As contagion continues to spread across the crypto industry, taking down exchanges and hedge funds alike, 2023 is shaping up to be the year of crypto bankruptcies.
Judge Martin Glenn, chief judge for the U.S. Bankruptcy Court in the Southern District of New York (SDNY), may have 16 years of experience as a bankruptcy judge, but in 2022 he got a crash course in the particulars of crypto bankruptcies.
Judge Glenn is overseeing the Chapter 11 bankruptcy proceedings for insolvent crypto lender Celsius Network, while another judge in his court, Michael Wiles, is simultaneously handling Voyager Digital’s bankruptcy.
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Though Celsius is headquartered in Hoboken, New Jersey, the company chose to file for bankruptcy protection in New York, claiming that the majority of its assets were located in New York City.
But Rick Hyman, a New York-based partner in Crowell & Moring’s corporate and financial services groups, told CoinDesk that it’s actually quite common for companies based outside of New York state to file for bankruptcy in New York City.
New York City's status as a global financial center, as well as the SDNY’s reputation for conducting efficient bankruptcy proceedings and for having expertise in the financial industry, has made it a top choice for complex bankruptcies, including the Lehman Brothers case and the Bernie Madoff Ponzi scheme, both in 2008.
“[Celsius] may have determined that it would be favorable to have the same court, although not the same judge, [as Voyager] addresses the many novel issues that are certain to arise in these high-profile cases,” Hyman said.
Though much about crypto bankruptcies is similar to traditional finance industry bankruptcies, there remains a steep learning curve, and questions – including whether Celsius users should be paid back in crypto or in the fiat value of their accounts – have yet to be settled.
One major issue Judge Glenn has struggled with is the need to protect user privacy and the specific risks – including doxxing, harassment and hacking – that Celsius users could face if their personal information, such as their names and wallet addresses, were made public.
When Glenn ignored concerns about making user data public and issued a ruling compelling Celsius to release the data (minus email and home addresses), it didn’t take long for internet sleuths to make use of the treasure trove of personal information. A website was launched that made the data publicly searchable by name.
Shortly after the data was made public, Judge Glenn agreed to appoint a consumer privacy ombudsman to oversee the case.
Customer privacy is just one of the unique challenges that courts will face as they oversee crypto bankruptcies in the future. Judge Glenn is paving the way for other judges and other bankruptcy courts – something that will likely be much needed in the wake of FTX’s collapse.
Though FTX filed for bankruptcy protection in Delaware, contagion has spread far and wide, including in New York. As crypto lenders like BlockFi and CoinDesk sister company Genesis wobble, Glenn and his court will likely have their hands full in the coming year.
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