US Crypto Exchange Bittrex Seeks Bankruptcy After SEC Complaint

Representations of virtual cryptocurrencies are placed on U.S. dollar banknotes in this illustration, on Nov. 28, 2021. Dado Ruvic/Reuters

Cryptocurrency exchange Bittrex filed for bankruptcy protection three weeks after the Securities and Exchange Commission (SEC) accused it of operating an unregistered securities exchange for years.

On May 8, the crypto firm made the filing in a Wilmington, Delaware, court after announcing in March that it would wind down operations in the United States by the end of April.

Court filings also show that related entities Desolation Holdings LLC, Bittrex Malta Holdings Ltd., and Bittrex Malta Ltd. had also filed for bankruptcy.

The exchange’s U.S. branch had already laid off 83 employees in February.

Bittrex was the latest crypto exchange to file for bankruptcy, joining FTX and other rivals like Celsius, Voyager, and BlockFi.

Several companies in the crypto industry have filed for bankruptcy over the past year, led by falling asset prices, increased regulatory crackdowns, and criminal charges in the case of the failed crypto exchange giant FTX.

Despite the impending shutdown of its American operations, the SEC decided to sue Bittrex in federal court in mid-April for allegedly violating regulations from 2017 through 2022, which was immediately denied at the time.

Bittrex was accused of failing to register with the SEC as a brokerage, exchange, and clearing agency, while bringing in at least $1.3 billion in revenue during that period.

Another Crypto Exchange Winds Down Its Operations

Richie Lai, co-founder and CEO of the American branch of Bitrrex, posted a tweet on May 8 that the bankruptcy filing was the “cleanest way to bury the baby,” but that the company “still has 100 percent of all customer funds.”

The Seattle-based exchange ceased its U.S. operations on April 30, and said that the bankruptcy filing would not impact Bittrex Global, which still serves customers outside the United States from its base in Liechtenstein.

Bittrex said that it was still holding crypto assets of American customers who failed to withdraw their funds before the end of April deadline.

The company declared those assets “safe and secure” and that it intended to ask the bankruptcy court for a limited reopening of customer accounts so that the remaining funds could be returned to customers.

According to court documents, Evan Hengel, Bitrrex’s co-chief restructuring officer, promised customers a “100 percent like-kind cryptocurrency distribution” under its liquidation plan that would enable them to access the platform to withdraw their crypto assets.

The crypto exchange said it had more than 100,000 creditors, with estimated assets and liabilities both worth between $500 million and $1 billion, according to the Chapter 11 bankruptcy petition, which was shared on Twitter by Randall Reese of Chapter 11 Dockets, a bankruptcy tracker.

The company “faced an untenable regulatory and economic environment” given “the lack of regulatory clarity in the U.S. [which] created a substantial negative economic impact on the digital asset industry and resulted in overlapping regulatory burdens and soaring regulatory costs,” according to Hengel.

SEC Continues to Pursue Its Crackdown on Electronic Currency Sector

The SEC charged Bittrex Global and former CEO William Shihara on April 17 for allegedly encouraging cryptocurrency issuers who wanted to list their tokens on the exchange’s platform to delete public statements that could lead regulators to investigate those token offerings as securities.

“Today’s action, yet again, makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity,” SEC chair Gary Gensler said in a statement at the time.

The crypto exchange denied those allegations, saying that none of the digital assets on its platform were either securities or investment contracts.

Oliver Linch, the current CEO of Bittrex Global, told Coindesk last month that it was a separate entity with no American customers and that it would fight those charges in court.

“Bittrex was an entirely separate legal entity and only provided services in the U.S. and only served U.S. customers. And they’re the ones that have had to shut down their operations … Global continues on providing the services to rest-of-world clients as it ever has,” he said.

However, the latest bankruptcy proceedings may make the parent company’s fight more difficult.

Meanwhile, Bittrex had previously agreed to pay $24 million and $29 million, respectively, in a separate dispute with the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) for “apparent violations” of sanctions on certain countries and breaking anti-money-laundering laws.

The exchange was accused of not preventing individuals located in the sanctioned jurisdictions of Cuba, Iran, Sudan, Syria, and the disputed region of Crimea from using its platform between March 2014 and December 2017, according to the OFAC.

Bittrex’s court filing listed OFAC as its largest unsecured creditor, with more than $24 million owed to the Treasury Department.

Other major creditors listed were mostly customers of the crypto exchange, with 16 unnamed entities maintaining at least $1 million in their accounts.

Bittrex’s largest remaining customer account has $14.6 million in assets, according to the bankruptcy documents.

European Union Passes Crypto Regulations

Gensler demanded last year that any companies which help facilitate transactions in the cryptocurrency market must register with the SEC.

Last month, Gensler was grilled by the House Financial Services Committee over his handling of the crypto sector at the same time the European Parliament passed landmark new crypto-licensing regulations.

The European Union’s Markets in Crypto Assets (MiCA) legislation will apply to its 27 member states, along with the three additional states of Liechtenstein, Norway, and Iceland, which are within the European Economic Area.

The new rules sets out requirements for crypto-service providers and issuers that must be implemented on a national level.

In addition to the European Union, cities and nations from Dubai to Hong Kong are looking to supervise the industry in a more methodical way, said Linch.

“What we’re seeing is a growing realization that the most successful regulatory regimes are ones that have created a framework for crypto on a bespoke basis,” Linch added.

“Now, that’s why we’re regulated in Liechtenstein, in Bermuda, because what those jurisdictions did really early on is really get to grips with crypto, what the product is, what services, what the risks are, and say to people, ‘OK, well, we can identify and manage. Here’s how you do it safely.’”

He said that years of experience as a financial regulatory lawyer in the Unite Kingdom taught him that agencies formulating their own regulation negatively stretch the boundaries of their legal authority.

“Ultimately, this is for Congress to sort. If it wants to set up a regulatory regime, set up a regulatory regime,” he said in reference to the SEC.

Reuters contributed to this report.