Global Practice Guides Web Summit: Bankruptcies in the Crypto Space

There have been a number of high-profile bankruptcies and failures in centralised blockchain business models, like the Terra network and Three Arrows Capital. The interconnected nature of many blockchain entities means failure at one can trigger a chain reaction impacting others. This interconnectedness also complicates the role of asset tracing and fraud investigation when addressing these failures.

There is a wide range of regulatory approaches taken to activities involving crypto-assets in different jurisdictions The panel consider the methods adopted and practices established in key jurisdictions, including the USA, Singapore, and the Cayman Islands.

There is a particular focus in the discussion on the regulatory responses to recent failures, with insights into potential adjustments or new laws and discussion of challenges in handling multi-jurisdictional cases, especially in insolvencies involving global crypto-assets.

As well as introducing the concept of stablecoins, including algorithmic stablecoins, the panel also consider the role of stablecoins as a gateway to the wider digital economy and their potential future amidst tighter regulations. This includes a discussion on CBDCs, with a focus on Singapore's approach to wholesale and retail CBDCs.

Throughout the discussion, the panellists highlight the increasing focus on decentralised models in the blockchain space, acknowledging their unique challenges and potential regulatory responses. The panel defines and explains the role of decentralised autonomous organisations (DAOs) and their legal implications. For example, the use of Cayman foundations as legal wrappers for DAOs to provide a liability shield. Challenges in apportioning responsibility in decentralised systems and the legal enforceability of obligations against DAO protocols are also examined.

The discussion concludes with a consideration of the impact of CFTC enforcement actions on DAOs, especially when there is no legal entity involved, and the legal challenges in defining membership and responsibility within DAOs. The panel predict an increased focus on decentralised systems in the future.