Throughout history, societies have often condemned bankruptcy, morally viewing it as a violation of mutual trust and duty.
But after experiencing and reporting on several financial crises, I have come to appreciate the legal process that modern capitalism uses to solve this annoying problem. Although bankruptcy imposes an arbitrary and asymmetric burden on those carrying the debtor's suitcase, in times like these it provides a much-needed respite to restore market confidence.
You're reading Money Reimagined , a weekly look at the technological, economic, and social events and trends that are redefining our relationship with money and transforming the global financial system. Subscribe to the full newsletter here .
In 2022, when the dust settles after the chaotic collapse of some major crypto players, this idea comes back to mind. Recently, FTX, Celsius, Genesis, Voyager and others have made varying degrees of progress in their efforts to return value to creditors, demonstrating that bankruptcy can be an effective circuit breaker .
Similar to the automatic stop-trading triggers that many exchanges use when selling gets out of control, stalled payments and margin calls break the cycle of panic that leads to bank runs and self-reinforcing market crashes. themselves. The bankruptcy gives us enough time to turn the market from fear to greed so that price recovery can begin to reduce losses.
Only when market volatility is taken into account can investors more accurately assess the value of real estate assets. When directors hire professional managers and start selling assets to recover money, they invariably discover that the panic is overblown and that parts of the balance sheet are undervalued. At the same time, if an insolvent company has a portfolio of illiquid exchange-traded assets (or holds them for the benefit of others, as is the case with many insolvent crypto companies), there is a good chance that their value will improve with overall growth. . market conditions.
Of course, such recovery is not guaranteed. However, the inherent volatility and cyclicality of the cryptocurrency market means that a creditor is more likely to collect better on its debts if it holds out.
“Complete” FTX Recovery
Take, for example, the bankruptcy of Crypto-Winter's grandfather: FTX. The founder of the bankrupt exchange, Sam Bankman-Fried, is in prison convicted of massive fraud, but John J. Ray III, the new CEO hired to recover the value of FTX assets on behalf of creditors, has been hard at work to recover most of what was lost. money.
The company revealed in a court filing this week that it plans to pay the full payment amount to the exchange's customers. The definition of "done" will be the subject of some debate as the company uses the date of its bankruptcy filing as a reference point, two weeks after FTX's problems had already driven down the price of most tokens for exchange clients. However, this is a significant improvement over the time when FTX creditor claims were trading at just 15 cents on the dollar.
The main driver of the recovery is the cryptocurrency market. At the time of writing, Bitcoin's price is just below $43,000, down from $18,200, the bottom of the bear market when FTX filed for bankruptcy on November 22. At the same time , the CoinDesk 20 index of top crypto tokens rose by 88%. This rising tide has given a boost to many delinquent lenders.
Of course, some of the profits of some insolvent companies come to the detriment of other distressed companies. Tensions rose during a dispute between bankrupt creditors FTX and Voyager in the summer of 2022. At one point, Bankman-Fried's company came close to acquiring Voyager, a troubled asset deal that fell apart two months later when FTX itself went bankrupt. . Last year, Voyager's estate became embroiled in a legal battle with FTX's trading arm, Alameda, which was demanding about $445 million in debt payments.
And Greyscale's digital asset manager, another failed lender, Genesis Global Capital, both owned by Digital Currency Group, the former owner of CoinDesk, recently experienced a significant outflow of FTX assets after being hit by the recent Bitcoin Trust conversion ( GBTC) from which he had benefited. Grayscale exchange. -Traded fund (ETF). ) will sell nearly $1 billion worth of GBTC stock. On Monday, Genesis went even further and sought court approval to sell $1.6 billion worth of Grayscale trust assets, the majority of which is now held in a Bitcoin ETF.
But these advances are also part of the clarity needed to stabilize the industry. There are other positive stories elsewhere. Last month, Celsius, another failed lender, officially emerged from bankruptcy by announcing a $3 billion payment to its creditors . And this week , the Voyager VGX token was added to the Gala Games blockchain , which could provide holders with an additional source of liquidity.
Dirty clothes
As attorneys Yesha Yadav and Robert Stark noted in an article last October , the bankruptcy filing fills a void left by U.S. regulators who have failed to develop a clear regulatory framework for the tech industry. Cryptography. This distorts the normal recovery process as it means that failed exchanges cannot safely continue operations to recover funds from creditors. In my opinion, this is more a failure of the political regulation process than the activation of an insolvency procedure.
In fact, Yadav and Stark identify key areas where bankruptcy courts have upheld important business principles that regulators have failed to enforce. FTX, Celsius and others used their judicial power to force disclosure of terrible behavior in customer accounts. This information will now help shape the reform.
Hopefully, most of the dirty laundry has now been exposed and investors won't have to face another brutal reckoning anytime soon. But since there was so much mess to clean up, we can be grateful for the cleanup through the bankruptcy process.