By: Christopher Donnelly
Cryptocurrency is “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” Cryptocurrency first came into the public spotlight with the release of Bitcoin in 2009. The popularity of this new digital currency exploded over the last few years, and now has an estimated global market value of $1.81 trillion with over 17,642 individual currencies.
There is limited case law and legislative guidance on cryptocurrencies so this leaves Bankruptcy Courts little direction on how to approach this expanding market. However, there is no disagreement that cryptocurrency falls within §541 of the Bankruptcy Code that finds “all legal or equitable interests of the debtor in property as of the commencement of the case,” are property of the estate. The current tension surrounding cryptocurrency and bankruptcy is how to properly classify the particular currency for the purposes of valuation, specifically related to avoidance actions. The discussion asks if cryptocurrency should be classified as either currency or a commodity. This key determination can have a wide range of effects on the decisions made by debtors and trustees in a particular case.
If a bankruptcy court treats cryptocurrencies like traditional currencies, a trustee will typically only recover the dollar value of the cryptocurrency from the date the petitioner filed for bankruptcy. This method ignores any potential fluctuations in the cryptocurrencies value and caps it early on. Versus treating cryptocurrencies as a commodity, which would allow the trustee to recover the actual cryptocurrency itself rather than just its value. Thus, allowing a chance of a larger recovery if the value of the cryptocurrency increases. To date, there are no U.S. bankruptcy court cases that have definitively answered this question.
Avoidance actions grant a trustee the ability to recover various transfers made by the debtor within the past two years, starting from the filing of the bankruptcy petition. This process allows past transfers to be reversed if the debtor did not receive a reasonably equivalent value in the transfer, and was either insolvent at the time of the transfer or became insolvent resulting from the transfer. This is the moment in which the classification of cryptocurrency becomes very important.
If classified as currency under the Bankruptcy Code, cryptocurrencies are likely to be categorized as “swap agreements.” Generally, “swaps” are contracts in which parties exchange currency for currency or currency for another form of currency. The benefits of this classification is protection from avoidance actions and the limitations inflicted by the automatic stay. Debtors and creditors both may benefit from this classification.
Section § 546(g) protects swaps from avoidance actions involving preferential transfers made before the filing of the bankruptcy, unless the transferor intended to hinder, delay or defraud creditors. This protection would allow debtors to conduct pre-bankruptcy planning to maximize creditor’s claims and the debtor’s goals without having to worry about the transfers being reversed if determined to be constructively fraudulent. Thus, granting debtors the ability to plan ahead of an expected bankruptcy filing.
The other benefit of currency classification is protection from the automatic stay. Creditors will have the ability to initiate, or continue to litigation against a company to enforce their swap agreements regardless of the imposition of the automatic stay. A creditor may also use any interest from a swap agreement to balance any debt it may owe to the debtor.
On the opposite side of the discussion is classifying cryptocurrency as a commodity. A commodity is defined as “a basic good used in commerce that is interchangeable with other goods of the same type.” Much like other commodities, cryptocurrencies are interchangeable and uniform, and their value relies on their supply. A commodity classification provides less protections but it grants the estate the power to regain possession of the actual cryptocurrency, even at higher value, and creditors an increased chance of being made whole. Proponents of this classification rely on Sections 541(a)(6), and 550 to reinforce the assertion that the appreciation of estate property returns to the bankruptcy estate.
One of the only bankruptcy cases that has discussed this distinction for cryptocurrencies is the Hashfast Technologies LLC v. Lowe case decided in 2016 in the Bankruptcy Court for the Northern District of California. The court was tasked to determine whether the chapter 7 debtor fraudulently transferred its Bitcoins, and if so, whether the transferee had to return the coins or their value to the estate. After learning the debtor paid a person related to the business in Bitcoin, within a year of the filing, the trustee attempted to reclaim the coins or receive the equivalent value by avoiding the transfer pursuant to 11 U.S.C. § 550(a). At the time of the transfer the coins were worth $360,000, but when the trustee tried to recover the coins were valued at $1.3 million.
Ultimately, the court punted on making a determination about the exact nature of the Bitcoins until the trustee could show the transfer was fraudulent. The case ended up settling before the court could make a determination, however, in the court’s order the judge did state, “Bitcoin are not United States dollars.” That line illustrates a bankruptcy court did find cryptocurrency legally different from U.S. currency, however no definitive ruling has been reached.
The uncertainty regarding this present issue of cryptocurrencies in bankruptcy remains murky. It will continue to plague bankruptcy courts around the country, and cause confusion among practitioners until Congress or the Courts dictate a clear statement on the classification of cryptocurrency under the Bankruptcy Code.
About the Author
Christopher Donnelly is a third-year law student at Widener University Delaware Law School and serves as a staff editor on the Delaware Journal of Corporate Law. He is a member of the Delaware Bankruptcy American Inn of Court and the 2021-2022 John F. Schmutz Corporate and Business Law Institute Fellow. He hopes to further his career in bankruptcy or complex commercial litigation after graduation.
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 Casey Bessemer, Cryptocurrency: Legality and Role Within Us Financial Institutions, 36 Syracuse J. Sci. & Tech. L. 3, 5 (2020).
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 Josephine Shawver, Commodity or Currency: Cryptocurrency Valuation in Bankruptcy and the Trustee’s Recovery Powers, 62 B.C. L. Rev. 2013, 2031 (2021).
 11 U.S.C. § 541(a)(1) (2012); See David E. Kronenberg & Daniel Gwen, Bitcoins in Bankruptcy: Trouble Ahead for Investors and Bankruptcy Professionals?, 10 Pratt’s J. Bankr. L. 112, 116 (2014) (finding that Bitcoins are part of a debtor’s estate after reviewing the first ever Chapter 11 Bitcoin case); Chelsea Deppert, Bitcoin and Bankruptcy: Putting the Bits Together, 32 Emory Bankr. Dev. J. 123, 130 (2015).
 Joanna Dreaver, Cryptocurrency Is A Misnomer, 40 Am. Bankr. Inst. J. 16, 39 (2021).
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 Shawver, supra note 4, at 2033.
 11 U.S.C. § 548 (2012).
 Casey Doherty, Bitcoin and Bankruptcy Understanding the Newest Potential Commodity, 33 Am. Bankr. Inst. J. 38, 38 (2014).
 See 11 U.S.C. § 101(53B).
 See 11 U.S.C. §§ 362(b)(17), 546(g).
 11 U.S.C. § 546(g).
 Chelsea Deppert, Bitcoin and Bankruptcy: Putting the Bits Together, 32 Emory Bankr. Dev. J. 123, 147 (2015).
 Matthew D. Rayburn, Bitcoin When the Bank Breaks: Uncertainty in the Treatment of Bitcoin & Other Cryptocurrencies in the Face of Bankruptcy, 16 N.Y.U. J.L. & Bus. 257, 269 (2019).
 11 U.S.C. § 362(b)(17).
 Rayburn, supra note 18, at 269.
 Id. at 270.
 Jason Fernando, Commodity, investopedia (Jan. 04, 2022), https://www.investopedia.com/terms/c/commodity.
 Dreaver, supra note 6, at 40.
 Ryan W. Beall, Cryptocurrency in the Law: An Analysis of the Treatment of Cryptocurrency in Bankruptcy, 35 Cal. Bankr. J. 43, 52 (2019).
 11 U.S.C. § 541(a)(6) (explaining property of the estate includes, “[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.”); 11 U.S.C. § 550 (providing that upon the occurrence of a fraudulent transfer the estate is entitled to, “property transferred, or, if the court so orders, the value of such property.”).
 Shawver, supra note 4, at 2036.
 Hashfast Technologies LLC v. Lowe, No. 14-30725DM, slip op. (Bankr. N.D. Cal. Feb. 22, 2016) (order granting partial summary judgment).
 Beall, supra note 24, at 52; see 11 U.S.C. § 550 (providing that upon the occurrence of a fraudulent transfer the estate is entitled to, “property transferred, or, if the court so orders, the value of such property.”).
 Shawver, supra note 4, at 2036.
 Rayburn, supra note 18, at 262.
 Megan McDermott, The Crypto Quandary: Is Bankruptcy Ready?, 115 Nw. U. L. Rev. 1921, 1931 (2021).
 Hashfast, No. 14-30725DM, slip op. at 1-2 (Bankr. N.D. Cal. Feb. 22, 2016).