Are these protocols capable of enduring another wave of volatility?
By: Joel Cohen, Stout Managing Director / New York Regional Leader
As we get further and further away from the wave of digital asset company insolvencies, we still see their influence. They were notable for both its scale and for what it revealed about how an emerging industry collides with long-established risk management principles. Matters such as those involving FTX, Celsius, Three Arrows, and Terraform exposed a market that had grown rapidly without the governance frameworks that courts typically rely on in distress.
In these cases, there was little statutory or regulatory guidance to fall back on. As a result, bankruptcy and district courts became the primary forum for defining acceptable conduct in the digital asset space and holding those accountable to it. Core restructuring concepts, including valuation, custody, and ordinary course of business, had to be applied to business models that operated with little precedent.
Over time, these proceedings helped establish baseline expectations. Activities that were once justified by novelty or speed were scrutinized through a more traditional lens. Governance gaps became harder to excuse. Risk management failures were analyzed not as technical quirks, but as drivers of value destruction.
In effect, the insolvencies forced a recalibration. Cryptobased businesses were increasingly expected to meet standards more closely aligned with other financial and capital markets participants.
How Investigative Priorities Have Shifted
Investigative priorities evolved alongside this shift. Early assumptions that crypto assets were perceived to be untraceable have largely given way to a more evidence-based view. Law enforcement, regulators, and forensic professionals have demonstrated, repeatedly, that blockchain transactions can be traced and assets recovered when paired with rigorous investigative techniques. The asset forfeiture groups at several regulators have touted success in locking down significant recoveries for victims.
For restructuring advisors, asset tracing in crypto matters is no longer a novelty exercise. It is becoming a core workstream, integrated with traditional financial analysis and litigation support. The availability of multiple professional tracing tools, and open-sourced tools, combined with the public nature of blockchain data, has raised expectations around what can be identified, reconstructed, and ultimately recovered.
A Case Study in Establishing Ordinary Course: The FTX Bankruptcy Matter
The FTX proceeding, which Stout was heavily involved in, illustrates how insolvency cases have functioned as a proving ground for regulatory and commercial standards in the digital asset space. With little legislative guidance available, courts were required to evaluate crypto activity using traditional bankruptcy concepts, including ordinary course of business, without established industry benchmarks.
In FTX, extensive intercompany and third-party digital asset transactions were analyzed to determine how the business operated in practice, not in theory. Stout professionals reconstructed and analyzed transaction flows, presenting a fact-based framework for assessing ordinary course under existing insolvency law. Similarly accepted were the valuation methodologies for many of the platform coins under dispute, resulting in a court-accepted method developed by the professionals at Stout.
That work did more than resolve disputes in a single case. It contributed to a court-tested approach that now informs how similar issues are evaluated across crypto insolvencies.
Key Takeaways for Restructuring and Turnaround Professionals
For companies operating in crypto and crypto-adjacent industries, exposure to digital assets is vastly broader than it was during earlier cycles, including through public companies, funds, and retirement-linked investment vehicles. Volatility and a potential future downturn would therefore have wider consequences and attract greater scrutiny.
Courts and stakeholders now expect clearer documentation and defensible processes, even in fast-moving digital markets. The last cycle of insolvencies unwound failed businesses, and it helped to define the rules that will govern the next wave of restructurings in the digital asset space.