Tips for filing companies and investors

A series of cryptocurrency bankruptcies in 2022 have triggered what analysts are calling a “crypto winter,” a prolonged period of price declines in the crypto market, with the market losing more than $2 trillion in 2022 and many investors' assets frozen due to bankruptcies.

According to CNBC, by December 2022, many popular cryptocurrencies, including Dogecoin, Bitcoin, and Terra, had fallen in value by 55% to 100%. The market turmoil began with troubles in May 2022 with TerraForm Labs and its cryptocurrency, TerraUSD.

Terraform Labs' troubles sparked the collapse of several other crypto lenders, including Voyager Digital, Celsius Network and Three Arrows Capital. Crypto's down year culminated in December 2022 with the bankruptcy of FTX crypto exchange and its affiliated hedge fund Alameda Research.

Since then, investors who were barred from withdrawing funds from bankrupt crypto companies have filed crypto bankruptcy lawsuits to get their money back.

The crypto bankruptcy list includes crypto exchanges and lending firms such as Genesis Global Capital and FTX. Several crypto companies filed for bankruptcy after other insolvent companies were unable to repay their debts.

Genesis Global Capital

Genesis Global Capital filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York in January 2023. Immediately prior to the bankruptcy filing, the crypto-lending firm froze customer redemptions.

The company, owned by Digital Currency Group, has assets and liabilities in the range of $1 billion to $10 billion, and Genesis estimates it has more than 100,000 creditors.

FTX

Cryptocurrency exchange FTX filed for bankruptcy in November 2022, along with its hedge fund Alameda Research. This is the first major cryptocurrency exchange to file for bankruptcy. Some investors are still unable to withdraw their funds. FTX investors include some of Canada's largest pension funds.

The Securities and Exchange Commission has filed charges against the owner of both companies, Sam Bankman Freed, who also faces criminal charges of fraud and conspiracy but has pleaded not guilty.

According to a lawsuit filed by Steven Pierce against FTX, over one million depositors lost their funds after the company collapsed. Other investors are also suing FTX for their funds.

BlockFi

In November 2022, weeks after FTX collapsed, crypto lender BlockFi filed for bankruptcy. The crypto lender said it had run into a liquidity crisis as it had relied on a $400 million loan from FTX to stay in business.

Celsius Network

Celsius filed for bankruptcy in July 2022. The cryptocurrency lender found itself in financial difficulties after the collapse of TerraUSD and its digital currency, Luna. At one time, the lender had promised yields as high as 30% to its crypto clients.

The lender suspended withdrawals from hundreds of thousands of customers in June 2022. The company is involved in a fraud investigation and has been accused of poor handling of customer accounts and customer privacy, among other things.

Voyager Digital and Three Arrows Capital

After hedge fund Three Arrows Capital filed for bankruptcy, crypto lending and brokerage Voyager Digital filed for bankruptcy in July 2022. Both companies halted customer withdrawals of funds shortly before filing for bankruptcy.

Both companies have had liquidity issues following the collapse of TerraUSD and Luna.

Voyager has more than 100,000 creditors and its assets and liabilities are estimated at between $1 billion and $10 billion.

Gemini Trust

Another company caught up in a cryptocurrency bankruptcy lawsuit is Gemini Trust. Gemini has not filed for bankruptcy, but about 340,000 investors in its lending program, Gemini Earn, lost hundreds of millions of dollars when Genesis Global filed for bankruptcy. The company subsequently laid off a significant number of employees and halted withdrawals from the Gemini Earn program.

Gemini Trust and its founders, Cameron Winklevoss and Tyler Winklevoss (also known as the Winklevies or Winklevoss Brothers), are facing a class action lawsuit from investors seeking the return of their funds. Similar to the plaintiffs in the FTX and Genesis lawsuits, the investors who filed the Gemini lawsuits accused Gemini Trust of selling unsecured securities.

The reasons for each crypto bankruptcy are complex, but in general, the biggest crypto bankruptcies of 2022 followed the collapse of TerraUSD and FTX. Many crypto exchanges and lenders are interconnected, with each company's liquidity dependent on investing in and lending to others.

FTX collapsed after clients massively withdrew as much as $6 billion in the next 72 hours after it was allegedly lending client funds to Alameda Research for risky bets. FTX's collapse, along with that of Three Arrows, led to the collapse of Genesis Global, as Genesis had invested some of its funds in these companies and lost that money in the bankruptcy.

BlockFi filed for bankruptcy after FTX filed for bankruptcy and was unable to lend money to the struggling company. Celsius, Three Arrows and Voyager all filed for bankruptcy after the collapse of TerraUSD and its cryptocurrency, Luna.

The 2022 crypto bankruptcy will impact investors because these crypto lenders and exchanges froze investor assets just before filing for bankruptcy. This means millions of customers lost access to billions of dollars. For many, this was their life savings and many felt their legal rights had been violated.

Additionally, many people who suffered losses in crypto bankruptcies had a hard time reporting them come tax season 2023. According to Bloomberg, investors were unable to report assets frozen in crypto bankruptcies as losses because “outside of the courts, the IRS has eliminated the option for taxpayers to report losses under Section 165 of the tax code if they experience a steep decline in value.”

Investors may attempt to file claims as creditors in bankruptcy with the respective bankruptcy courts, but this is often a complicated process. Instead of filing claims themselves, some investors are choosing to file cryptocurrency bankruptcy lawsuits to get their funds back.

For investors interested in filing a crypto bankruptcy lawsuit, there are time limits on your claims. To protect your right to file a lawsuit, you should speak to a crypto bankruptcy lawyer immediately.