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- Title
THE BANKRUPTCY COURT AS CRYPTO MARKET REGULATOR.
- Authors
YADAV, YESHA; STARK, ROBERT J.
- Abstract
In the second half of 2022, several large and systemically important cryptocurrency firms, such as BlockFi, Celsius, FTX, and Voyager, collapsed into bankruptcy. Their sudden implosion can be attributed, at least in part, to a scant pre-existing framework for oversight, allowing firms to engage in runaway risk-taking, exuberant opportunism, and, in some cases, outright fraud. Bankruptcy courts adjudicating these cases found themselves in a strange role: serving as a sort of proxy overseer for a maturing cryptocurrency industry, and forced into doing some of the work historically entrusted to regulatory agencies like the SEC, CFTC, and Fed. This Article explores the implications of bankruptcy courts being drafted into this kind of quasi-regulatory service. We observe that bankruptcy's intervention comes with numerous payoffs, given that Chapter 11's end-goals often align with traditional regulatory objectives. Indeed, by case necessity, bankruptcy courts have overseen broad and detailed reporting from some of the industry's darkest corners, rendered decisions that likely will have lasting impact on customer protection, directed regulatory attention to particular points of public vulnerability, and afforded opportunity for regulatory agencies to advance their policy initiatives. Nevertheless, we also observe that bankruptcy courts are inadequate proxies for administrative, technocratic oversight. Focused mainly on the debtor's fate, the Bankruptcy Code is ill-equipped to address, in a prophylactic way, system-wide risks in crypto markets. Even disclosure--a foundational regulatory tool--works idiosyncratically when delivered in the bankruptcy context, intended to inform the debtor's stakeholders in furtherance of bankruptcy-specific imperatives, rather than to facilitate knowledgeable investing by the general public. Bankruptcy courts are, moreover, statutorily constrained in ways that lack the mission, modalities, and mechanisms to protect an industry and its participants. As we show here, even as bankruptcy courts have stepped up to do their work, their role in overseeing crypto bankruptcies firmly establishes a paramount need for comprehensive regulation tailored for the digital asset space.
- Subjects
BANKRUPTCY courts; CRYPTOCURRENCIES; CORPORATE bankruptcy; CONSUMER protection; PROXY; GOVERNMENT agencies; FRAUD; UNITED States. Bankruptcy
- Publication
Southern California Law Review, 2023, Vol 96, Issue 6, p1479
- ISSN
0038-3910
- Publication type
Article