Crypto Exchange Has Collapsed – Is Bankruptcy an Option?

Feb 7, 2023 | Bankruptcy

We’ve talked about cryptocurrency before, and yet here we are. Why are we at it again? Who really cares about cryptocurrency and possible bankruptcy? Does this affect anyone in the real world? How many questions can we ask in a row before we are completely and utterly confused? Shall we continue?

Cryptocurency – What Is It?

Douglas Adams, in The Ultimate Hitchhiker’s Guide to the Galaxy, said this about an alternate currency:

“Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich. […]

“But we have also,” continued the management consultant, “run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying on ship’s peanut.” […]

“So in order to obviate this problem,” he continued, “and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and…er, burn down all the forests. I think you’ll all agree that’s a sensible move under the circumstances.”

If enough people agree that some object represents something of value, then that object takes on value. Let’s say our little group decides that seashells can be used for this purpose. We then start using shells to trade for services or goods. Having such a currency encourages us to do work for others or to make things other people want so that we can get more shells. We can exchange them for goods and services that we desire but cannot or will not provide for ourselves.This also means that we can save these shells instead of spending them to increase our wealth.

These shells sound a lot like money, don’t they? This is pretty much how cryptocurrency functions, at least in its most simple form.

Why Bother With Cryptocurrency?

Playing with cryptocurrency seems like a risky game, doesn’t it? What’s the motivation? Why would anyone bother?

Any time you see people with money getting interested in an investment, a business, or some type of scheme, you can usually assume there’s a way to either make money or save money by getting involved, and cryptocurrency is no different.

A big motivation for using cryptocurrency is the lack of official, government regulation. Trading, spending, investing, and making money using traditional currency is subject to a lot of regulations, and taxes. Converting all of these activities into a new currency can be an end-around to government-imposed regulation, allowing for the free, unfettered exchange of those valuable objects we call money.

Isn’t Crypto Risky?

Douglas Adams wrote the words above decades ago, but they are as true of leaves as they are of crypto. There’s a lot to gain from unregulated economic exchange, but there’s a lot to lose. It’s like being West of the Pecos River in the Old West, except at least then you could carry a six-gun. Crypto might be more like being up a creek without a paddle.

The cost of an unregulated currency and the market thereof can be an expensive one. It’s easy for the whole thing to completely collapse without some kind of oversight. You can buy cryptocurrency with real currency, like American Dollars, and you can do real work for cryptocurrency, like debugging a friend’s computer program. If the whole market dies, your money and your effort die with it.

Has a Cryptocurrency Exchange Ever Collapsed?

Unfortunately, yes. It has been all over the news recently. We’ve seen at least one crypto exchange die. That means that people potentially lost a lot of real money when this happened. It’s a tale of caution for anyone who is interested in investing in crypto.

Was there corruption? Possibly. There has been talk that there was some potentially illegal or at least, unethical dealings by some of those who were running the exchange. Whether or not this is true, it begs the question – couldn’t this happen with any form of investment, crypto or otherwise?

You would have to be kidding yourself if you think there’s no chance for corruption or dishonest dealing in any context where you are an investor. However, when the market is regulated, there are safeguards in place to ensure that dishonesty doesn’t directly affect your investment – at least not completely.

For example, you might buy stock in a company that seems like blue chip solid gold. Maybe it’s been that way for decades, but things change. The new CEO gets caught with his hand in the cookie jar. Next thing you know, his name is all over the news. Turns out he’s done some illegal insider trading, or maybe misappropriated company funds. Maybe the whole board of directors colluded to do something unsavory.

Regardless of the possible scenario, virtually all investments have some risk associated with them, and the potential for human dishonesty affecting the value of your investment is an ever present reality.

You’ve also probably heard that you should hedge your bets. Is it wise to put all of your money into crypto? Probably not. Is it wise to put all of your money into any one thing? Not likely. Is it wise to put any money into crypto? You’d have to decide for yourself based on what we’ve seen so far.

Can Crypto File for Bankruptcy

Can you picture two cowboys riding out onto the Wyoming plane, looking into the setting sun and the golden fields of grass blowing in the wind saying, “That there is new territory, I reckon.”

The camera, now zoomed in on a profile of their faces, begins to pull back. As the image expands we begin to appreciate the utter vastness of that new territory. We see the growing dusk and the shrinking image of the two cowboys on horseback – a final tableau before fading to black.

We all reckon that crypto is new territory. Besides, it takes an eternity for the law to catch up to anything new, especially something new and unprecedented like crypto. So the answer to whether or not a crypto exchange can file for bankruptcy is not exactly as clear as it could be. What happens when the image fades to black?

A crypto exchange is a business entity, so for all intents and purposes, it should be able to file for bankruptcy. Let’s not worry about issues such as jurisdiction (what country/court etc. it would be allowed to file in). For argument’s sake, we will just treat our hypothetical crypto exchange as eligible for bankruptcy in the United States.

What chapter of bankruptcy would it file in the US? It would file for chapter 11, since almost all business bankruptcies are chapter 11. It is not like the bankruptcy your cousin Gary filed. You can’t just stroll into an attorney’s office with a stack of papers and walk out having filed bankruptcy and eliminated your debt. That’s chapter 7 bankruptcy, and that just doesn’t work for a big business.

A chapter 11 bankruptcy is considered a restructuring of a business. Thus after filing, the business doesn’t necessarily die. At the completion of chapter 11 bankruptcy, a business will often be smaller, free from most debt, and under new ownership. Its creditors will have gotten some of what they were owed, but not everything. But there are times when a business is done for at the end of chapter 11. This often takes place when there is no hope for the business to make money no matter how restructured it is, and/or it doesn’t have enough assets to continue.

Does a Crypto Exchange Have any Assets?

Considering the whole venture revolves around creating a currency that has no traditional monetary value, the likelihood of a crypto exchange having a lot of fungible assets is low, unless the business invested in real cash, or other assets that could be sold as part of a chapter 11 bankruptcy. So it’s unrealistic to expect that a crypto exchange could survive the restructuring process of a typical chapter 11 bankruptcy. And if you are a creditor of the exchange (which would be anyone who owns cryptocurrency in that exchange), you will have a low chance of getting anything of value from the exchange if it files for bankruptcy.

In Conclusion

A crypto exchange will probably be able to file for chapter 11 bankruptcy, but it won’t have a means of surviving the bankruptcy. Also, it will likely not have the resources to pay you if you own currency in that exchange. If the threat of your cryptocurrency or crypto exchange filing for bankruptcy and leaving you high and dry scares you, it should. Caveat emptor.

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