On May 8, 2023, online cryptocurrency exchange platform Bittrex, Inc. and three of its affiliated entities (collectively “Bittrex”) filed for chapter 11 to wind down their U.S. and long-dormant Malta operations. The bankruptcy filing followed costly regulatory investigations and an April 17, 2023 SEC enforcement action alleging that Bittrex improperly sold crypto assets that were securities. Unlike other crypto bankruptcies, Bittrex did not risk, hypothecate, or loan cryptocurrencies needed to meet its contractual obligations to its customers. Instead, since March 31, 2023, Bittrex had been urging its 5.4 million customers to withdraw their cryptocurrency deposits. Bittrex’s ultimate goal in its case is to pay all customer’s claims in full as soon as possible.
What is particularly interesting about the Bittrex case is that for the first time, on June 7, 2023, a bankruptcy court authorized a debtor to obtain postpetition financing solely in bitcoin (“BTC”) from the DIP lender.
DIP Financing Motion
Bittrex filed a postpetition financing motion on the petition date requesting that Bittrex’s ultimate parent company, Aquila Holdings Inc. (“Aquila”), be authorized to issue a DIP loan of 700 BTC to Bittrex. The DIP financing agreement provides that Aquila is entitled to a non-priming, super-priority administrative claim pursuant to section 364(c) of the Bankruptcy Code (i.e., higher priority over any and all administrative expense claims), but does not grant Aquila a security interest in any of Bittrex’s assets. Bittrex intends to use the DIP loan to fund the bankruptcy case and make distributions of cryptocurrency holdings to its former customers.
There were several reasons why Aquila required the DIP loan to consist exclusively of BTC rather than fiat currency. First, in the crypto industry it is common for participants to borrow funds in BTC. Second, after fiat banking services provider Silvergate Bank closed, it became very difficult for a cryptocurrency firm in wind-down mode to access fiat currency. And perhaps most importantly, Aquila would face negative tax consequences if it was required to liquidate its BTC, which would greatly increase the expense of Bittrex’s DIP loan.
According to the financing motion, once Bittrex receives the BTC from Aquila, Bittrex will promptly convert the BTC into U.S. dollars to minimize the risk of currency rate fluctuations. Bittrex will then use the BTC proceeds to pay administrative expenses in accordance with the budget attached to the motion. Bittrex will need to repay the DIP loan principal no later than nine months after the interim order was entered (i.e., February 10, 2024), and the principal portion of the DIP loan must be repaid in BTC. Any other obligations, like the 4% interest per annum, may be repaid in BTC, U.S. dollars, or any combination thereof. To protect Bittrex against BTC price fluctuations between the time of borrowing and maturity, Bittrex negotiated a cap on the amount of additional BTC it may need to acquire to pay any shortfall. Specifically, Bittrex is only required to pay Aquila BTC equal to 110% of the value of the shortfall on the petition date. In other words, Bittrex is protected in the event the price of BTC rises after the petition date by only needing to pay Aquila up to 110% of the value of BTC advanced on the petition date.
For example, on the petition date the value of BTC in U.S. dollars was $28,611.44. The DIP loan is for 700 BTC, which means that on the maturity date Bittrex needs to repay 700 BTC to Aquila. If the price of BTC remained stable during the nine-month period, then Bittrex would need $20,028,008 worth of BTC to repay the DIP loan. But because the price of BTC constantly changes, if the price per BTC skyrockets following the petition date, Bittrex would only need to pay Aquila $22,030,808.80 of BTC (i.e., 110% of the value of BTC on the petition date) to satisfy the principal obligation, thus capping its risk.
Bittrex’s DIP financing is relatively non-controversial – it does not include a rollup, does not prime any preexisting debt, does not impose a security interest against any assets, only includes a 4% interest rate per annum, meaningfully caps any upside Aquila may receive for postpetition increases in BTC valuation, and authorizes Bittrex to recognize any price savings if the value of BTC falls after the petition date. What may appear to be unique, at least for bankruptcy purposes, is that the loan is in BTC, although entities in the crypto industry commonly lend and borrow cryptocurrencies from one another. As crypto firms continue to file bankruptcy, Bittrex’s DIP facility may serve as a template for firms that intend to borrow BTC or other cryptocurrencies to finance their cases.
Bankruptcy practitioners can now seek to expand the scenarios for when BTC or other cryptocurrency DIP financing is acceptable in other cases. Debtors may begin to seek financing with more obscure cryptocurrencies or negotiate more complicated risk-transferring procedures to account for postpetition currency valuation fluctuations. For example, to obtain a lower interest rate or more value, debtors may agree to (i) a higher cap for a lender to obtain a larger principal payment (when valuations increase postpetition), and/or (ii) limit the floor of how large of a principal discount the debtor may obtain (when valuations drop postpetition).
The future has just begun to present creative cryptocurrency DIP financing solutions to debtors and lenders.