Classifying Creditors In Digital Asset Bankruptcy Cases

As digital asset markets continue to struggle, and multiple digital asset platforms seek refuge in Chapter 11 proceedings, courts will be confronted with several novel issues.

A previous article addressed how traditional bankruptcy recovery mechanisms might operate when the recoverable assets are digital assets recorded on a blockchain. This article discusses another critical issue: how digital asset customers will be classified under the Bankruptcy Code. The resolution of this thorny issue will significantly impact the extent to which customers can recover assets from digital asset firms in bankruptcy.

Priority of Claims in Chapter 11 Proceedings

The classification of creditors in a Chapter 11 case determines the likelihood of recovery in a bankruptcy case. The Bankruptcy Code contemplates at least four tiers of recovery for creditors. Each tier may have subgroups or classes: