In this episode of “The Bitcoin Verdict,” host and partner Hailey Lennon welcomes Vanderbilt Law School professor Yesha Yadav and Brown Rudnick’s Bankruptcy and Corporate Restructuring Chair Robert Stark to discuss cryptocurrency bankruptcies, what led to them, and how clear regulation could have better protected investors.
Stark and Yadav, who co-authored an analysis of the intersection between crypto and bankruptcy in the Southern California Law Review, have spent months examining how bankruptcy courts have filled an administrative void and acted as quasi-regulators throughout the collapse of some companies within the crypto market.
In looking at the cause of the crypto bankruptcy wave, which started with the collapse of Terra Luna, Yadav said during the podcast there may not be one specific person to point a finger at. She noted that as with every industry – especially one so heavily involved with money – there are going to always be bad actors looking to steal money from those who are most vulnerable.
“That’s a problem that’s endemic to any system that is a financial system,” Yadav said. “What we’ve lacked in the crypto market is any set of regulatory guardrails that would provide adequate disclosure to customers. … In addition, we have lacked some really basic protections to keep the customer safe, to custody [assets] in a way that is segregated and bankruptcy remote.”
Stark agreed with Yadav, adding that one of the most important takeaway from the last few years is that bankruptcy is not an effective place to fix a broken regulatory system. Bankruptcy is meant to take a broken business, rehabilitate it, reorganize it’s financial structure, and then turn it into a viable business on the other side – not serve as a default regulatory arm of government, he added.
“Bankruptcy is not best to be thought of as a purely legal system; it melds law with business,” Stark explained. “Banks, exchanges and financial companies don’t do well in bankruptcy, as just a generalized matter. And we’ve known that for a very long time. … When a bank collapses, like Washington Mutual or Silicon Valley Bank more recently, there were bankruptcy cases, but before there was the bankruptcy case there was other systems migrating customers’ accounts and their management to a different bank or a different place, and then the bankruptcy was only to pick up the pieces of what was left behind. … But crypto didn’t want to be part of those systems, those industries had an anti-establishment kind of an ethos.”
Lennon, who has been involved in the crypto space since 2013, said she has had conversations with companies in the industry and they are frustrated with the lack of clarity surrounding regulation and registration requirements. She hopes to see Congress and the U.S. Securities and Exchange Commission take action on the regulatory front, so something like this doesn’t happen in the future.
“I think that people, at least in the industry, have started to think about not keeping their funds with one company, distributing that risk, self-custody,” Lennon said. “I hope that people take the future risks of something like this happening again very seriously and I think the work you both are doing will help push along some of the regulatory efforts that we’re hoping to see.”