By Ronit J. Berkovich and John Marinelli
Weil, Gotshal & Manges attorneys Ronit Berkovich and John Marinelli highlight major factors in cryptocurrency’s recent downturn and the likely uptick in legal action and industry regulation as more companies file for bankruptcy.
This past summer, the crypto industry experienced a significant downturn. Precipitated by interrelated factors in the traditional economy and crypto sector, industry distress caused a crash in cryptocurrency prices and several high-profile insolvencies.
Notably, crypto firms Voyager Digital, Celsius Network, and Three Arrows Capital all filed for chapter 11 or similar proceedings.
This crash has impacted many individual retail holders of cryptocurrency. As the insolvencies progress, courts may clarify open questions of insolvency law related to crypto.
It has focused attention on the need to resolve longstanding regulatory uncertainty in the space with more thorough controls. And it may produce clearer rules for the crypto sector.
Beginning in late 2021 and continuing into this year, cryptocurrency prices declined from all-time highs to much lower levels. Between November 2021 and June 2022, the price of bitcoin—widely considered a proxy for the crypto market—plummeted from an all-time high over $68,000 to just below $20,000 where it remains today.
The roots of this crash date to the earliest days of Covid-19. As central banks and governments enacted relief programs to alleviate economic turmoil, asset prices skyrocketed across multiple sectors, including cryptocurrency. In 2022, however, these stimulus programs began to wind down.
Their end coincided with Russia’s invasion of Ukraine and a resultant rise in commodity prices as governments imposed sanctions against Russia.
Fear of a coming recession spread throughout the economy, and tech assets of all kinds dropped in value. Crypto assets did not escape this broad downturn, and their values dropped steadily through early 2022.
This decline accelerated in May when stablecoin UST lost its peg to the US dollar. Stablecoins—a type of crypto asset—seek to maintain a specific value relative to another asset. UST aimed to maintain a value of exactly $1.
But in May, the system that maintained this value failed, users rushed to sell their holdings of UST and sister cryptocurrency Luna, and both coins became completely worthless.
Because of UST’s consistent price, cryptocurrency traders relied extensively on the stablecoin to buy and sell other crypto assets. When this common medium of exchange lost its value, users sold other assets to recoup their losses, causing the previously steady decline of crypto prices to accelerate into an outright crash.
This downturn affected firms and investors throughout the sector. Companies with significant exposure to UST and Luna were the most negatively impacted, and their inability to satisfy financial obligations led to a domino effect on other companies.
As crypto investors heard this news, they withdrew investments from crypto exchanges, leading to further price drops and liquidity issues.
As a result of the crash, crypto exchange Voyager Digital, lending platform Celsius Network, and crypto fund Three Arrows Capital all began insolvency proceedings. These cases remain pending in US bankruptcy courts and elsewhere.
The crypto downturn may ultimately result in more clear rules for the space as courts in these insolvency proceedings resolve open questions of law and regulators consider more stringent controls on cryptocurrency in response to the crash.
The Voyager, Celsius, and Three Arrows insolvency proceedings may produce some long-sought legal clarity with respect to cryptocurrency. As these cases progress, courts may engage with—and resolve—various open legal questions, including:

A committee of account holders in the Celsius chapter 11 cases has sought a declaratory ruling that custodial accounts are not property of the bankruptcy estate. As these cases progress, courts may soon resolve this and other similar questions of law.
The industry plunge has also caught the attention of US regulators and legislators. Because stablecoins create particular economic risks—as evidenced by the impact of the UST and Luna collapse—regulators are particularly focusing on those assets.
On March 9 President Joe Biden signed an executive order encouraging federal action with respect to cryptocurrency. Among other measures, the order called for the Treasury Department to develop policy recommendations and an oversight regime to address the growing crypto sector.
Legislators have also set their sights on crypto, and several major bills are being discussed. The proposed Stablecoin Transparency Act, pending in the Senate, would require any issuer of stablecoins to register as a money transmitting business, an insured depository institution, or a new category of business.
Separately, the Responsible Financial Innovation Act, also pending in the Senate, would require stablecoin issuers to maintain traditional assets equal to the value of their outstanding coins, preventing the sort of collapse that UST and Luna experienced.
And an as-yet unnamed bill pending in the House of Representatives would reportedly allow banks to issue stablecoins and appoint the Federal Reserve as overseer of non-bank stablecoin issuers.
For these reasons, the crypto downturn may result in clearer rules for the crypto space as courts resolve open questions of law and regulators impose new controls.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Ronit J. Berkovich is a partner in Weil, Gotshal & Manges’ restructuring department where she represents debtors, creditors, lenders, investors, and acquirers of assets in all aspects of distressed situations.
John Marinelli is an associate in Weil’s restructuring department.
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