Bursting the Crypto Bubble and the Financial Turbulence Ahead
With the FTX Group's recent Chapter 11 filing, on the heels of the recent Celsius Network LLC Chapter 11 filing, we have entered what could be described as a "Lehman Brothers moment" for the crypto industry. This observation, together with the recent awarding of the Nobel Prize in Economics to former Federal Reserve chair Ben Bernanke and professors Douglas Diamond and Philip Dybvig for their pioneering research on banks and financial crises, has caused some of us to experience a déjà vu moment.
As many will not forget, in September 2008, Bernanke allowed Lehman Brothers to file for bankruptcy. However, when a full-blown financial crisis erupted, he encouraged Congress to bail out the biggest banks while creating new money to pour into the financial system. This policy, which was repeated at the start of the pandemic, has proved effective in quelling financial panic. However, economics professors Raghuram Rajan and Viral Acharya warn that the approach has left many actors in the financial sector "dependent on easy liquidity," placing monetary policy-makers "in a very difficult position." To bring down inflation, central banks need to withdraw money from the economy and raise interest rates, increasing the likelihood of another financial earthquake.
In Canada, Q2 insolvency data portend the beginning of a similar financial earthquake with the expected increase in insolvency filings that many observers have been predicting and preparing for since the start of the pandemic. We saw an increase in most types of insolvency filings other than receiverships this past quarter.
In this issue of Davies Insolvency Now, we first highlight the significant data points in these rising filing rates. Next, we provide a Canadian lens on the digital asset marketplace. With recent drops in crypto prices severely affecting several digital asset lenders and exchanges, we explore what this could mean in the Canadian context – in particular, what could be in store for the key players in a cryptocurrency exchange insolvency.
Davies Insolvency Now is a quarterly publication authored by Natasha MacParland, Robin B. Schwill and Stephanie Ben-Ishai that analyzes key trends and developments in the insolvency and restructuring community.
Insolvency Data for Q2 2022: Highlights
CCAA F I L INGS
The number of CCAA (Companies' Creditors Arrangement Act) proceedings in 2022 grew signifcantly from four in Q1 to nine in Q2. Manufacturing and retail trade had the most CCAA flings in Q2 2022. Contrary to historical trends, British Columbia experienced an unusually high number of CCAA flings in Q2 2022 (fve). Ontario had three flings in that quarter.
BUSINESS BANKRUPTCIES AND PROPOSALS
The number of business insolvencies in Q2 2022 was similar to that in Q1 2022. However, the total number of business insolvencies in July 2022 was 45% higher than the total number of insolvencies in July 2021. Business insolvencies for the 12-month period ending in July 31, 2022 increased by 20.2% over the 12-month period ending July 31, 2021. In addition, there were 303 Bankruptcy and Insolvency Act (BIA) proceedings in June 2022, the highest month since February 2020.
When we break down the number of business insolvencies into bankruptcies and proposals, we note that proposals in Q2 2022 decreased slightly from Q1 2022 whereas bankruptcies in Q2 2022 experienced a small increase from Q1 2022.
The sectors that registered the biggest increases in insolvencies were construction, accommodation and food services, and transportation and warehousing. The sectors with the biggest decreases in insolvencies were mining and gas extraction, and management of companies and enterprises.
The provinces with the most business insolvencies were Ontario, Québec, Alberta and British Columbia, consistent with historical trends.
CBCA ARRANGEMENTS
The number of arrangements under the Canada Business Corporations Act (CBCA) for the three-month period from May to July increased signifcantly year over year, with 18 arrangements reported in 2022 compared with three arrangements over the same period in 2021.
RECEIVERSHIPS
month of 2022 compared with 2021. The declared assets of receiverships in 2022 have maintained a similarly low level to that in 2021.
Cryptocurrency Exchange Insolvency
OVERVIEW OF KEY PLAYERS1
Since the beginning of 2022, the total value of cryptocurrencies in the [global] market has plummeted from US$3 trillion to less than US$1 trillion. This sharp downturn had profound efects on cryptocurrency trading and lending frms, with major players such as Three Arrows Capital, Voyager Digital and Celsius Network suspending user withdrawals and fling for bankruptcy. These bankruptcy cases present novel questions regarding the treatment of cryptocurrency assets and the relief available to diferent stakeholders in insolvency proceedings. This infographic surveys the key players involved in the bankruptcy of cryptocurrency exchanges.
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Footnote
1. Please see:
ttps://www.forbes.com/advisor/investing/cryptocurrency/best-crypto-exchanges/
tps://laws-lois.justice.gc.ca/eng/acts/c-44/page-14.html#docCont
tps://scc-csc.lexum.com/scc-csc/scc-csc/en/item/2184/index.do
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