Crypto Winter Continues: When Will Spring Happen? – in depth

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Triggered by the collapse of Terraform Labs in May, the collapse of FTX, once valued at $32 billion before filing for bankruptcy in the Bahamas and the United States this month, leaving a gaping $8 billion black hole. dollars and over a million creditors, sent shockwaves through the digital asset community.

Bitcoin and Ethereum, the two most well-known cryptocurrencies, have fallen significantly in value. Bitcoin fell from 36,000 in March 2022 to around 14,000 in November 2022 while Ethereum fell from around 2,600 to less than 1,000 in November 2022 over the same period. Some might say that the digital asset market has now reached its Lehman moment. So what happens next, and will spring be here soon?

Before snowdrops are likely to be found, there will be significant and continuing fallout from the FTX collapse. BlockFi, one of FTX’s largest creditors in the US with outstanding loans to FTX of $275 million, was forced to file for bankruptcy in Bermuda, as well as US Chapter 11 bankruptcy, End of november. BlockFi had already suffered losses earlier in the year on loans to collapsed crypto hedge fund Three Arrows Capital and questions must be raised about how much BlockFi could recover from FTX’s bankruptcy.

The string of crypto failures has put the crypto ecosystem under increased pressure from investors and regulators to (among other things) become more transparent, limit asset concentration and increase due diligence around investments, highlighting the need for a regulation. FTX USChapter 11 filings in Delaware reveal a lack of internal controls that would normally be prevalent in a large company. This largely uncontrolled process of action is believed to be a major contributor to the demise of FTXs. John Ray, the chief restructuring officer appointed to oversee the US bankruptcy, said he had never seen such a complete failure of corporate controls.

The European Union regulation on crypto-asset markets awaits final approval from the European Parliament. If adopted, they will establish harmonized rules for consumers and investors. The regulation will cover three types of crypto-assets: asset-referenced tokens, e-money tokens and other crypto-assets not covered by existing EU legislation. Among other things, the regulations will place these assets under the supervision of ESMA and the European Banking Authority. They will implement guidelines for trading crypto assets and import rules from existing stock market regulations on market manipulation and investor protection, including AML rules. It remains to be seen whether these regulations will do what the EU hopes and protect consumers and investors while encouraging innovation and investment in this sector.

The United Kingdom and the United States lag behind the EU. As both jurisdictions seek to implement regulations, the United States has been hampered by the ongoing debate over the classification of cryptocurrencies as securities or commodities, which has so far stifled progress. US Senator Lummis spoke about the need for the US to put in place regulation urgently after the collapse of FTX. An early adopter of cryptocurrencies, she bought her first bitcoin nearly a decade ago. Lummis said: I hope [FTXs collapse] stressed with members of Congress who have not taken the time to learn more about this asset class, that it is time for them to learn more about it so that we can engage in regulation appropriate.

The UK, on ​​the other hand, has not shied away from its intention to become a global hub for the crypto industry, proposing new regulations for stablecoins, a Royal Mint NFT and a host of others. measures to woo digital asset companies. The UK’s City Minister reiterated this intention after FTX and said his approach to setting rules for financial services was to allow more risk despite FTX’s collapse and the contagion that continued to spread in the crypto industry.

So for now we will have to wait and see if the UK and the US can pull themselves together and put in place rules that help restore some confidence for investors by balancing consumer protection and the need transparency while providing an environment that enables innovation and growth. But what about the here and now?

Fortunately, UK courts have been at the forefront when it comes to shaping and using existing fraud and asset recovery tools to make them fit for purpose in crypto recovery. -stolen and misappropriated assets and fraud. They recognized that hackers and fraudsters are often faceless and nameless. So while you can trace where your crypto went, you cannot uncover the name of a culprit without legal assistance. This led to British courts allowing the use of unknown person jurisdiction to circumvent the problem of inability to name defendants without further discovery. They have ruled that cryptocurrency and NFTs are proprietary, using creative ways to manage service, including service through NFTs and, opening the gateway for the use of discovery tools like Norwich Pharmacal and Bankers Trust against exchanges and other third parties who may hold valuable KYC documents. and information that can unlock the identity of the bad actor. Additionally, they have introduced freezing injunctions to prevent stolen crypto-assets that have been tracked, transferred at the push of a button, and disappear without a trace.

UK courts have also recently introduced new rules allowing UK judges to order foreign companies to deliver documents (CPR PD 6B 3.1(25)). The rules have been hailed by lawyers as particularly helpful to victims of cryptocurrency fraud, where the parties involved are often anonymous. Victims who turn to the law for help will often not have even the most basic information about the person who stole their property or know their whereabouts.

Last month, UK courts ordered cryptocurrency exchanges to hand over customer details to a rival exchange to help it track down $10.7 million in stolen funds. LMN’s landmark decision against Bitflyer Holdings Inc. and others [2022] EWHC 2954 (Comm) is the first case to use the new court rules. The judge upheld the AA against the unknown persons [2019] The EWHC 3556 (Comm) decision that cryptocurrencies are a form of property and recognized that discovery under English common law (Norwich Pharmacal relief) is a flexible remedy capable of adapting to new circumstances. He ordered the discovery of information and documents against six exchanges, including details of the account holder’s identity, email addresses, residential addresses and bank details, adapting the orders as necessary to meet the Exchange concerns regarding the use of documents and information to ensure discovery would be provided. The judge also ordered service of the claim by email and, in one case, by linking the documents to an online account form on one of the exchanges’ websites, confirming the creative approach of the English courts when it comes to meaning in the digital age.

Importantly, the judge addressed the issue of whether issuing discovery orders against foreign defendants constitutes an infringement of the sovereignty of a foreign jurisdiction and should only be issued in exceptional circumstances on the basis of what was said in the Mackinnon case (Mackinnon v Donaldson, Lufkin & Jenrette Société [1986] Ch 482 by Hoffman J.). In reaching its decision that Mackinnon was unenforceable in this case, it said: The court is faced with the new challenges of fraud in relation to cryptocurrency transactions. It would be impractical and contrary to the interests of justice to require a victim of fraud to make speculative inquiries in different jurisdictions to seek to locate the relevant brokerage firm and then request disclosure.

The LMN case is a welcome step forward for the English courts in their approach to combating crypto fraud by assisting in the recovery of stolen digital assets that are often moved quickly across international borders. However, such measures are unlikely to be enough on their own to help begin to thaw the ice and help the industry transition into a Crypto Spring but, in this ever-changing industry, one thing is for sure, the courts English will likely continue to evolve the tools that are already available to them where possible, in an attempt to help victims of crypto fraud.

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