The Wall Street Journal16 hrs ago
The collapse of several cryptocurrency platforms this year is testing the industry’s promise of user privacy as bankruptcy courts weigh if millions of individual customers’ identities should be revealed to the public.
Hundreds of thousands of customers of Celsius Network LLC have already lost their anonymity because of its chapter 11 filing after a court ruling in September forced it to disclose its account holders’ names and coin balances.A different bankruptcy court is expected to consider next month if failed crypto exchange FTX can seal information on its customers’ identities and contact information from its publicly-available filings.
Bankruptcy gives troubled businesses an extraordinary opportunity to resolve their debts in exchange for transparency into their affairs, including names and addresses of their business counterparts and known creditors.Government lawyers and media organizations are opposing FTX’s efforts to seal its customers’ information, saying it hasn’t provided enough evidence to justify curtailing the public’s right of access to judicial records.
“One of the biggest selling points of crypto is the anonymity,” but the notion becomes an issue in bankruptcy courts that require transparency, said Joanne Gelfand, a bankruptcy lawyer with Akerman LLP.
“Many people believe that the anonymity only protects wrongdoers, that the anonymity enables thieves and fraudsters to transfer money and not be accountable,” she said.“Other people look at it as a personal individual right-to-privacy issue.”
Lawyers representing crypto firms have urged courts to err on the side of redacting information, saying that disclosure will only reduce whatever value the businesses have left and harm customers who are already facing financial losses.
The turmoil in cryptocurrency markets this year has already hurt crypto’s credibility with the investing public as plunging asset prices blew holes in the balance sheets of lenders, exchanges and hedge funds.The resulting bankruptcies blocked millions of individuals and institutions worldwide from accessing their crypto and exposed how some platforms weren’t as careful with customer funds as they let on.
FTX in particular shook the crypto world with its swift implosion and alleged misuse of customer funds.Some platforms may simply shut down if they can’t sell or reorganize their businesses in chapter 11.
FTX management has said in court papers that keeping its customer information under seal is crucial to maintaining its competitive advantage and protecting its customers’ privacy.The company has put some potentially salvageable business units in Europe and Japan up for sale, but not FTX.com and FTX US, its biggest platforms for international and U.S.customers.
The Wall Street Journal, Bloomberg LP, the New York Times and The Financial Times Ltd.
have intervened in FTX’s chapter 11 case to oppose its sealing request.Lawyers for the Journal and the other media companies argued in court papers this month that creditor lists have historically been open to the public and that FTX hasn’t met its burden to be granted an exception.
An FTX representative didn’t respond to requests for comment on the court filing by the Journal and the other companies.FTX’s lawyer Brian Glueckstein said in a court hearing last month that releasing names and email addresses would give competitors a “free opportunity to poach” FTX’s customers and potentially hurt the value of its assets.Identifying customers who are often high net-worth individuals or entities with significant digital assets could “put them in the crosshairs of bad actors” such as identity thieves or hackers, he said.
“Many customers invest in cryptocurrency in part to not be publicly identified,” Mr.
Glueckstein said.“It is a highly sensitive issue for the customer community.”
FTX’s recent terms of use stipulate that in events such as a merger, restructuring or bankruptcy, its customer information may be sold or transferred as permitted by law or contract.If customers never had a contractual right to keep their FTX information private, “it’s hard to see why customers would suddenly gain privacy rights in bankruptcy,” said Adam Levitin, a professor at Georgetown Law.
Judge John Dorsey of the U.S.Bankruptcy Court in Wilmington, Del., who is overseeing FTX’s case, has expressed a willingness to shield identifying information on crypto customers in a chapter 11 case.
In 2020, lawyers of online cryptocurrency platform Cred Inc.asked Judge Dorsey to hide its customer information from the general public.They argued that releasing such information could give Cred’s competitors an unfair advantage while parties involved in the chapter 11 case would get no apparent benefit.
Cred, which went bankrupt before the more recent wave of crypto insolvencies, said in court papers that its customer list was a potentially valuable asset, and that disclosing its creditors as required by normal bankruptcy procedure would amount to giving up that valuable corporate asset.
Judge Dorsey granted its sealing request.
Cred won approval of a chapter 11 plan in 2021 to liquidate its assets over time and repay customers some of the $160 million they were owed.The customer list has never been sold or made public.
More recently, Judge Martin Glenn with the U.S.Bankruptcy Court in Manhattan in September allowed Celsius Network to redact contact information for individual customers, while refusing the company’s request to seal their names.Businesses, however, got no seal at all: Their names, email addresses and physical addresses were made public.
“Enabling parties in interest and the public to see the identity of creditors and the amount of their claims, and then tracking the disposition and treatment of claims during the bankruptcy case, is important to the fairness and public perception of the bankruptcy process,” the judge wrote.
After the release of customers’ names, Celsius lawyers reported phishing attempts in which customers received emails from senders who posed as law firm associates, requesting wallet numbers and account information.
In his September ruling, Judge Glenn also rejected Celsius’s request to seal the identities of European customers covered by U.K.and EU data protection regulations, finding that those rules didn’t take precedence over U.S.bankruptcy law.
However, his colleague in the same court, Judge Michael Wiles, allowed Voyager Digital Holdings Inc.to redact customer information, invoking those same European regulations.
Clifford White, who led the Justice Department’s bankruptcy division until March, said creditor names were traditionally sealed to protect vulnerable populations, such as sex-abuse victims or residents of nursing homes.But in the past decade, bankruptcy courts have expanded the protection to others and most recently to crypto investors, he said.
Court approval of FTX’s request would “signal a significant expansion of the practice of sealing,” Mr.White said.
Write to Akiko Matsuda at [email protected]
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