given the complexity of those cases, it will also mean justifiably exorbitant billable hours.

The Future Looks…More Regulated

But it is not just the exchange bankruptcies that will generate business for lawyers, but also the myriad of securities fraud cases that will arise as well, as investors, both individual and institutional, file their lawsuits seeking to answer the questions: How could there be such a total lack of corporate controls where billions of dollars were at stake? How much material misrepresentation took place? And where were the due diligence evaluations? Allegations that have surfaced so far include misuse of corporate funds to pay for employees’ luxury items and even their homes.

Going forward, there will be a demand for new control mechanisms, changes in corporate governance protocols, and the need to address stricter financial regulation, which will be a logical outcome of the FTX crash. All of these issues will also put corporate and financial sector lawyers in the spotlight—and on the payroll. One blockchain and cryptocurrency expert pointed out that the fallout from the FTX collapse will mean changes in corporate structure by other cryptocurrency exchanges and a reevaluation of their board makeup, given the reported inexperience and lack of sophistication of various FTX board members.

Story Behind the Story

Regardless of how many heads roll over the FTX collapse and whether or not hard prison time is meted out to certain individuals, the bigger story is that of over 100 Delaware bankruptcies being filed by affiliated entities, the likelihood of over one million creditors, and global investigations by not just U.S. and Bahamian investigators but also by other international regulatory agencies.

Christmas, it seems, will extend far, far, beyond December 25th for thousands of lawyers.

Executive Summary

The Issue

How the collapse of FTX will impact lawyers and law firms.

The Gravamen

The crash of FTX is so profound and far-reaching that it will have ramifications throughout numerous legal practice areas including in bankruptcy, securities, regulation, and corporate governance.

The Path Forward

Lawyers who have practiced in traditional bankruptcy law and other areas would do well to quickly become versed in how to re-tool their practices for the emerging opportunities in cryptocurrency industry law.

Action Items

The Crypto Security

Research all you can into the workings of cryptocurrency, how it is traded, how the exchanges are regulated, the role of collateral, and all other factors that make cryptocurrency a quite distinct asset.

Crypto Creditors

Learn what the role is of the various parties in the cryptocurrency market, the rights of cryptocurrency creditors, the role of receivers when cryptocurrency exchanges file for bankruptcy, and what claims are enforceable and which are not.

Cross-border Crypto

Rules and regulations regarding cryptocurrency trading vary widely from one jurisdiction to another, and there are few, if any, universal rules governing the industry. Therefore, determining the domicile and the ‘jurisdiction’ of a cryptocurrency will be crucial in determining which country’s laws will apply and how they impact your client’s position.  

Follow FTX

Clearly, new laws will emerge from the gargantuan FTX bankruptcy and its related lawsuits. By studying FTX now, you will be better positioned to catch the crypto-crash wave that is widely anticipated to follow.

Further Readings

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