Partnered With:

Should the public be informed of user identity information in the event of a cryptocurrency project's bankruptcy?

Read this article in 11 Minutes

If the project goes bankrupt, should all of our information be made public?

Original title: "Can bankrupt crypto projects keep customer identities anonymous?"

Source: The Wall Street Journal

Translated by: Mary Liu, BitpushNews

In 2022, several encryption platforms have collapsed one after another, testing the industry's commitment to user privacy. The US bankruptcy court is weighing whether these companies should disclose the identity information of millions of personal customers to the public.

After a court ruling in September, Celsius Network LLC has disclosed the names and token balances of hundreds of thousands of account holders under Chapter 11 bankruptcy proceedings. It is expected that next month, another bankruptcy court will make a ruling on whether FTX is allowed to keep its customers' identities and contact information anonymous.

Bankruptcy provides an excellent opportunity for struggling companies to resolve their debts in exchange for transparency in their business, including the names and addresses of their business partners and known creditors. Government lawyers and media organizations oppose FTX's practice of sealing customer information, arguing that it has not provided sufficient evidence to justify restricting the public's right to access judicial records.

Akerman LLP bankruptcy lawyer Joanne Gelfand said, "One of the biggest selling points of encryption technology is anonymity." However, this concept becomes a problem in bankruptcy courts where transparency is needed.

She said: "Many people believe that anonymity only protects criminals, allowing thieves and fraudsters to transfer funds without taking responsibility, while others see it as a matter of personal privacy rights."

The lawyer representing the encryption company urges the court to stand on the side of protecting anonymity, claiming that disclosure will only reduce any remaining value of the enterprise and harm customers who are already facing economic losses.

The market turbulence of 2022 has damaged the reputation of cryptocurrencies among investors, as token price drops have caused vulnerabilities in the balance sheets of lending platforms, exchanges, and hedge funds. The resulting bankruptcies have left millions of individuals and institutions worldwide unable to access their cryptocurrencies, and exposed some platforms' cautious attitudes towards customer funds.

Especially the rapid implosion and alleged misuse of customer funds by FTX has shocked the cryptocurrency industry. If FTX is unable to sell or restructure its business through Chapter 11 bankruptcy law, it may go bankrupt directly.

FTX management stated in court documents that keeping customer information confidential is crucial for maintaining a competitive edge and protecting customer privacy. The company has listed for sale some profitable business units in Europe and Japan, but will not sell its largest platforms, FTX.com and FTX US, which serve international and US customers.

FTX lawyer Brian Glueckstein stated: "One of the reasons many clients invest in cryptocurrency is the ability to remain anonymous. For the client community, this is a highly sensitive issue."

Several well-known media outlets, including The Wall Street Journal, Bloomberg, The New York Times, and The Financial Times, have become involved in the FTX Chapter 11 case and are opposing its confidentiality request. Lawyers for The Wall Street Journal and other media companies argued in court documents this month that the list of creditors has always been open to the public, and FTX has yet to fulfill its obligation to obtain an exemption.

FTX represents the request to not comment on court documents submitted by The Wall Street Journal and other companies without response to the journalist.

FTX lawyer Brian Glueckstein stated at a court hearing last month that disclosing names and email addresses publicly could give competitors the opportunity to "dig up" FTX customers for free and potentially harm their asset value. He said that disclosure could potentially "trap them in the circle of malicious actors such as identity theft or hackers" and that this is particularly true for high net worth individuals or institutional clients with large amounts of digital assets.

FTX's recent terms of use stipulate that customer information may be sold or transferred in the event of a merger, restructuring, or bankruptcy, as permitted by law or contract. Adam Levitin, a professor at Georgetown Law School, believes that if customers have never had contractual rights to keep their FTX information confidential, "it is difficult to understand why customers would suddenly gain privacy rights in bankruptcy proceedings."

The Delaware Wilmington US Bankruptcy Court Judge John Dorsey, who is responsible for overseeing the FTX case, has expressed his willingness to shield the identity information of cryptocurrency customers in Chapter 11 cases.

In 2020, the lawyers of Cred Inc., an online cryptocurrency platform, requested Judge Dorsey to hide their client information from the public. They argued that releasing such information could give Cred's competitors an unfair advantage, and that the parties involved in the Chapter 11 case would not receive any apparent benefits.

Cred filed for bankruptcy before the recent wave of crypto bankruptcies and stated in court documents that its client list is a potentially valuable asset. Disclosing its creditors as required by normal bankruptcy procedures would be equivalent to giving up this valuable company asset. Judge Dorsey approved its request for confidentiality.

Cred received approval for Chapter 11 bankruptcy in 2021, which will liquidate its assets over time and repay a portion of the $160 million owed to its clients. The client list has never been sold or made public.

Recently, Manhattan Bankruptcy Court Judge Martin Glenn allowed Celsius Network to protect personal customer contact information in September, while rejecting the company's request to seal their names. However, the company does not have a seal: their names, email addresses, and physical addresses are all public.

The judge wrote: "It is very important for the fairness and public awareness of the bankruptcy proceedings to allow interested parties and the public to see the identity of creditors and the amount of debt, and to track the disposal and handling of debts in the bankruptcy case."

After the client's name was disclosed, Celsius reported a phishing attempt, in which the client received an email from a sender impersonating a colleague from a law firm, requesting wallet and account information.

In the September ruling, Judge Glenn also rejected Celsius' request to seal the identities of European customers covered by UK and EU data protection regulations, finding that these regulations were not prioritized over US bankruptcy law. However, his colleague Michael Wiles at the same court allowed Voyager Digital Holdings Inc. to cite the same European regulations to seal customer information.

In March of this year, Clifford White, head of the bankruptcy department at the Ministry of Justice, said that the names of creditors have traditionally been kept confidential to protect vulnerable groups, such as victims of sexual abuse or residents of nursing homes. However, he stated that in the past decade, bankruptcy courts have expanded the scope of protection to include other individuals, and recently expanded it to include cryptocurrency investors. The court's approval of FTX's request will "mark a significant expansion of the scope of confidentiality."