Digital Assets, DAOs, and Bankruptcy Law

What Happens When a Crypto Platform Fails?

In July 2022, the cryptocurrency platforms Voyager Digital and Celsius Network filed for Chapter 11 bankruptcy; FTX followed in November of that year, no longer able to conceal the “gaping $8.7 billion chasm between its liabilities and assets.”¹ The scale of the failures was without precedent in the digital assets industry. Voyager entered bankruptcy with approximately 3.5 million customers and over $5.9 billion of crypto assets, and Celsius held deposits worth approximately eight billion dollars for its 1.7 million customers.² FTX customers “were told they no longer owned the digital assets in their accounts and instead held only a bankruptcy claim of indeterminate value.”³ These collapses confirmed that “insolvent crypto businesses end up in bankruptcy court just like any other enterprise.”⁴

The consequences for customers were severe. Most account holders assumed that their deposited digital assets remained their property. The ensuing litigation put that assumption to the test, for in those lawsuits “the central question was whether customers who had entrusted their digital assets to these platforms retained ownership interests or merely held unsecured claims.”⁵ The answer turned on the contractual architecture of each platform, none of which had opted into the custodial framework of Article 8 of the Uniform Commercial Code (UCC).⁶ In January 2023, Bankruptcy Judge Martin Glenn held that most of the cryptocurrency deposited under the “Earn” program belonged to Celsius rather than to its customers, leaving depositors with general unsecured claims.⁷ The decision sent shockwaves through the industry because it “stripped away the protections customers believed they were entitled to in the event of a cryptocurrency exchange or retail platform bankruptcy.”⁸ In the absence of the special rules and protections afforded to traditional banking and brokerage accounts, “customers of cryptocurrency platforms are merely unsecured creditors should the platform become insolvent.”⁹

That outcome was not inevitable. In some cases the allocation of risk is simply the chosen business model; in others it is the result of ignorance or oversight, as “the crypto platform could have legally structured itself in such a way that account holders would be vested with a property interest that would be safe from creditors’ claims.”¹⁰ Celsius, in particular, “could have used Article 8 to hold customers’ assets in custody in a way that would have protected them from the firm’s creditors.”¹¹

Early recovery estimates and claim prices reflected the uncertainty facing creditors. Voyager agreed early in its case to a $1.42 billion sale to FTX, a deal that evaporated when FTX itself became insolvent; a $1.02 billion sale to Binance.US was confirmed over the objections of the Securities and Exchange Commission, only for Binance.US to terminate the purchase in April 2023, leaving Voyager to wind down with an initially predicted recovery of thirty-five percent for account holders.¹² In September 2023, Celsius creditors approved a proposed reorganization involving Fahrenheit LLC, with estimated creditor recoveries between sixty-seven and eighty-five percent at that stage of the proceedings.¹³ The FTX proceedings, for their part, spawned frenzied trading in customer claims, which changed hands for five to eight cents on the dollar in the days following the collapse; within months, approximately $91.7 million in individual customer claims were listed on the claims trading platform Xclaim alone.¹⁴

Platform failure is not the only setting in which holders of digital assets confront issuer insolvency. Before the GENIUS Act of 2025, stablecoin “holders possess[ed] no proprietary interest in reserves and would likely stand as unsecured creditors (if they have standing at all) in bankruptcy proceedings.”¹⁵ The Act provides for excluding required reserves from the property of a covered issuer’s estate and granting holders priority, yet its bankruptcy provisions “are internally contradictory and operationally incoherent, casting doubt on how an issuer’s insolvency would unfold and whether reorganization remains viable.”¹⁶ Where the insolvent party is a stablecoin issuer rather than a platform, the analysis diverges sharply, and it is set out under Stablecoins and Private Law.

What Are Debt Tokens?

Every corporate bankruptcy leaves behind claims that can themselves be bought and sold. Today, “the market for bankruptcy claims is broad, international, and liquid,” with estimated annual volumes between $50 and $300 billion, yet federal law regulates it only lightly through Federal Rule of Bankruptcy Procedure 3001(e).¹⁷ Trade debts circulate as accounts under Article 9 of the UCC, a regime that ordinarily requires signed writings and public registry filings and leaves them the least actively traded class of bankruptcy claims.¹⁸

The crypto insolvencies unleashed a wave of such claims, held largely by individual customers unwilling to wait years for a distribution. Amid these proceedings, bankruptcy has “unexpectedly become a crucible for innovation, forging a new type of digital asset: debt tokens.”¹⁹ The most developed offering came from OPNX, a platform launched in April 2023 by the founders of the bankrupt hedge fund Three Arrows Capital and the co-founders of the bankrupt exchange CoinFLEX.²⁰ Rather than tokenizing anything, OPNX pooled customer claims into an opaque trust and issued reOX and oUSD tokens that conferred rights against OPNX alone, not against the bankruptcy estate in question; the touted tokenization “was a mere illusion,” and the platform shut down in February 2024.²¹

Can Bankruptcy Claims Be Genuinely Tokenized?

Genuine tokenization is possible, but only through the channel that private law supplies. Under the numerus clausus principle, “[t]he law, not technological ingenuity or contractual creativity, determines which property forms receive legal recognition and protection,” and a purported tokenization falling outside the sanctioned forms “remains legally ineffective: a sophisticated illusion rather than a legally binding reality.”²²

For bankruptcy trade claims, the sanctioned form is the controllable account introduced by the 2022 UCC Amendments. A controllable electronic record (CER) can evidence the claim if the bankruptcy trustee undertakes to pay the person with control of that record. The controllable account “is an account that is evidenced by a CER and in respect of which the account debtor agrees to pay the person in control of that CER.”²³ Upon that conversion, “[the creditor’s] bankruptcy trade claim becomes a highly negotiable asset that can circulate at high velocity,” as qualifying purchasers take free from competing claims.²⁴ Transactional structures range from fully peer-to-peer minting to special purpose vehicles pooling claims from multiple bankruptcies, yet this flexibility “pivots on a mandatory fulcrum” in that “bankruptcy claims must be tokenized as controllable accounts.”²⁵ The doctrinal mechanics of control and the take-free rule belong to Article 12 itself and are traced in UCC Article 12 and Controllable Electronic Records.

Can a DAO File for Bankruptcy?

Decentralized autonomous organizations (DAOs) present the problem of crypto financial distress in a more radical form. Estimates reported in 2026 placed the number of DAOs at 20,000 and their assets above $20 billion.²⁶ Many “claim to exist outside traditional legal frameworks, but such claims are illusory.”²⁷ Where no corporate form has been chosen, the law categorizes a profit-seeking DAO under default rules for unincorporated organizations, typically as a general partnership whose partners bear unlimited personal liability. The bZx litigation made the point concrete. After a hack caused approximately $55 million in losses, the United States District Court for the Southern District of California held that the allegations supported treating the DAO as a general partnership, allowing claims against alleged partners to proceed.²⁸

Eligibility is not the principal obstacle to a DAO bankruptcy, as the Bankruptcy Code extends relief to “persons” with a domicile, place of business, or property in the United States, and courts construe these gateways broadly.²⁹ The friction lies in process, because “bankruptcy’s centralized governance layers are unpalatable, if not outright anathema, for DAOs built upon decentralized and automated decision-making as a matter of identity.”³⁰ A DAO seeking protection must vest decision-making authority in identifiable representatives, submit public disclosures including the names and addresses of its members, and keep pace with urgent judicial timelines, compromising the pseudonymity and decentralization that define its ethos.³¹ The resulting confrontation is the moment “when unstoppable code meets immovable bankruptcy law.”³²

What Does the Hector DAO Bankruptcy Reveal?

In June 2024, Hector DAO became the first DAO to enter bankruptcy, commencing Chapter 15 proceedings in New Jersey after its treasury had plummeted from approximately $100 million to $9.3 million amid the collapse of the Terra stablecoin, ransomware attacks, and repeated security breaches.³³ The filing followed a tokenholder suit alleging breach of contract, breach of fiduciary duty, and conversion, together with a receivership in the British Virgin Islands.³⁴ The episode discloses “a stark contrast between ex ante ideological commitments and ex post pragmatic needs.”³⁵ Faced with litigation, the receivers embraced the centralized oversight and extensive disclosure that DAO principles ordinarily reject. Counterintuitively, complexity narrows the gap. As DAOs mature, their philosophical tension with bankruptcy processes “may actually decrease rather than intensify,” because institutional maturity requires the very centralization that makes bankruptcy workable.³⁶ Nor is entry always chosen. Creditors holding qualifying claims can force a DAO into involuntary proceedings, and in a general partnership even a subset of disgruntled tokenholders can do so.³⁷

Could Bankruptcy Itself Be Decentralized?

Whether the distributed ledger technology (DLT) ecosystem could build an insolvency framework of its own has been tested through a thought experiment denominated BrokeDAO, a blockchain-based platform that would oversee the liquidation or restructuring of distressed DAOs through smart contracts and tokenized incentives, echoing the contractual bankruptcy alternatives theorized in the 1990s.³⁸ The exercise exposes “inherent and insurmountable limitations in trying to opt out of bankruptcy’s protections through crypto private ordering.”³⁹ BrokeDAO and comparable non-bankruptcy alternatives founder because they “lack the coercive power of bankruptcy law.”⁴⁰ The “tokenized carrots and sticks” of such a platform can bind tokenholders, yet off-chain creditors such as employees, vendors, tort claimants, and regulators have little reason to accept rehabilitation tokens in satisfaction of conventional claims.⁴¹ The utility of any decentralized autonomous bankruptcy would accordingly be “confined to small, homogeneous organizations operating exclusively within DLT networks.”⁴² Whether private ordering through code can displace the coercive machinery of the law is the larger question, taken up in Code is Not Law.