Secured lenders who include personal property assets as collateral in lending transaction structures have long relied upon the regularity and clarity of the Uniform Commercial Code (“UCC”) provisions which provide a roadmap for creation, perfection and enforcement of security interests in personal property. Revisions made to the UCC since 2000 have recognized and incorporated concepts to address changes in marketplace reality driven by technological advances.  The creation of cryptocurrencies, however, has posed challenges to entrepreneurial lenders and their counsel who desire to reach a level of comfort that a perfected security interest in a cryptocurrency can be achieved within the existing UCC framework.  The mere fact that a new Article 12 of the UCC, tentatively entitled “Controllable Electronic Records”, is in the early stages of adoption in state legislatures is proof enough that current law is at best inadequate to address issues peculiar to digital asset classes, including cryptocurrencies. The Wyoming legislature amended its version of UCC Article 9 effective as of July 1, 2019 with the intent of permitting perfection by control for cryptocurrencies (by controlling the applicable private key, including through a multi-signature arrangements) without addressing significant legal, practical and policy issues addressed in the proposed new Article 12 and its conforming amendments to other UCC articles.  It is presently unclear if Wyoming will follow other jurisdictions in adopting the Article 12 regime.

Secured lending against cryptocurrencies as collateral is but one of the topics addressed by the proposed UCC revisions.   Lenders who are currently taking  cryptocurrencies as collateral and their counsel have followed two basic approaches to achieve security interest perfection to the extent possible under current law:

Approach 1: The cryptocurrency is transferred to a securities intermediary, the securities intermediary agrees to treat the cryptocurrency as a “financial asset” which is then credited to the borrower’s “securities account” held at the “securities intermediary,” and the securities intermediary, the borrower and the lender enter into a control agreement as to the “securities account” and the “securities entitlement”; or

Approach 2: The lender files a UCC financing statement indicating the cryptocurrency/general intangible as collateral, the borrower provides the lender with the private key, and the lender transfers the cryptocurrency into its own public address or “wallet”. Note that absent the filing of the financing statement, the lender will be unperfected; having the cryptocurrency in the lender’s “wallet” alone does not perfect the security interest. Often, lenders may have no option under current law other than to perfect via Approach 1 as borrowers may be apprehensive about transferring the cryptocurrency to the lender and having a public record by filing of a financing statement tying the borrower to ownership of cryptocurrency, especially if the public address or amount of cryptocurrency is disclosed in the financing statement.  

Neither of these approaches, however, provides the securities intermediary or the secured party with any legal or practical assurance that the borrower owns the cryptocurrency free of other claims, nor that the securities intermediary will acquire the cryptocurrency free of other claims. Under the current version of Article 9 of the UCC there is also no way to ensure priority of the security interest without obtaining a release or subordination from all other secured parties, even if they are disclosed.  While the Wyoming non-uniform UCC amendments offer some additional protections, these uncertainties cannot be fully resolved under the current state of the law.

Therefore, lenders may need to simply rely on representations and warranties from the borrower as to its ownership of the cryptocurrency being free and clear of liens and other adverse claims encumbrances. In addition, in order to provide some comfort to the lender until the law catches up with the marketplace, the lender may need to engage in a factual diligence process to protect itself from other claimants to the cryptocurrency that may exist at the time of the transfer to the securities intermediary or the filing of the financing statement, such as examining the on-chain transactions and inquiring about the prior owners and prior public addresses of the cryptocurrency being used as collateral. In practice, while not fully resolving these concerns, some lenders have required borrowers to incorporate a borrowing entity in Wyoming to utilize Wyoming’s amendments to Article 9 to make use of the perfection by control rules available in that jurisdiction.

The revisions to the UCC, once enacted, will as a legal matter, create uniform rules for perfection of “controllable electronic records” (a new asset class that includes digital assets broadly defined and most, but not all, cryptocurrencies) via a “control” regime aligned to the peculiarities of this new asset class and rules that will either cut off prior claims or that will give the secured lender with control a priority over other claims.  These revisions are more clear and robust than the non-uniform Wyoming amendments. Wyoming, for example, provides for a cut off of prior claims only after two years following perfection by filing provided the secured party does not have actual, as opposed to constructive, notice of an adverse claim during  two-year window. Unlike the very familiar account control agreements for deposit accounts and securities accounts currently in use where parties can look for the magic language that imparts “control” to the secured party, the new Article 12 paradigm will  require careful analysis to determine if in fact the asset in question is a “controllable electronic record” and whether it is meets the newly developed tests for “control” of a “controllable electronic record” set out in the new Article 12. It is unlikely that a “form” document like an account control agreement will be the one size fits all mechanic to gain perfection by “control” for this asset class.

On September 22, 2022, Compute North Holdings, Inc. and certain affiliates filed bankruptcy in the Southern District of Texas in Houston.  The company describes itself as “a leader in data centers, focused on delivering sustainable, cost-effective infrastructure for customers in the blockchain, cryptocurrency mining and distributed computing space.”  See Declaration of Harold Coulby, Chief Financial Officer and Treasurer of the Debtors (Doc. 22). It owns and operates three operating facilities that provide remote computing capacity and has rights to two others that remain in development. Its main business lines include (i) hosted cryptocurrency mining services, (b) bitcoin mining, and (c) cryptocurrency equipment sales. See Id.

The company attributes its predicament to a severe liquidity crisis that constrained its ability to complete development of two facilities that had begun prior to the distress that has marked the digital assets markets in 2022. In particular, it points to the drop in bitcoin prices to levels almost 75% below its peak in late 2021 and the doubling of costs for electricity required for bitcoin mining. See Id. The company also encountered extreme difficulties with one of its lenders, Generate Lending, LLC (“Generate”), the lender on a $300 million credit facility. Following a number of alleged defaults under the facility, among other things, Generate effectively ceased control of a non-debtor subsidiary that indirectly owns two critical facilities, including the so-called “crown jewel.” The company says that it had disputed the existence of the alleged defaults and remains in discussions with Generate regarding financing. See Id.    

With regard to its mining operation, the company says that it maintains cryptocurrency wallets which contain customer “subaccounts or subwallets” — the mining gear that is awarded bitcoin “could belong to a customer.” The wallets are maintained on the Genesis and Bitstamp exchanges. See Id. Given the opacity in this largely unregulated environment, it is unclear whether there will be any dispute regarding the ownership of bitcoin maintained in those wallets.

Like Voyager and Celsius before them, the company filed bankruptcy without arranged financing. The case will be funded at the outset with the company’s limited unrestricted cash (approximately $8.7 million).Also similar to those cases, the company plans to pursue a dual path process, either a sale of the business as a going concern or a stand-alone plan.  See Id.  

We will continue to provide updates as circumstances warrant.

Crowell’s Crypto Digest Blog sat down with MakersPlace’s Head of Legal and Trust and Safety, Kayvan Ghaffari, to learn about the NFT marketplace and the current legal landscape regarding NFTs.

What does it mean to be the Head of “Trust and Safety”?

Trust and safety revolve around ensuring the platform is secure and safe, and ensuring that whoever interacts with the website has a trusting relationship with the platform.

To me, it involves four buckets.

One, is content moderation. Essentially, how are we thinking about the content that is being provided on our platform? We are thinking through these murky issues to make sure people are safe and that there is nothing inherently wrong, illegal, or harmful on our platform.

Second, is fraud. How do we prevent fraud and scams from occurring on our platform? This is a big issue in the art world and also the digital assets space. We want to make sure we have a reputable platform that people engage in.

Third, is cybersecurity. How do we maintain our infrastructure and secure it?

Finally, intellectual property. How do we approach potential IP theft? All of these encapsulate trust and safety at a high level.

How did you come into your role at MakersPlace?

MakersPlace was a client of mine when I was at Crowell. What I did for them for the most part was IP due diligence. They would send artistic works from creators before they were launched and I would look at them and see if there were any IP issues. I was really fascinated by this work. There’s a lot of IP issues around art, including licensing, copyright, and trademark issues.

I never anticipated being an art lawyer. Working with any startup is a fascinating opportunity. They don’t take no for an answer and you are required to think creatively about a solution. Regardless of where they are located in the world, they have this ethos of “break it and then fix it.” As a lawyer, you’re saying “alright, here’s a set of items you want to achieve, I can’t tell you, ‘you can’t do this.’” That doesn’t work, because the startup will go to another law firm. Instead, I find ways to mitigate that risk and look at the startup’s risk tolerance. You don’t get that same issue with large institutional clients. With startups, you’re forced to reckon with that. From that perspective, it always fascinated me and interested me – it’s something I always enjoyed in my career. When they asked me to take this role, it was a hard decision, but it was an opportunity to flex my creativity and I couldn’t say no to it. I have a chance to operate at the cutting edge of IP issues. 

What’s the mission of MakersPlace?

Our company is called MakersPlace, a place of makers. Our goal is to empower creators and to give them a platform to speak. We want to connect these creators with collectors who value and appreciate that art and expression. We haven’t wavered from this mission. This is evident by the fact that we have not deviated from being a curated marketplace. It’s also why in our smart contracts there’s a built-in royalty flow where an artist will gain royalties for any secondary sale of that particular art in perpetuity. This is a revolutionary system for creators. This has never happened before in the “traditional” art world.

What’s exciting you right now at MakersPlace?

The first thing that comes to mind is O(V.)Erturned.This month-long exhibition featured women creators. The idea behind this came after the Supreme Court overturned Roe v. Wade. We as a company took issue with that decision and we issued a public statement condemning the decision. So, we wanted to empower women voices and amplify them. We had a curated exhibition, just of women creators, where we donated all of our commissions to Planned Parenthood, the ACLU Reproductive Freedom Project, and the Brigid Alliance. Each week we had a Twitter Spaces with some of our women creators. It was such a remarkable, moving, powerful experience to hear these women and hear about their inspiration and their thoughts on the Supreme Court’s decision. Hearing the raw vulnerability of these creators was so moving.

What are the goals of MakersPlace moving forward?

We want to really lean in and maintain our message of being a curated digital marketplace for leading artists.  In many ways, we want to be premier destination of digital art. We want people to think about and be proud of owning a beautiful piece of digital art. It is art. It’s just using another medium – a new technology – to communicate that art. We want to become the go-to for art. And we want to be able to cultivate that community of collectors who value and appreciate it in a material way.

And, as a I mentioned earlier, trust and safety is a big deal, MakersPlace is taking and making strides to lean in on trust and safety. We want to be totally transparent about issues that are happening on the platform, and being transparent on what our views are on content and moderation. I want to ensure that anyone that spends any money at MakersPlace can trust that they are receiving the value for what they spent money on.

On the flip side, what are some challenges that are on the horizon?

The biggest challenge is the unknown. The regulatory uncertainty is challenging. We don’t know who is going to regulate us. What they are going to regulate us with. We don’t know how everything is going interplay with laws in other countries. We’re starting to see hints of it, but it will be interesting to see how it all plays out. In many ways, it’s helpful to be regulated because it creates some certainty.

Of note, the SEC recently announced that they are doubling the size of their digital assets division and for the first time the SEC has identified NFTs as an area of focus.

In general, how would you use outside counsel and how can outside legal counsel be helpful to MakersPlace?

There are a few things that outside counsel can do to help MakersPlace and any NFT company.

First, monitoring what laws are happening. What’s the noise on the ground? What is the SEC saying? What is the CFTC saying? What is Congress saying on NFTs? This all goes to what regulations will be applicable. I think law firms need to keep their ears to the ground and immediately notify companies like MakersPlace about any developments and, critically, to provide insight on how it may affect us.

Outside counsel would also be helpful in IP litigation. Or any litigations. The non-digital art world is full of litigations both in terms of IP litigation but also a “who owns it?” litigation, what is the commission split, breach of contract stuff. I suspect we’ll start to see additional activity in that domain in the next few years. Scam and fraud are happening a lot in this ecosystem as well. It’s not just isolated to NFTs and crypto. It happens all the time outside of this space.

Most importantly, and lastly, when I’m asking outside counsel for advice, I’m asking, “what should I do?” I’m not asking for a recitation of the law. Take the law and tell me what to do with it. First and foremost, I’m paying you to tell me what to do first. I don’t necessarily need or want a memo or full-blown analysis of the law. I need lawyers to give me solution and provide a pathway of how we’re going to mitigate those risks.

What predictions do you have for the NFT ecosystem in the next few years?

I think we are starting to see a lot of consolidation of marketplaces. I think people are being smarter about NFTs, and digital assets in general because there have been a lot of rug pulls recently. We’ve launched an education hub on our platform which is designed to actually educate people on NFTs, including on what it takes to become a creator and collector on our platform.

I also think we’re going to see a bifurcation and trifurcation of the industry. We’re going to see companies like OpenSea that are open marketplaces. And we’re going to see curated marketplaces. And we’re also going to see studios that are facilitating creators that will feed into these marketplaces.

Anything else that you want to communicate about MakersPlace and the NFT space?

It’s a young space. If we think about the internet and where it is and how many issues there are, it’s like what my mentors Gabe Ramsey and Warrington Parker would always tell me, “it’s kind of like an adolescent riding a bus.” We kind of know what it is. We kind of have an understanding of its full potential, but we don’t really know, and don’t really have the capacity and the maturity to really understand it. With NFTs, we’re like children driving a bus. It’s an exciting industry that needs to be taken seriously. The industry needs to do a better job of educating people about its capacity and about instilling trust and safety within the industry, and we’re trying to do that through our MakersPlace Education Hub. From an intellectual perspective, there are a lot of opportunities to pave the way and be leaders from a business and artistic perspective. It’s scary, but also really fun. There are so many ways this industry can mature and adapt. I found it both exciting and impactful.

The UK has seen the launch of a competition-law based collective action – the equivalent of a class action in other countries – on behalf of an estimated 240,000 investors in the digital assets space.  The claim is brought against four cryptocurrency exchanges: Binance, Bittylicious, Kraken and ShapeShift.  It alleges that those exchanges colluded in delisting the Bitcoin Satoshi Vision (BSV) currency; and converting BSV to other cryptocurrencies without investor consent.  The claim is being brought by BSV Claims Limited, a special purpose company set up to bring the action.

This is interesting for a number of reasons.  First, it is the first time that a competition law claim has been brought in the digital asset space in the UK.  Second, the level of the claim – at just under £10 billion – would, if successful, be the second largest UK collective action to date and would have serious consequences for the four exchanges.  Third, the class representative and founder of BSV Claims Limited is Lord David Currie, a previous Chairman of the Competition and Markets Authority, the UK competition regulator.

The claim is being brought in front of the UK Competition Appeal Tribunal (“CAT”), which has powers to hear collective actions on breaches of competition law.  The first step is for the CAT to decide whether the claim is a suitable one for collective proceedings.  Class actions are still a relatively novel way of bringing a claim in the UK; although the number of cases being brought and approved by the CAT is growing rapidly since a recent landmark ruling by the UK Supreme Court effectively lowered the bar for successful certification of a claim.  If this claim is approved, it will be the tenth collective claim successfully certified.

In the short time since we last provided an update regarding the bankruptcy cases of Celsius Networks LLC and its affiliates (here), there have been a number of material developments to report.  

  • As ordered by the court, the debtors filed copies of all versions of Celsius’ Terms of Use that have been in effect since February 1, 2018.  The filing contains more than 1000 pages and includes eight versions of the General Terms of Use (or TOS) with mark-ups showing changes from version to version.  Of interest is the development of the paragraph that governs a customer’s consent to Celsius’ use of digital assets. In the fifth version, effective September 30, 2020, references to “interest” were replaced with “rewards” and references to a customer’s “Account” were replaced with “Celsius Wallet” (and later to “Celsius Account”). In the sixth version, going into effect on July 22, 2021, the reference to “Your” Digital Assets was removed so that the title read: “Consent to Celsius’ Use of Digital Assets.” “You may not be able to exercise certain rights of ownership” was replaced with “You will not be able to exercise rights of ownership” (emphasis added). Any lingering implication that the customer might retain interests in digital assets deposited into the program was stricken from the TOS. And the following was added:  “In the event that Celsius becomes bankrupt, enters liquidation or is otherwise unable to repay its obligations, you may not be able to recover or regain ownership of such Digital Assets, and other than your rights as a creditor of Celsius under any applicable laws, you may not have any legal remedies or rights in connection with Celsius’ obligations to you.” Earlier revisions removed implications that Celsius retained some risk of loss in connection with a customer’s account. In his declaration accompanying the TOS, Alex Mashinsky explained that “[e]xisting customers and counterparties were advised of the updated Terms of Use Version 6 via email on the date the Terms of Use Version 6 went into effect.” He does not detail whether customers were notified of prior changes to the TOS or whether they were asked to accept the revised TOS with an affirmative act. These differences may raise interesting questions regarding the treatment of customers onboarded while different TOS were in effect, or perhaps the claims that those customers may have against the Celsius.
  • Celsius filed its most recent budget and coin report on August 14th. The budget indicates that the enterprise will have negative cash flow before the end of October and reflects expenses relating to “restructuring activities” to exceed $33 million from August through October. The coin report details digital currency assets and liabilities as of July 29th, showing a shortfall of more than $2.8 billion. It would appear that some form of debtor-in-possession financing is needed in short order. Of course, absent consent from any such lender, such financing would be repaid in full before junior creditors (i.e., customers) would be entitled to any recovery.   
  • The Bankruptcy Court approved the debtors’ motion authorizing Celsius Mining LLC to sell Bitcoin generated from its mining activity on an arms’-length basis to unaffiliated third parties, the proceeds of which shall be directed to a segregated account. Celsius Mining entity may use the proceeds in the ordinary course of its business or as otherwise authorized by the court. Celsius Mining is an indirect subsidiary of Celsius Networks Inc. and, along with Celsius Networks LLC, one of the eight affiliated entities that filed bankruptcy. Celsius has reported that as recently as July 2022 it had plans to proceed with an IPO of Celsius Mining.
  • Letters from customers have continued to flood the docket. Stories of misery are aplenty, including in letters from those that had engaged in the lending program. Pursuant to that program, customers could post digital asset collateral in exchange for low or no interest loans in fiat currency or stablecoin. Customers wishing to repay their loans and recover the posted collateral have expressed surprise and shock that they are unable to do so and that title to their digital assets may have passed to Celsius Lending LLC. In one instance, a customer filed documentation purporting to show a one-year loan for $37,000 at a 0% interest rate with a whopping 25% loan-to-value ratio (approximately 3.69 Bitcoin). Celsius has stated that, as of July 13, 2022, it had approximately 23,000 loans outstanding in the aggregate amount of approximately $411 million which were backed by approximately $765.5 million in digital asset collateral.   
  • Counsel to the Official Committee of Unsecured Creditors filed an unusual “statement” regarding its objectives in the case. They explained that the committee “is committed to thoroughly investigating Celsius, including potential misconduct by Celsius and its insiders, and pursuing a resolution that will maximize Celsius’ value for the benefit of its account holders and unsecured creditors.”  Their objectives include: (i) ensuring that Celsius is effectively safeguarding account holders’ assets, (ii) overseeing the Celsius’ efforts to develop a viable business plan, reducing overhead and preserving cash reserves, (iii) investigating the conduct of Mr. Mashinsky and other insiders, including with regard to asset deployment decisions, prepetition transfers, and other issues, and (iv) exploring options to reorganize or sell the Celsius businesses to maximize value. The Celsius cases present a somewhat unique opportunity for the committee to exercise leverage and provide input regarding the outcome.  Given the lack of funded debt, the committee represents the interests of the most powerful creditor contingency in these cases – the customers.  
  • The United States Trustee filed a motion seeking the appointment of an independent, third party examiner. The Bankruptcy Code provides that a court may appoint an examiner to conduct investigations as appropriate, including of any allegations of “fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity” regarding the debtor or by current or former management thereof, if, among other things, such appointment is in the interests of creditors, any equity security holders, and other interests of the estate. As support, the UST argues that there are credible allegations of incompetence or gross mismanagement, that there are significant issues of transparency, and that there exists widespread mistrust of the company. Any such widespread investigation would undoubtedly be expensive and seemingly overlap the investigations of the Unsecured Creditors’ Committee.  Of course, the committee only represents one constituency, general unsecured creditors, and is not tasked with making a public record of its findings. The UST mentions it its motion that it has received two separate requests for the appointment of official committee of equity holders, a constituency rarely granted the benefit of an official committee absent evidence of equity value.

On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned virtual currency mixing service Tornado Cash, which OFAC said has been used to launder billions of dollars in virtual currency, including $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (“DPRK”) state-sponsored hacking group that OFAC sanctioned in 2019.  Though OFAC’s action marks the second instance it has sanctioned a virtual currency mixer—OFAC sanctioned in May 2022—this is the first time that OFAC has designated a non-entity software protocol. Tornado Cash is a “smart contract” that allows users to anonymize the origins, destinations, and counterparties for virtual currency transactions. 

OFAC’s action builds on its action against, and the enforcement action of OFAC’s sister agency, the Financial Crimes Enforcement Network (“FinCEN”), against the founder and operator of mixers Helix and Coin Ninja.  It also builds on a general rise of OFAC enforcement against virtual currency businesses. These actions point to OFAC’s growing concern about the use of virtual currency to facilitate sanctions evasion and the activities of sanctioned actors broadly, and its increasing willingness to take enforcement action against crypto market participants that facilitate such activities.  Virtual currency exchanges, decentralized finance (“DeFi”) entities and developers, non-fungible token (“NFT”) platforms, Web3 companies (together, “Virtual Currency Market Participants”), and traditional financial institutions (or “TradFi”) should continue to assess the risks associated with the use of mixers by sanctions targets and other illicit actors, and consider adjustments to their sanctions compliance and anti-money laundering (“AML”) programs to address such risks.     

OFAC’s Action

OFAC designated Tornado Cash pursuant to Executive Order (“EO”) 13694, as amended, for providing support to malicious cyber actors, along with 38 Ethereum (“ETH”) virtual currency wallet addresses and six USD Coin (“USDC”) virtual currency wallet addresses.  In addition to the $455 million stolen by the Lazarus Group, OFAC said that Tornado Cash had been used to launder more than $96 million of malicious cyber actors’ funds derived from the June 24, 2022 “Harmony Bridge Heist,” and at least $7.8 million from the August 2, 2022 “Nomad Heist,” and that Tornado Cash had failed to impose effective controls designed to prevent its use for laundering funds for malicious cyber actors, “despite public assurances otherwise.”  As a result of the sanctions, U.S. persons are prohibited from having any direct or indirect interactions with Tornado Cash unless authorized by a general or specific license issued by OFAC. Additionally, U.S. persons must block and report to OFAC all property and interests in property of Tornado Cash.    

Unlike, Tornado Cash is a non-custodial, smart contract-based software application, not an entity.  In designating Tornado Cash, OFAC effectively sanctioned a technology that resides on the Ethereum blockchain.  Thus, while Tornado Cash remains operational, Virtual Currency Market Participants should be mindful that OFAC and the U.S. Department of Justice may pursue civil or criminal enforcement proceedings for direct or indirect interactions with the Tornado Cash code.  This is particularly the case for instances when those agencies view persons as evading U.S. sanctions or causing U.S. persons to violate sanctions.  There also is some risk that OFAC may view assets that have passed through the mixer as blocked property. Further, non-U.S. persons not subject to OFAC’s jurisdiction may wish to consider risks of continued transactions with Tornado Cash, as OFAC may consider such persons as potential targets for secondary sanctions pursuant to EO 13694.

Key Takeaways: Has the Tide Turned Against Mixers?

Treasury’s sanctioning of Tornado Cash follows a series of actions in which the U.S. Government has highlighted the risks of mixing services.  In October 2020, FinCEN assessed a $60 million penalty against Larry Dean Harmon, the founder, administrator, and primary operator of the Helix mixer, for violations of the Bank Secrecy Act (“BSA”).  In August 2021, Harmon pleaded guilty to conspiracy to commit money laundering in connection with his operation of Helix.  Last summer, FinCEN penalized BitMEX, a virtual currency exchange, for its failure to file suspicious activity reports (“SARs”) on transactions involving virtual currency mixers. Then, as discussed above, in May 2022, OFAC sanctioned virtual currency mixer for assisting cryptocurrency transactions on behalf of the DPRK.   

Given these enforcement actions, Virtual Currency Market Participants should consider ways to address and mitigate sanctions and AML risks arising from transacting with mixers.  Last November, OFAC issued its first-ever Sanctions Compliance Guidance for the Virtual Currency Industry (“Sanctions Guidance”), along with updated “Frequently Asked Questions” regarding virtual currency sanctions compliance.  In its Sanctions Guidance, OFAC highlighted the potential usefulness of blockchain analytics tools to help identify transactions with listed addresses, and provided advice on how to mitigate the risks associated with dealing with unlisted virtual currency addresses that transact with sanctioned wallets.  Additionally, in April, 2022, the New York State Department of Financial Services (“NYDFS”), the State of New York’s crypto regulator, issued its own virtual currency guidance that similarly stressed the importance of blockchain analytics.  NYDFS indicated that blockchain analytics are relevant to effective compliance programs, customer due diligence, transaction monitoring, and sanctions screening by NYDFS-licensed virtual currency businesses, as this technology can help trace the provenance of virtual currency transactions, including through the review of on-chain “hops”. Such “Know Your Transaction” technology could help mitigate compliance risks and address red flags.

Cryptocurrency exchanges should be mindful of continued scrutiny by OFAC and other agencies for sanctions compliance in the virtual currency sector.  In October, 2021, Suex OTC became the first virtual currency exchange to be placed on the SDN List for facilitating transactions involving ransomware payments.  Media reports indicate that OFAC is investigating at least one other major virtual currency exchange for allowing almost 2,000 accounts from Iran, Syria, and Cuba, potentially in violation of U.S. sanctions.

Despite Tornado Cash’s stated connection to the Lazarus Group, OFAC’s actions against Tornado Cash has prompted debate about the role that mixers, privacy coins, and other anonymizing technologies play in the broader virtual currency ecosystem, and what qualifies as legitimate use of such technologies.  For example, Vitalik Buterin, a co-founder of Ethereum, used Tornado Cash to donate to Ukraine following Russia’s invasion.  It remains to be seen whether similar uses might expose those mixers, or those users, to potential sanctions or other forms of regulatory scrutiny.

OFAC’s action also suggests a willingness to pursue sanctions against decentralized protocols—even where these protocols are not clearly associated with an entity—when the protocol is used by sanctioned actors to evade sanctions or to engage in malicious activity.  It also raises the risk of action against the developers or persons with control over these decentralized protocols.

Compliance Considerations

In light of OFAC’s recent actions:

  • Virtual Currency Market Participants may wish to: (1) review OFAC’s October 2021 Sanctions Guidance and virtual currency Frequently Asked Questions, as well as NYDFS’s April 2022 Virtual Currency Guidance for  best practices for virtual currency sanctions compliance; (2) assess their potential touchpoints to mixers, including Tornado Cash, and consider how they will address the potential uses of such technology in a manner consistent with their sanctions and AML obligations, including, potentially, the use of blockchain analytics and other controls to identify transactions or clients that use such technologies and to understand the implications of such technologies for those customer relationships.
  • Virtual Currency Market Participants should add Tornado Cash, along with the 44 associated virtual currency wallet addresses sanctioned by OFAC to their sanctions screening programs, and identify whether they receive or transmit any virtual currency, directly or indirectly, associated with these sanctioned wallet addresses, and any other address believed to be associated with Tornado Cash.
  • Financial institutions and technology companies that have Virtual Currency Market Participants or DeFi customers or users, may wish to conduct diligence on these participants’ AML and sanctions compliance programs as part of their own compliance practices.
  • DeFi developers should consider sanctions risks as they develop projects, particularly in pre-launch stages where there may be opportunity to implement protections against potential sanctions risks before a product is launched, a point OFAC emphasized in its 2021 virtual currency sanctions guidance.  OFAC’s designation of Tornado Cash, in part for failing to “impose effective controls,” implies that Treasury feels such measures are reasonable and possible, even in DeFi.
  • Consult with experienced sanctions and AML counsel regarding potential risks associated with developing, supporting or operating a business involving identity mixers, DeFi, or virtual currency anonymizing technologies.

We will continue to monitor enforcement actions involving virtual currency.

There is much to report since our last update on Voyager Digital’s bankruptcy case discussed here

  • Importantly, the court set a “bar date” with respect to claims arising prior to the petition date.  Proofs of claim, including those with respect to administrative claims arising under section 503(b)(9) of the Bankruptcy Code, must be actually received by Voyager’s claims agent on or before 5:00 p.m. Eastern Time on October 3rd.  Procedures for filing or electronically submitting proofs of claim can be found on the claims agent’s site:  Voyager Digital Holdings, Inc., et al. (
  • The court approved Voyager’s motion regarding bidding procedures with respect to the potential sale of its equity or certain or all of its assets. Bids must be received by August 26th and an auction will be held on August 29th, if needed. Bids may be for the company’s equity or some or all of the company’s assets and may also contemplate acquisition through a plan of reorganization. Objections to any proposed sale must be received by September 6th and a hearing to approve any sale will be held on September 8th. In the event that the company is able to identify a purchaser to act as a “stalking-horse” for any assets, it will file a notice of the same. Generally, a stalking-horse purchaser serves to set a floor for value and helps standardize contracts for bidding purposes. In exchange, they are often entitled to certain bid protections (e.g., a break-up fee and expense reimbursement).
  • Voyager filed its first amended plan of reorganization and related disclosure statement on August 12th. Among other things, the revisions in the plan remove Alameda Ventures Ltd, and its affiliates from those parties that would be released upon confirmation. There are no changes to the proposed treatment of customer claims. A hearing on the motion to approve the adequacy of the disclosure statement has been scheduled for September 15th. The company has asked that solicitation packages be delivered to creditors by September 26th and that votes be cast by October 24th. If this schedule holds, a confirmation hearing could be held in early November. In its newly filed disclosure statement, Voyager provides some greater detail regarding hurdles to confirmation or a third-party sale, including with respect to its money transmitter licenses and applications. They note that state banking authorities have broad approval rights over any transfer of the licenses or applications.
  • As has been reported, Voyager has received approval to return funds to customers that were maintained in custody in two separate FBO accounts at Metropolitan Commercial Bank.
  • Some customers have sought recovery outside of the protective confines of Voyager’s bankruptcy case. On August 10th, certain customers commenced a putative class action in Florida naming Stephen Ehrlich (Voyager’s CEO), Mark Cuban and Dallas Basketball Limited as defendants. The complaint alleges causes of action including aiding and abetting fraud and breach of fiduciary duty, civil conspiracy and unjust enrichment, among other things. This action followed another putative class action that was commenced by a customer in Canada in early July. The action asserts claims against one of the debtors, and certain current and former directors and officers asserting liability under Canadian securities laws and negligent misrepresentation. Voyager has asked the bankruptcy court to rule that the automatic stay (which protects debtors from certain adversary actions) be extended to the various D&O defendants in the Canadian action. We expect that they will similarly seek to stay proceedings against Mr. Ehrlich in the Florida action.

Now that their bankruptcy filing is a few weeks behind us, we provide below an update on certain matters of interest in the case of Celsius Networks and its affiliates. Of course, it’s still very early in the bankruptcy case — and in cryptocurrency cases in general — but we have already heard from many distressed opportunity investors that are interested in identifying investment opportunities. Given the novel legal and difficult valuation issues involved, it will be important to keep a close eye on the developments in these proceedings.

  • Like they have done in Voyager’s case (discussed here), customers of Celsius Networks have been filing letters en masse expressing their dismay at the extraordinarily difficult situation many of them now find themselves in. Many customers state that they were deceived by the debtors and their leadership, led to believe that their assets were safe, including in weekly YouTube videos posted by management right up to its bankruptcy filing.  Some have pointed to provisions in earlier versions of the Terms of Use that, according to the customers, are inconsistent with the treatment they now expect to receive given the attention the cases have garnered.  Indeed, recognizing that the debtor had posted a number of versions of its Terms of Use, the Bankruptcy Court has ordered it to file copies of all versions of the Terms of Use that have been in effect since February 1, 2018 by early August.
  • A meeting of creditors (or Section 341 meeting) has been scheduled for August 19th at 9:00 a.m. ET.  Section 341 meetings are held during the early stages of Chapter 11 cases, overseen by the Office of the United States Trustee, and provide creditors an opportunity to ask direct questions of a representative of the debtor while under oath. It goes without saying that Celsius Networks’’ Section 341 meeting will be colorful. Directions for joining the meeting can be found- here:  Celsius Network LLC, et al. (  The debtor’s counsel has also established a dedicated email address for customer’s questions at
  • The Office of the United States Trustee has appointed an Official Committee of Unsecured Creditors, consisting of seven creditors, presumably all customers. The committee has retained counsel and financial advisors.
  • The debtor has filed a motion to approve certain bid procedures in an effort to attract interest in the purchase of its equity interests in GK8 Ltd.  GK8 Ltd. is described as “a digital, self-custody platform for financial and crypto institutions to securely manage and store blockchain-based assets.” They have asked that initial bids be due by August 15th and binding bids be due by September 21st, with an auction occurring shortly thereafter if needed.
  • The debtor also filed a motion seeking authority to “sell, pledge, transfer, assign, or otherwise monetize the Bitcoin generated from their mining activity” in the ordinary course of business.  It explained that, as of the filing date, its mining subsidiary, Celsius Mining LLC, owned 43,632 operating rigs, generating approximately 14.2 Bitcoin/day.  Before the filing, they used this Bitcoin to cover expenses, and expand, of the operation and to repay an intercompany loan to Celsius Network Limited.  The debtor has already received interim approval to pay certain creditors as “critical vendors” to ensure completion of the mining operation build-out.
  • In its statement in advance of the “first day” hearing, Celsius included among a list of key questions: “Can Celsius recover customer withdrawals or loan liquidations completed in the 90 days before filing as preferences?”  We can expect much discussion regarding this question.  A preferential transfer is subject to avoid and very generally includes any transfer made by the debtor during the 90 days prior to the filing, to or an account of antecedent debt, while the debtor was insolvent, and that allows the creditor to receive more than it would in a liquidation.  The answer to the question will impact the recovery of all customers, but particularly those that received a return of their investments during the 90-day period during the case.
  • Potential buyers of account holder bankruptcy claims are keenly focused on another key question that was posed by Celsius in its statement: “The amount of a crypto claim is determined as of what date (e.g., as of the petition date, effective date, distribution date)?”  Given the volatility in the crypto market there is conceivably an opportunity for cryptocurrency values to significantly increase during the pendency of this bankruptcy case.  The question of who will benefit from any upside in market price is an issue that may be litigated during plan confirmation process if the Debtor’s Chapter 11 plan fails to provide crypto-claim holders with the opportunity to benefit from an increase in their cryptocurrency values.  We expect that bankruptcy claim traders may price in this upside in the future as the case develops.  

Please register for regular updates from Crypto Digest here as well as for updates on matters related to restructuring and bankruptcy at Restructuring Matters here.

There is heightened public interest in what may be an increasing trend of digital asset bankruptcy filings and in the resulting legal and business issues which are both novel and complex. It’s in that vein, we provide this update on Voyager Digital (as we originally discussed here ).

Voyager Digital Holdings, Inc. and two affiliates filed for bankruptcy protection on July 5th with a proposed plan of reorganization in hand.  Below we provide a few updates from the early days of Voyager’s case.

  • While Voyager filed a proposed plan of reorganization (albeit lacking certain critical information) it has not yet filed a proposed disclosure statement, indicating that there will likely be further significant amendments to the proposed plan’s terms. The filing of a disclosure statement is often a clear signal that a case is wrapping up because it is the first step in the solicitation process that is required to confirm a plan of reorganization. Indeed, a disclosure statement must first be approved by the court before a court-supervised solicitation can begin. Only then, after a plan has been approved by necessary classes of creditors, can the company exit bankruptcy as a reorganized entity (if that is the outcome).  More on timeline toward confirmation below.     
  • Voyager recently filed a motion seeking approval of bidding procedures with respect to the potential sale of its equity or assets, including scheduling an auction.  The motion also seeks approval for a schedule for plan solicitation and confirmation.  The company explained that, as of last week, nearly 40 entities had entered into confidentiality agreements and were offered due diligence. Voyager requested that bids be delivered by August 26th and, if more than one qualified bid is submitted, an auction will be held on August 29th.  Voyager also seeks discretion to select a “stalking-horse” bidder to set a floor on valuation and as a baseline for other bids. With respect to a potential plan process, the schedule they requested included the following: (i) disclosure statement filed by September 7th, (ii) hearing on the disclosure statement on October 12th, and (iii) a confirmation hearing on November 23rd.  While this motion has not yet been approved and may also be further amended, the outcome of the sale process could affect plan confirmation timing – which Voyager hopes to accomplish by the end of the year.  However, this timing does not necessarily mean that creditors will receive distributions by the end of this year as the debtor will still need to conduct a claims reconciliation process and potentially initiate claw-back and other litigation, which may take a significant amount of time.
  • Voyager also filed a response to an unsolicited bid from AlamedaFTX, the holder of a $75 million claim against Voyager.  In the response, Voyager disparaged the offer as “not value maximizing” and not consistent with the proposed bid procedures. They also took the opportunity to state their opinion that AlamedaFTX’s claim is subordinated to customers (rather than pari passu as suggested by AlamedaFTX).  In another release, Voyager implied that the Voyager tokens have an aggregate value in excess of $100 million.  
  • Numerous customers have filed often heartbreaking letters, pleading with the court for the return of “their” cryptocurrency and explaining how they were led to believe that so-called “customer assets” were safe.  Some have expressed dismay regarding the proposed plan which offers customers some percentage of a reorganized Voyager’s equity and Voyager tokens, among other things.  They have also expressed concern that their recoveries would be based on the value of their accounts at the filing date, losing the benefit of any upturn the cryptocurrency markets. 
  • An Official Committee of Unsecured Creditors has been appointed, made up of 7 customers.  The Official Committee is tasked with representing the interests of general unsecured creditors generally and its legal and financial professionals are paid by Voyager’s estate.  The Official Committee will weigh in on the sale process and the proposed plan terms with the goal of maximizing recoveries to unsecured creditors.  Voyager has also sought approval of the engagement of special counsel on behalf of a special committee of Voyager’s board. The special committee was established to investigate “historical transactions” relating to Voyager and “investigate any potential estate claims and causes of action against insiders” of Voyager, including with respect to the loan to Three Arrows Capital.

The first week of July has brought with it a flurry of activity in the digital asset markets – but not the type of activity that investors in the space likely hoped for. 

On June 27th, Three Arrows Capital, Ltd. (“3AC”) commenced a liquidation proceeding in the British Virgin Islands, followed on July 1st by a Chapter 15 case in the Southern District of New York. Chapter 15 generally provides for recognition by a US court of an insolvency proceeding in a non-US jurisdiction. The company, a proprietary trading fund, is now under the control of joint liquidators tasked with stabilizing the estate, preserving and winding up its assets, investigating claims and pursuing causes of action under the laws of BVI. Should the BVI proceeding be recognized as a “foreign main proceeding,” the case will provide the liquidators some stability through the enforcement of the automatic stay over the firm’s US assets, preserving the status quo.

Continue Reading Cryptocurrency Hedge Fund Three Arrows Capital and Platform Voyager Digital Resort to Bankruptcy for Relief