A New Zealand cryptocurrency exchange, Cryptopia Limited, filed bankruptcy in New York under Chapter 15, seeking the United States’s recognition of its liquidation proceeding filed in its home country of New Zealand. A crypto exchange is like an online bank for cryptocurrencies such as Bitcoin and Litecoin. It facilitates transfers of the cryptocurrencies among its account holders in the same way a traditional bank facilitates transfers of funds via check or electronic funds transfers.
Cryptopia had an estimated two million account holders. In January 2019, the company was hacked and digital assets with a value in excess of $16 million were stolen from accounts (called “digital wallets” — account holders are known as “wallet holders”) stored on the exchange. This resulted in the holders of Cryptopia’s voting shares electing to place it into liquidation in New Zealand because it was insolvent.
The largest wallet holder is GNY.io, a machine learning platform for blockchain applications based in the Channel Islands, that reports losses of more than 492 Bitcoins (BTC), valued at $2.5 million at the time of the claim, but now worth $4.2 million in BTC terms.
The failure of crypto exchanges is one of the financial stories so far of 2019. Several have already gone under, including Canada’s Quadriga and Italy’s Bitgrail. The failure of a crypto exchange is similar to a bank failure. Wallet holders are clamoring for their money along with creditors. Lawsuits invariably result, some dragging on for years. In the case of Japanese exchange Mt. Gox, the first crypto exchange to fail, lawsuits are entering their sixth year, with some expressing cautious hope that a resolution can be achieved in 2020. Using that timeline, Cryptopia’s case could drag on until 2025.
The delays are caused mainly by the fact that crypto exchanges are international, unlike banks, which operate in one state or, at most, within the United States. While it’s clear, due to the transparency of the blockchain ledgers, which wallet holders hold the stolen funds, identifying the hackers and matching funds to legitimate wallet holders is proving to be a daunting task. Information regarding those wallet holders resides exclusively on a server in Arizona. Part of the bankruptcy filing in New York is to ask the Bankruptcy Court to order the Arizona company to provide data on all the accounts house on its server. Therefore, this international case involving a New Zealand company that caters to wallet holders around the world will hinge on convincing a New York bankruptcy judge to order an Arizona company to release data that most people would consider private and not want released.
The cryptocurrency industry is in its infancy, and neither it nor the legal system has yet developed to a point that these kinds of questions can be answered neatly. It’s for reasons like this that the banking industry is so highly regulated, either by the FDIC or state regulators. Eventually some sort of internationally recognized regulatory organization may have to be created.