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"The GENIUS Act tries to mitigate credit risk on stablecoins by declaring their property of the investor vis-a-vis custodians, and prioritizing the investors' claims vis-a-vis creditors of the issuer. But neither is really a fix, and the truth is that absent a government guaranty, there's no way around this problem. No matter how much stablecoins are prioritized in bankruptcy, bankruptcy is a slow process, and time is money. And there are limits to how far stablecoins can be prioritized in bankruptcy without rendering the bankruptcy system unworkable. (Making stablecoins the property of the investors is no help in an issuer bankruptcy because all the investor gets is a digital token that is worthless without the redemption right, and that's just a bankruptcy claim; this is different than in the custodian bankruptcy scenario.) The only real way to ensure 100% timely repayment is a government backstop, but that's not something the industry wants (because it goes with regulation)." (Adam Levitin)

Georgetown University's Adam Levitin examines the lack of bankruptcy protection for people who entrust their assets to U.S.-based crypto-asset exchanges. He makes a case that legally, crypto-assets "deposited" with exchanges, are actually sales with the "possessory interest" going to the exchange. If the exchange goes bust, a "bankruptcy estate" is created, and those coins become its property, as do any coins that have been staked (placed in escrow) via the exchange. Secured creditors get first dibs on whatever is in the estate, so unsecured creditors (i.e., crypto "depositors") might get nothing. And any assets remaining for distribution to unsecured creditors may be frozen for years, and their values based on their value when the exchange tanked. Plus, the bankrupt exchange can legally claw back many of the withdrawals its depositors made over the 90 days before the bankruptcy.

"A U.S. bankruptcy judge ruled on Wednesday that Celsius Network owns most of the cryptocurrency that customers deposited into its online platform, meaning most Celsius customers will be last in line for repayment in the crypto lender's bankruptcy. The ruling by U.S. Bankruptcy Judge Martin Glenn in New York affects approximately 600,000 accounts that held assets valued at $4.2 billion when Celsius filed for bankruptcy in July. The company does not have enough funds to fully repay those deposits, Glenn wrote."

Genesis Global Capital, the cryptocurrency lending unit of Digital Currency Group (DCG), is reportedly laying the groundwork for a bankruptcy filing as soon as this week. It has been in confidential negotiations with various creditor groups amid a liquidity crunch, and has warned that it may need to file for bankruptcy if it fails to raise cash. Genesis suspended withdrawals in November, soon after crypto exchange FTX - where Genesis held some of its funds - filed for bankruptcy.

Digital Currency Group (DCG) owned Genesis Global Holdco LLC filed for Chapter 11 bankruptcy protection. Genesis owes over $3.5 billion to its top 50 creditors, including crypto exchange Gemini. The bankruptcy could have broader implications because DCG also owns digital assets manager Grayscale, which operates the Grayscale Bitcoin Trust (GBTC), which has $10 billion-plus in assets under management. There would be serious crypto market  repercussions if the Genesis bankruptcy somehow leads to the liquidation of 600,000+ bitcoin holdings.

"The judge overseeing the bankruptcy case of fallen crypto exchange FTX today agreed to continue bankruptcy proceedings in Delaware and keep the names and addresses of the top 50 creditors-owed approximately $3.1 billion-redacted for now. "

"Crypto lender BlockFi filed for bankruptcy protection Monday, days after suspending withdrawals amid the ongoing fallout from exchange FTX's bankruptcy filing."

Celsius Network, the crypto lender that is facing a liquidity crisis, has filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. It suspended withdrawals starting June 12, cut jobs and hired restructuring experts to advise on its financial situation. Celsius says it has $167 million in cash on hand, enough to "support certain operations during the restructuring process."

"Ernst and Young (EY), the court-appointed monitor for collapsed Canadian crypto exchange QuadrigaCX, has proposed transitioning the company from a restructuring process to bankruptcy proceedings."

Ernst & Young, the trustee overseeing the bankruptcy case for the failed Canadian crypto exchange, will be turning over all of Quadriga's user info and data to the country's tax collector.

ISDA also published a whitepaper that addresses some of the derivatives-related legal issues raised by the recent bankruptcies of major crypto exchanges and market participants. It focuses on the importance of close-out netting and collateral arrangements for derivatives referencing digital assets and identifies several areas of focus for policymakers and market participants to ensure greater certainty. This includes use of standardized contractual frameworks and further legal clarity from national authorities on the property status of digital assets.

Digital-asset brokerage Genesis is struggling to raise fresh cash for its lending unit, and it's warning potential investors that it may need to file for bankruptcy if its efforts fail. The rush for funding was precipitated by a liquidity crunch at the lender after the sudden collapse of FTX, Genesis halted redemptions shortly after revealing on November 10 that it had $175 million locked in an FTX trading account.

"The Toronto-based Voyager filed for Chapter 11 bankruptcy protections Tuesday in the Southern District of New York, estimating that it had more than 100,000 creditors and somewhere between $1 and $10 billion in assets. It also recorded the same range for its liabilities."

Matt Taibbi asks some tough questions about the sanctity of the reserve assets that back Circles USDC stablecoin, and the issue of bankruptcy remoteness. Circle is unlike some competitors, whose user agreements specifically spell out that reserves are, say, "fully backed by US dollars held by Paxos Trust Company, LLC," or "custodied pursuant to the Custody Agreement entered into by and between you and Gemini Trust Company, LLC." Those describe trust agreements, which are truly bankruptcy remote. However, Circle is not a trust, so customers  are guarded only by protections afforded under state money transmission laws. However, Circle is only regulated  as a money transmitter in the states where Circle has licenses, and the firm has obtained licenses only in those states were licenses are required. There are other reasons to be concerned as a USDC hodler, and I recommend reading the whole post.

"Unless the Terms of Use expressly provide for digital assets to be held in trust for the customer, digital assets held in yield-earning or other accounts, where property is hypothecated by the cryptocurrency platform, are likely to be deemed property of the bankruptcy estate. "

"As we first warned last summer, crypto property held in a custodian-controlled account could become the property of that custodian in the case of a bankruptcy filing. At the time, we recommended that crypto investors avoid this possibility by self-storing their assets in either a "cold" or "hot" wallet. We urgently reiterate that suggestion now."

The World Federation of Exchanges (WFE) published good practice recommendations for crypto-asset custody providers. These include segregating client assets to ensure they are protected in the event of a company's bankruptcy, ensuring client assets remain bankruptcy-remote, having adequate insurance and/or surety bonds and disclose these policies in clear understandable terms, and seeking independent audits from reputable and credible auditors to provide an assessment of financial statements, process and controls.

The European Banking Authority (EBA) published a paper that uses a theoretical model to show how transparency incentivises stablecoin issuers to keep a larger share of the reserves in liquid assets, thus reducing the risk of runs and potential bankruptcy ex-ante. In addition, transparency on reserves disincentivises stablecoin holders from irrationally demanding the reimbursement of their funds. The model also suggests that regulatory interventions after a run has become imminent, in the form of a suspension, can still reduce the negative impact of potential bankruptcy on consumers, and that letting assets mature after imposing the suspension can deliver the first-best social welfare outcome.

Banking crypto exposes banks to an unpriceable type of credit risk related to chargebacks. If a consumer claims that a transaction was unauthorized or that they did not receive the goods and services ordered, they can initiate a chargeback with their bank. When that happens, the consumer's bank has a right to claw the funds back from the merchant's bank. That leaves the merchant's bank holding the bag unless it can recover the funds from the merchant. If the merchant is bankrupt or absconds, the merchant's bank-the payment processor-is stuck with the loss. As long as chargeback levels are predictable, payment processors can price for them. However, not only is there probably a relatively high baseline level of chargebacks for crypto, the chargebacks are also likely to be highly correlated whenever there is a market crash or allegations of fraud about a particular coin. So, if cryptos crash, chargebacks are likely to soar at the very time when the risk of the crypto company customer going bankruptcy rises. So the scenario that the payment processor is facing is that it will be hit with a tidal wave of chargebacks and that it will not be able to recover them from the crypto company, but will instead just have an unsecured claim in the crypto company's bankruptcy. The implication here is that no amount of crypto-friendly bank regulation is going to change the fact that prudent risk management committees will eschew crypto companies.

FTX announced that it has moved to file for Chapter 11 bankruptcy protection, along with FTX US, Alameda Research and approximately 130 additional affiliated companies. FTX Digital Markets, FTX Australia, FTX Expess Pay and LedgerX (which does business as FTX US Derivatives) are not included.