Abstract

Late 2022 was crypto’s Minsky moment, characterized by wholesale sector collapse and over a dozen major bankruptcies, including FTX’s implosion. For millions of investors, it was the worst of all worlds, combining the frenetic contagion of 2008 with consumer protections most reminiscent of the Panic of 1907.

While the industry’s challenges are often attributed to the nature of crypto itself, the true root cause reflects a fundamental category error. This Article’s comprehensive market taxonomy identifies as the sector’s nexus of risk entities it terms “Crypto Platforms,” like FTX. Crypto Platforms are essentially financial institutions – a cauldron of externalities subject to comprehensive oversight and tailored insolvency frameworks. Yet, despite presenting similar risk profiles, Crypto Platforms have not been treated as such, evolving in an unsupervised parallel universe-turned systemic risk tinderbox. Compounding the challenges, Crypto Platforms appear generally ill-suited for the Chapter 11 reorganization processes to which they have inaptly defaulted.

Crypto’s 2022 crisis and exceptionally problematic bankruptcies underscore the need for a paradigm shift with respect to sector oversight and insolvency resolution. First, to prevent future crises, regulation must emphasize substance irrespective of form – uniform treatment for uniform risks – while evolving beyond an instrument-level approach toward broader sector oversight including Crypto Platforms as well as emerging risks. Second, distressed Crypto Platforms should follow the financial institution bankruptcy template: orderly liquidation to facilitate prompt return of customer assets. Both recommendations are actionable using existing legal tools, without the need for bespoke crypto-specific legislation or regulatory action.

Document Type

Article

Publication Date

Spring 2024

Publication Information

98 American Bankruptcy Law Journal 97-173 (2024)

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