The Legal Minefield of Crypto Collapses: Institutional Partners Face a Perfect Storm of Liability

The collapse of crypto firms like FTX, Celsius, and Terraform Labs has exposed a seismic shift in the legal and regulatory landscape, with institutional partners—law firms, auditors, and exchanges—now facing unprecedented liability risks. As courts and regulators grapple with the fallout, the question is no longer whether these entities can be held accountable, but how much they will pay in penalties, fees, and reputational damage.

The Enforcement Surge and Legal Ambiguity

The Securities and Exchange Commission (SEC) has weaponized the Howey Test to classify crypto assets as securities, triggering a wave of enforcement actions. In SEC v. Terraform Labs, the agency secured a $4.5 billion penalty, arguing that LUNA and UST were investment contracts [1]. Similarly, the Ripple case, now in the Second Circuit, has forced courts to confront whether programmatic token sales to retail investors qualify as securities offerings [1]. These cases highlight a critical vulnerability: institutional partners who advised on token structures or governance may now be retroactively deemed complicit in regulatory violations.

Meanwhile, the Department of Justice (DOJ) has taken a harder line on criminal liability. The conviction of Tornado Cash developers for AML violations and the prosecution of bot-driven trading schemes in Massachusetts illustrate a trend toward direct accountability for fraudulent or illegal activities [2]. Law firms like Fenwick & West, which represented FTX, now face lawsuits alleging they enabled fraud through inadequate corporate safeguards [3]. This dual-track approach—SEC enforcement for regulatory gaps and DOJ prosecutions for criminal misconduct—leaves legal advisors in a precarious position, navigating a minefield of overlapping obligations.

The Financial Toll on Creditors and the Rise of Fee Examiners

The aftermath of crypto bankruptcies has also revealed a hidden cost: exorbitant fees charged by institutional partners. Law firms such as Kirkland & Ellis and Sullivan & Cromwell have collectively billed over $210 million in FTX, Celsius, and Voyager cases—funds drawn from the very pool meant to compensate retail investors [4]. Bankruptcy courts have responded by appointing fee examiners to scrutinize these costs. In FTX’s case, Katherine Stadler, the appointed examiner, noted that legal fees consumed 10% of the firm’s remaining cash [4]. Critics argue this creates a perverse incentive for law firms to prioritize their own compensation over creditor recovery, eroding trust in the bankruptcy process.

Regulatory Shifts and the Search for Clarity

The Trump administration’s 2025 executive order on digital assets marked a pivot toward pro-crypto policies, with Chair Paul Atkins advocating for innovation-friendly frameworks [1]. Yet, this shift has not halted litigation. The SEC’s recent dismissal of several high-profile cases to focus on guidance creation has sparked debate: while it aims to reduce regulatory ambiguity, it risks leaving investors without recourse in future collapses [4].

Legislative efforts like the GENIUS Act—mandating 100% reserve backing for stablecoins over $50 billion—and the CLARITY Act, which seeks to define digital assets as either securities or commodities, signal a push for clarity [1]. However, these measures also complicate liability for institutional partners. For instance, auditors of stablecoin issuers now face stricter compliance demands, while exchanges must navigate a patchwork of state and federal rules.

The Long-Term Risks for Institutional Partners

For law firms and auditors, the stakes are clear: they must now assume a gatekeeper role in a sector where regulatory lines are still being drawn. The concept of “techwashing”—using technological complexity to obscure operational risks—has been called out as a liability multiplier [3]. Institutions that fail to conduct due diligence on crypto projects may find themselves entangled in lawsuits, as seen in the FTX case.

Moreover, the rise of fee caps and creditor pushback suggests a growing appetite for accountability. In FTX’s bankruptcy, Kirkland & Ellis agreed to limit hotel and catering costs after public outcry [4]. This trend could force legal partners to adopt more transparent billing practices, potentially reducing their margins in crypto-related work.

Conclusion: A New Era of Caution

The crypto collapse of 2023-2025 has rewritten the rules for institutional partners. Legal advisors must now balance innovation with compliance, while auditors and exchanges face heightened scrutiny. For investors, the lesson is clear: the absence of clear regulations has created a vacuum where liability is retroactively assigned, often at the expense of retail investors. As the SEC and DOJ continue to shape the legal framework, one thing is certain: the days of crypto’s Wild West are over, and the era of accountability has begun.

Source:
[1] Crypto in the Courts: Five Cases Reshaping Digital Asset Regulation [https://katten.com/crypto-in-the-courts-five-cases-reshaping-digital-asset-regulation-in-2025]
[2] Crypto Legal Liability and Corporate Governance Risks [https://www.ainvest.com/news/crypto-legal-liability-corporate-governance-risks-accountability-law-firms-enabling-fraud-2508/]
[3] (Un)accountability of crypto assets exchanges - Emerald Insight [https://www.emerald.com/qrfm/article/doi/10.1108/QRFM-01-2025-0016/1271526/Un-accountability-of-crypto-assets-exchanges]
[4] A $700 Million Bonanza for the Winners of Crypto's Collapse [https://www.nytimes.com/2023/09/05/technology/crypto-collapse-lawyers-turnaround-specialists.html]