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As the cryptocurrency mania raged, Congress took a hands-off approach, keeping the fast-growing industry in legal limbo as it spawned startups and drew billions of dollars from investors. That’s left it to the courts to deal with the wreckage, Bloomberg News reported. The bankruptcies of FTX Group, Celsius Network and Genesis Global are promising to turn judges into after-the-fact rulemakers for an anarchic industry whose pioneers saw it as a way to keep money beyond government reach. With little guidance to go on, the judges will need to decide fundamental questions with high stakes for creditors who bankrolled the companies and the customers who trusted them with their funds. Among them: Is a token more like money or a security like a stock or a bond? What’s owed to those who deposited cryptocurrencies on platforms that are now broke? Who has the right to be repaid first? And how does the court even properly value debts denominated in tokens — just privately concocted bits of digital code — instead of the U.S. dollar? None of that is clear. “Bankruptcy courts are doing things that the normal regulatory system is not able to provide, like guidance,” said Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency. “It’s essentially becoming like a proxy regulator.” The precedents that emerge from the bankruptcies will have the ability to shape an industry that for years avoided direct oversight as Congress failed to enact legislation to put it under the sway of Washington regulators. In the absence of a cryto-specific law, the Securities and Exchange Commission and the Commodity Futures Trading Commission have been left to decide for themselves how to use their current powers over the securities and derivative industries to crack down on alleged wrongdoing in cryptocurrencies. But the bankruptcy decisions have the potential to affect the business more quickly because regulators typically have to ask a court to enforce their rulings.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

A federal judge yesterday rejected a proposal to modify Sam Bankman-Fried's bail conditions, despite an agreement between the FTX cryptocurrency exchange founder and prosecutors to address potential witness tampering concerns, Reuters reported. U.S. District Judge Lewis Kaplan in Manhattan did not provide reasons for the denial, and said a hearing on bail remains scheduled for Feb. 9. A spokesman for Bankman-Fried declined to comment. The office of U.S. Attorney Damian Williams in Manhattan also declined to comment. Bankman-Fried, 30, has been free on $250 million bond and living in Palo Alto, Calif., with his parents, who guaranteed the bond, since pleading not guilty to looting billions of dollars from the now-bankrupt FTX. On Tuesday afternoon, he formally appealed Kaplan's Jan. 30 ruling granting a request by 11 media outlets including Reuters to reveal the names of two other people guaranteeing his bail. Bankman-Fried has said his parents, both Stanford Law School professors, had been harassed and received physical threats since FTX's collapse, and there was "serious cause for concern" the additional guarantors might suffer similar treatment. Prosecutors had asked last month to tighten bail, citing Bankman-Fried's efforts to contact both the general counsel of the FTX U.S. affiliate and new FTX Chief Executive John Ray, ostensibly to provide assistance.

FTX's lawyers on Monday strongly urged a U.S. bankruptcy judge in Delaware not to greenlight a court-supervised investigation into its collapse, saying it would waste time and money and could pose a security risk, Reuters reported. FTX attorney James Bromley at Monday's hearing told Bankruptcy Judge John Dorsey, who is overseeing the crypto exchange's chapter 11 case, that the proposed review the U.S. Department of Justice's bankruptcy watchdog is seeking is so vague that it is essentially asking for an examiner to look at "everything, everywhere, all at once." The U.S. Trustee has asked Dorsey, to appoint an independent examiner to investigate allegations of fraud, misconduct, and mismanagement that are "too important to be left to an internal investigation." Juliet Sarkessian, an attorney for the U.S. Trustee, argued such an investigation is mandatory under federal law in large bankruptcy cases where DOJ or a creditor requests one. Judge Dorsey, who said he believed an examiner was not required, but should be appointed if "appropriate," did not rule on Monday. He asked FTX, its creditors and the U.S. Trustee to try to reach an agreement on the scope of a potential examiner review. FTX said that an examiner would merely duplicate work already being done by FTX, its creditors, and law enforcement agencies, adding cost and delay to its effort to repay customers in bankruptcy.

Potential buyers are inquiring about purchasing the struggling crypto lender Hodlnaut and its claims against bankrupt digital-asset exchange FTX, Bloomberg News reported. “Various parties who are interested in acquiring” Singapore-based Hodlnaut’s crypto platform and FTX claims have contacted the interim judicial managers overseeing the company after it sought protection from creditors, according to an affidavit seen by Bloomberg News. The judicial managers are in the process of signing non-disclosure agreements with the potential investors, the document shows. The affidavit indicates that as of Dec. 9 Hodlnaut Group owed a combined $160.3 million, or 62% of outstanding debt, to Algorand Foundation, Samtrade Custodian, S.A.M. Fintech and Jean-Marc Tremeaux. Hodlnaut, which also has operations in Hong Kong, halted withdrawals in August amid last year’s crypto rout — one of many lenders to hit the buffers. FTX accounted for about 72% of the digital assets the platform deployed on centralized exchanges, with an estimated market value of S$18.5 million ($14 million), according to a November filing. Last month, key Hodlnaut creditors rejected a proposed restructuring plan and said they preferred to liquidate the company.

Lawyers for veterans suing 3M Co. over its earplugs have asked a federal judge to dismiss the bankruptcy filing of a 3M subsidiary that would shield the industrial conglomerate from court trials, WSJ Pro Bankruptcy reported. The motion for dismissal filed late Thursday in U.S. Bankruptcy Court for the Southern District of Indiana followed a federal appeals court ruling last week that tossed out a chapter 11 filing by LTL Management LLC, a company created by Johnson & Johnson in 2021. J&J had transferred its talcum-powder-related liabilities to LTL, which then filed for bankruptcy, blocking plaintiffs from bringing additional lawsuits. 3M, the St. Paul, Minn.-based manufacturer of thousands of consumer and industrial products, followed a similar strategy in 2022. Its Aearo Technologies LLC subsidiary filed for bankruptcy after accepting the responsibility for about 230,000 claims from veterans alleging that 3M’s foam earplugs failed to protect them from service-related hearing loss. 3M has said that its military earplugs are safe if service members receive proper training on using them. Aearo was the original manufacturer of the earplugs, but 3M acquired the company in 2008 and absorbed its operations into 3M. 3M pledged last summer to pay for the settlement of the claims negotiated by Aearo in bankruptcy court.

Federal prosecutors are scrutinizing a growing array of people tied to Sam Bankman-Fried’s collapsed cryptocurrency empire, including his father, his brother and former colleagues, as part of a rapidly expanding investigation into one of the biggest American financial crime cases in more than a decade, the New York Times reported. The U.S. attorney’s office in Manhattan has created a special task force to pursue its investigation into the collapse of FTX, the crypto exchange founded by Mr. Bankman-Fried. More than half a dozen prosecutors, led by Damian Williams, the U.S. attorney for the Southern District of New York, are building the criminal case and tracking down the billions of dollars in customer money that Mr. Bankman-Fried has been charged with misappropriating. In recent weeks, prosecutors have had talks with lawyers representing a dozen former executives and employees at FTX and Alameda Research, the hedge fund Mr. Bankman-Fried also founded. Prosecutors have also examined the role of Mr. Bankman-Fried’s family members in his business empire. The collapse of FTX has forced virtually everyone in Mr. Bankman-Fried’s immediate orbit to seek legal counsel as the investigation intensifies and prosecutors weigh bringing more charges. Defense lawyers at the law firms Mayer Brown, Steptoe & Johnson, and Covington & Burling each represent multiple former FTX executives who may have information to contribute. The FTX investigation could also ensnare companies that either received money from the exchange or lent it funds. The collapse of FTX last year set off a crisis at the crypto lending firm Genesis, which was recently charged with securities law violations by the S.E.C. And in late January, a bipartisan group of senators sent a letter to Silvergate, a bank that did business with FTX, asking company officials whether they were aware of the exchange’s misuse of customer money.

Sam Bankman-Fried’s Emergent Fidelity Technologies Ltd., an offshore entity that owns 55 million shares of Robinhood Markets Inc., filed for bankruptcy Friday amid a fight over who should get the stock following the collapse of FTX Group, Bloomberg News reported. The Robinhood stake, worth more than $590 million at current market prices, has been seized by the U.S. government, but its ultimate fate is unclear. A hodgepodge of parties including the Justice Department, bankrupt crypto lender BlockFi Inc., and Bankman-Fried himself, are trying to take the shares for good. The chapter 11 filing gives Emergent Fidelity and its liquidators — appointed by a court in Antigua — some breathing room. The liquidators’ “duties are to the debtor’s creditors, whoever those creditors may be,” Angela Barkhouse, one of the liquidators, said in a sworn court statement. “Given the many parties claiming to be creditors or outright owners of the debtor’s assets in proceedings in the U.S., the JPLs believe that Chapter 11 protection is the only practical way to empower the debtor to defend itself, the assets, and its creditors’ interests in the U.S.” Emergent Fidelity also holds $20.7 million of cash, but has no other assets, according to court papers.

A Washington, D.C., townhouse that FTX’s new management has linked to Sam Bankman-Fried ‘s political spending has been pulled off the market after the company alleged that the $3.3 million property was purchased with FTX customer funds, WSJ Pro Bankruptcy reported. Property records show the four-bedroom, 4,100-square-foot property in Capitol Hill is owned by Guarding Against Pandemics, a nonprofit organization founded by Mr. Bankman-Fried’s brother Gabriel. FTX’s newly appointed management team said in a court filing last month that Guarding Against Pandemics was also funded by FTX founder Sam Bankman-Fried and that the organization purchased a multimillion-dollar property using what the company believes are misappropriated customer funds. The listing was taken off the market after WSJ Pro Bankruptcy contacted the real-estate agent representing the property on Thursday. Devon Fox, who handled the Capitol Hill listing, said the seller pulled it as a show of good faith. On Friday morning, a for-sale sign remained in front of the townhouse in Northeast Washington. A representative for Guarding Against Pandemics said Thursday that Gabriel Bankman-Fried is no longer part of the organization. Representatives for Gabriel Bankman-Fried and Sam Bankman-Fried didn’t respond to requests for comment. U.S. prosecutors have said that former FTX Chief Executive Sam Bankman-Fried misused customer deposits at FTX to fund his trading firm Alameda Research and make political donations. He has pleaded not guilty to prosecutors’ charges.

Embattled FTX founder Sam Bankman-Fried has staved off a case alleging he broke Texas securities laws, after a judge ruled that the state regulator lacks jurisdiction to act against him, Bloomberg News reported. The ruling came in a case brought by the Texas State Securities Board claiming Bankman-Fried offered unregistered securities through FTX’s yield-bearing cryptocurrency accounts and that he now owes refunds to Texas investors. Administrative Law Judge Sarah Starnes has canceled a Thursday hearing at which Bankman-Fried had been ordered to testify and has given the securities agency until March 1 to file an amended complaint. Joe Rotunda, the agency’s director of enforcement, didn’t return messages seeking comment on the ruling, and it isn’t clear whether he will refile. But the case reflects the early efforts some states are making to recover money from FTX and Bankman-Fried in the wake of the crypto exchange’s implosion in November. The obstacles: a criminal fraud prosecution of Bankman-Fried and a sprawling FTX bankruptcy case.

Pacific Gas & Electric will face trial for manslaughter over its role in a 2020 wildfire in Northern California that killed four people, a judge ruled Wednesday, the Associated Press reported. The judge in Shasta County, Calif., ruled after a preliminary hearing that there was enough evidence for the nation’s largest utility to face trial on 11 felony and misdemeanor charges, including involuntary manslaughter and recklessly starting a fire. Twenty other charges were dismissed. The company, which is the nation’s largest utility, pleaded not guilty to the charges last June and was scheduled for arraignment on Feb. 15. The Zogg Fire that began in September 2020 tore through the forested county south of the Oregon border. The blaze burned 88 square miles (228 square kilometers) of land and destroyed more than 200 homes before it was brought under control. Four people died, including an 8-year-old girl and her mother who were caught by the flames while trying to drive away from their home. State fire officials said the fire began when a pine tree fell into a PG&E distribution line. The California Public Utilities Commission last year proposed fining PG&E more than $155 million, saying it had failed to take down the tree, one of two that had been marked for removal.