On May 8, cryptocurrency platform Bittrex filed for chapter 11 in Delaware. Bittrex’s first day filings emphasize that, unlike many other crypto filings over the past year, this case is not a “free fall” bankruptcy. In fact, a plan has already been filed, and the first day declaration said the debtors “took extensive action pre-petition to ensure full customer recovery, and plan to swiftly bring these chapter 11 cases to a responsible conclusion.”

These pre-petition actions include the company’s March 31 announcement that it would be ceasing all U.S. operations effective April 30. The announcement explained that trading would be permitted until April 14, and all customer funds should be withdrawn by April 30. Because Bittrex did not use customer assets as security or otherwise risk customer deposits, the company was able to satisfy all customer withdrawals. However, as of the petition date, Bittrex was still holding certain customer assets, including $14.6 million in assets belonging to its largest remaining customer. The debtors’ first day filings stated that those customer assets are safe and will be returned in due course.

Bittrex’s filings explain that the chapter 11 was a result of macroeconomic trends as well as regulatory tightening. Regarding the regulatory element, in October 2022, Bittrex agreed to pay more than $29 million in fines after years of investigations by the U.S. Department of Treasury’s Financial Crimes Enforcement Network and Office of Foreign Asset Control. In its petition, Bittrex lists the Office of Foreign Asset Control as its largest unsecured creditor.

Notwithstanding this large liability, the company’s first day filings focus more on the “insufficiently defined standards and regulations” that allegedly create a “constant threat of fines and enforcement actions.” Over the past year, as the so-called crypto-winter has financially devastated some investors, the chorus of voices demanding greater regulatory oversight of the crypto industry has grown stronger. Bittrex’s first day filings turn this criticism on its head by suggesting that the issue is not a lack of oversight, but a lack of guidance on how to properly operate a crypto business in the U.S. Notably, only Bittrex’s U.S. operations are winding down, and its active foreign affiliates are not debtors in the bankruptcy.

Compared to the colossal collapses of FTX and Celsius (among others), Bittrex’s controlled wind-down may seem mundane. Bittrex had no secured debt and was only a borrower on unsecured intercompany loans. In addition, as noted above, Bittrex’s business model did not involve putting customer assets as risk. These unique factors allowed Bittrex to pursue a more orderly wind-down, but these factors are not easily replicable. As such, the case does not provide a helpful roadmap for how other crypto companies may avoid messy bankruptcy filings.

What Bittrex’s filing may do, however, is pave the way for more flexible post-petition lending facilities (or “DIP” loans). As with most debtors, Bittrex requires financing to fund the costs of its bankruptcy proceeding. Here, the DIP lender is the debtors’ ultimate parent company, Aquila Holdings. The interesting part of Bittrex’s proposed DIP loan is that it will be provided in bitcoin and repaid in bitcoin.

Bittrex’ filings acknowledge that this kind of loan is “novel” outside of the cryptocurrency industry, but providing and receiving payment under the loan in bitcoin allows Aquila to avoid certain negative tax consequences, which makes the lending cheaper. The debtors also have limited access to fiat currency because their usual banking partner is one of the U.S. banks that recently shut its doors. These two facts have made the proposed DIP loan the most appealing option.

Given the notorious volatility of cryptocurrencies, the debtors had to negotiate protection against conversion rate fluctuations. First, the debtors will convert the bitcoin to U.S. dollars promptly upon each drawdown, which will minimize the impact of any fluctuations on the front end of the loan. Second, if the debtors do not have enough bitcoin on hand to repay the loan, then the debtors’ repayment obligation is also capped to protect against any rate fluctuations between the borrowing and repayment date. The capped amount is tied to the bitcoin to U.S. dollar conversion rate as of the petition date, and, therefore, provides more certainty to the debtors on their repayment obligations.

On May 10, the court approved Bittrex’s proposed DIP loan on an interim basis. The court noted that the proposal was unusual but that the terms were “very favorable” to the debtor. These favorable terms include the fact that the loan is unsecured and carries only a 4% interest rate. If this loan facility is a success, it could open up the possibility for other debtors to seek post-petition financing in the form of alternative assets such as cryptocurrency.