Crypto Bankruptcy and the Risks of Fraudulent Schemes: Why Traditional Legal Safeguards Are Now Extending to Digital Assets

The collapse of major cryptocurrency platforms like FTX, Celsius, and BlockFi has exposed the vulnerabilities of digital assets in insolvency scenarios and fraudulent schemes. As these cases unfold, traditional legal frameworks—designed for tangible assets and conventional financial systems—are being stretched to address the unique challenges of crypto. This evolution reflects a broader trend: courts and regulators are increasingly treating digital assets as a legitimate domain for legal oversight, even as gaps in the system persist.

The Bankruptcy Conundrum: Valuation and Tracing Digital Assets

Bankruptcy courts have faced unprecedented complexity in valuing digital assets, which fluctuate wildly and often exist in opaque, decentralized ecosystems. In the Celsius, FTX, and BlockFi bankruptcies, courts adopted the petition-date method, valuing assets based on their price at the time of filing—often during the 2022 "crypto winter." This approach left creditors with claims that failed to reflect subsequent market recoveries, sparking debates about fairness and efficiencyPurdue Pharma Bankruptcy Deal Ruling Is Taking Courts ...^[1]. Conversely, the Genesis bankruptcy tested the distribution-date method, which values assets at the time of distribution, aiming to maximize in-kind returns but drawing criticism for potential overvaluationPurdue Pharma Bankruptcy Deal Ruling Is Taking Courts ...^[1].

The FTX case further highlighted these challenges. The court applied a blockage method to value specific utility tokens (MAPS, OXY, SRM), applying steep discounts (100% for MAPS, 99.9% for OXY) to account for market distortions caused by the debtor's massive holdingsBankruptcy Court Evaluates Cryptocurrency Value, Claims^[2]. Such rulings underscore how bankruptcy courts are acting as de facto regulators, navigating uncharted territory in the absence of a comprehensive legal framework for cryptoThe Bankruptcy Court as Crypto Market Regulator^[3].

Fraud in the Digital Shadows: Legal Reckonings

The FTX collapse exemplifies how traditional fraud statutes are being weaponized against crypto misconduct. Sam Bankman-Fried and Caroline Ellison received prison sentences of 25 and 2 years, respectively, for orchestrating a $32 billion fraudA List of Recent Major Ethics & Compliance Issues^[4]. Simultaneously, professional service providers like the law firm Fenwick & West faced lawsuits for allegedly enabling FTX's misappropriation of customer fundsA List of Recent Major Ethics & Compliance Issues^[4]. These cases signal a shift toward individual accountability and institutional liability, leveraging existing securities and fraud laws to hold actors in the crypto space responsibleCrypto Compliance: A Comprehensive Guide^[5].

Federal agencies have also intensified enforcement. The SEC and CFTC have pursued unregistered offerings and market manipulation, while the DOJ has expanded criminal investigations into money laundering. In 2023 alone, the SEC reported over $280 million in penalties from crypto-related enforcement actionsCrypto Compliance: A Comprehensive Guide^[5].

Extending Legal Safeguards: From Bankruptcy Code to New Legislation

Traditional legal tools are being adapted to address crypto-specific risks. For instance, Section 541 of the Bankruptcy Code, which defines a debtor's estate, is now being interpreted to include digital assets, even as debates persist over their classification as propertyTHE CLARITY ACT^[6]. Similarly, fraud statutes like 18 U.S.C. § 1348 (securities fraud) and 18 U.S.C. § 1956 (money laundering) have been applied to crypto schemes, demonstrating their flexibility in digital contextsCrypto Compliance: A Comprehensive Guide^[5].

Legislative efforts are also emerging. The GENIUS Act of 2025 introduced the first federal regulatory framework for payment stablecoins, imposing reserve requirements and anti-money laundering (AML) rulesCrypto Compliance: A Comprehensive Guide^[5]. Meanwhile, the CLARITY Act of 2025 seeks to clarify token classification and custody rules, ensuring digital assets are returned pro rata to customers in bankruptcyTHE CLARITY ACT^[6]. These laws reflect a growing recognition that digital assets require tailored safeguards while leveraging existing legal principles.

The Road Ahead: Risks and Opportunities

For investors, the evolving legal landscape presents both risks and opportunities. On one hand, the lack of standardized valuation methods and regulatory clarity creates uncertainty. On the other, the extension of traditional safeguards—such as bankruptcy protections and fraud enforcement—offers a degree of recourse in cases of insolvency or misconduct.

However, gaps remain. Secondary markets for tokens and foreign-issued stablecoins remain largely unregulated, creating avenues for exploitationCrypto Compliance: A Comprehensive Guide^[5]. As the crypto industry matures, the interplay between decentralized innovation and centralized legal oversight will define its stability and legitimacy.