Below is the abstract for “Debt Tokens” available for download on SSRN.
The worlds of crypto and bankruptcy have collided. Once-prominent, fast-growing, and even politically influential platforms for trading cryptocurrencies have imploded spectacularly. Gone are the glossy advertisements, celebrity endorsements, and proclamations that blockchain operates as a law unto itself. Instead, insolvent crypto businesses—including the crypto exchange giant FTX—find themselves in bankruptcy court, no different from any other failed enterprise. These bankruptcies reveal a startling reality: individual investors who placed their trust in these platforms have been stripped of their digital assets. In their stead, they hold hard-to-collect claims against these defunct platforms.
Amidst the chill of the crypto winter, bankruptcy has unexpectedly emerged as a crucible for innovation, forging a new digital asset: debt tokens. Entrepreneurs have responded to the tidal wave of trade debts arising from the insolvencies of crypto platforms by embarking on a mission to create blockchain-based digital assets that represent bankruptcy claims. They present debt tokens as cutting-edge devices for swiftly and advantageously liquidating these distressed assets. Yet, the pressing question is this: are these debt tokens actually useful innovations or yet another hollow promise?
This Article offers the first comprehensive analysis of debt tokens, making three seminal contributions. First, we scrutinize existing debt token offerings, laying bare their inherent flaws and casting doubt on their legitimacy. Second, we explore the potential for genuine debt tokens within the framework of the recently adopted 2022 amendments to the Uniform Commercial Code. Lastly, we delve into the broader socio-economic implications of widespread debt token adoption. Specifically, we anticipate debt tokens fostering more effective collective action and improved exit opportunities, particularly for those creditors who traditionally fare the worst in bankruptcy due to having fewer resources and pressing financial needs. However, we also caution against the looming risks of irrational speculation and the exploitation of inexperienced retail investors blinded by the bright lights of innovation.