SMU Law Review
Abstract
The explosion of cryptocurrency, along with other digital assets, has led to many new transactions and investment opportunities for those interested in broadening their portfolios. While cryptocurrency is new, the failure of a cryptocurrency exchange requires the application of the same bankruptcy procedures in the same way as parties using traditional U.S. currency. In bankruptcy, these intangible assets are designated property of the estate and are deemed subject to the court’s jurisdiction. At this point, an issue arises: Once classified as property of the estate, how should crypto be classified?
The lack of regulatory infrastructure regarding this classification further complicates the issue by allowing conflicting guidance. The Securities and Exchange Commission (SEC) considers offerings related to cryptocurrencies (crypto) to be securities subject to SEC rules. The Commodity Futures Trading Commission (CFTC) believes crypto should be treated as a commodity under the Commodity Exchange Act. The Consumer Financial Protection Bureau (CFPB), relying on several court opinions that treat crypto as a currency, believes that crypto is a type of virtual money. This lack of regulatory consensus is concerning because of the differences between each regulatory scheme’s treatment of the cryptocurrency exchanges and their digital assets.
In the wake of cryptocurrency’s confusing and contradictory regulatory body, courts have splintered in their treatment of the digital asset. A patchwork of recent cases where a cryptocurrency exchange has declared bankruptcy has left much to be desired regarding an analytical framework under which crypto can be valued. These cases reveal a recurring theme of crypto’s volatility because of its lack of inherent value.
In conjunction with the issue of crypto’s classification, several other problems are pervasive within these cases, including ownership, disclosure of information, privacy, discovery, and asset location are also pervasive within these cases. The inconsistency of holdings and unsolved problems in these cases illustrate the dire need for government intervention and regulation regarding the treatment of crypto.
Several cases have suggested that a potential solution to the classification question exists within the relationship between the parties to the transaction, viewing the asset’s sale as an investment contract. While courts are split on this issue, the cases in which the SEC attempts to subject crypto exchanges to enforcement actions illustrate the SEC’s aggressiveness and involvement in the area, potentially outlining attempts to classify cryptocurrency as a security. Congressional guidance is likely necessary to determine how these crypto assets should be treated in bankruptcy proceedings.
This Comment argues that the cryptocurrency industry’s recent and significant evolution has culminated in a sector characterized by ambiguous definitions due to fragmented judicial decisions stemming from failures of cryptocurrency exchanges and a deficiency in regulatory guidance. Although legislative intervention is the most viable solution to these challenges, an analysis of the current fragmented approach to the treatment of cryptocurrency in bankruptcy, along with potential foreseeable outcomes, will furnish parties with a degree of assurance concerning their investments. This analysis will also provide insight into what the future regulatory framework for this sector may resemble.
Recommended Citation
Grayson Timmins,
Crypto Chaos in the Courtroom: Navigating Bankruptcy’s Digital Gold Rush,
78
SMU L. Rev.
1211
(2025)
