We previously wrote about the important uncertainties facing the first couple of crypto bankruptcy filings. Primarily the issues involve whether the “customers” of a crypto platform are asset owners (as they believe and are sold on) or whether they are going to end up being unsecured creditors who won’t see a penny out of their investments. Very.Major.Problem.
What seems to be flying under the radar is that there is already at least one case deciding this issue, and it is not in favor of the “customers.” [Maybe investors need to start calling themselves owners instead of customers]. Cred Inc. was founded in 2018 and operated a “global financial services platform” serving investors in over 183 countries. Crypto owners would transfer digital cryptocurrency to Cred, pursuant to contract, and Cred would reinvest into third-party asset managers. Crypto owners could also deposit their crypto with Cred and then borrow against it at a fixed rate.
Chapter 11 Filing in November 2020
Cred Inc. and its affiliates filed bankruptcy in 2020 with over $160 million in liabilities. The Court ordered the appointment of an examiner, which is a fairly rare remedy, and is a costly independent review of allegations usually involving fraud or mismanagement of some kind.
The Cred Inc. case contains many other complicating factors and issues beyond who owned the actual assets, too lengthy to go into here. There were alleged thefts of crypto by fraudsters/imposters, market fluctuation timing problems, and the entire set up as a crypto lender was complex and outside the norm of a mere platform holding crypto assets.
Examiner Report
The Examiner issued his report in March 2021, and Cred eventually confirmed a liquidation plan. The “customers” who had given their crypto to Cred were treated as general unsecured creditors, and all the commingled crypto assets were treated as property of the estate.
Of major note is the importance of the documentation between the platform and the crypto customer/owner. In the Cred case, while the documents entitled the owners to a return of principal and interest at the expiration of their loaning the crypto to Cred, it was not the exact same cryptocurrency, just the same amount. In effect, this was run as a giant commingling of assets without much if any protection or restrictions to protect the owners.
Learning points:
Read your contract agreements with a fine tooth comb when using a crypto platform. These will be of ultimate legal importance if things go bad.
KYC becomes KYP. In banking, “know your customer” rules have long been in place. For crypto, we need “Know Your Platform.” In Cred, the examiner found very lax internal controls and governance processes in a company with over $150 million in investments.
Know Your Platform also extends to who the platform is dealing with- all of its major counter-parties. Most crypto investors aren’t technology geniuses, and they are trusting of the marketing and sales teams and all the hype around crypto. As a long time bankruptcy attorney, trust me when I say there are always new and exciting ways to lose money. Don’t get in over an amount you can risk losing, and try to understand exactly who/what/why/how your platform runs it operations. In Cred, they were hedging and dealing with margin calls and substantial loans and micro loans in Hong Kong and China. If you didn’t want to make a micro loan in China, then perhaps rethink if Cred was the right platform for you.
Once it dies down, it is too late to address any of this. Be proactive in learning more about your platform.
About DelCotto Law Group
DelCotto Law Group is Kentucky’s asset preservation and business restructuring law firm known for its commitment to the lifetime success of its clients. DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.