Stablecoins in Bankruptcy

Abstract

Summer 2022 has been a scorcher, but the crypto market is in winter. In recent weeks, the crypto market has plunged by $2 trillion. Several crypto service companies face financial distress, seeking emergency loans or filing for bankruptcy protection. Even stablecoins, cryptoassets touted for their low volatility, did not avoid the fallout.

Now that the bloom is somewhat off the rose for stablecoins, investors, lawmakers, and legal thinkers are beginning to consider more seriously the impact that the failure of these cryptoassets might have on their holders. Doing so involves difficult questions about what stablecoins are, who issues them, what rights holders of stablecoins enjoy, and what coinholders’ legal position would be in the event of a bankruptcy. We have spent the past several months working to answer these questions, mining the terms of service of leading stablecoin issuers to assess coinholder vulnerabilities in a stablecoin collapse or insolvency scenario. Our broader study of these issues is forthcoming in the Arizona State Law Journal. This Law Letter offers an expanded bankruptcy analysis of these matters.

Reprinted from Bankruptcy Law Letter, Volume 42, No. 10, October, 2022, with permission. Copyright © 2022, Thomson Reuters. For more information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books.

Keywords: cryptocurrency, stablecoins, bankruptcy, contracts