Courts Put Privacy Over Transparency in FTX, Other Crypto Bankruptcies – Crypto News

FTX and several other bankrupt crypto platforms have recently won court approval to redact from the public record customers’ names, account balances and other data, despite the standard practice requiring disclosure of corporate creditors in chapter 11.

Bankruptcy courts have opted for sealing as they adjust to handling cryptocurrency-related cases, a new breed of insolvency involving millions of individual customers. But similar data-sealing efforts are also catching on in bankruptcies that aren’t crypto-related, reflecting courts’ changing views of data privacy.

Earlier this month, Judge John Dorsey of the US Bankruptcy Court in Wilmington, Del., issued the largest sealing order yet, allowing FTX to keep the names of nearly 10 million customers secret to protect them from online threats and to protect the value of the company’s assets, including the proprietary value of its users’ identities.

His ruling follows similar redactions in separate chapter 11 cases of crypto exchanges Voyager Digital and Bittrex, which are winding down. Bankrupt crypto lender Genesis Global Capital is also seeking to redact its customers’ names.

Bankrupt businesses are legally obligated to disclose the names and contact information of their creditors, with limited exceptions. For crypto companies, their creditors are predominantly the millions of individual and institutional traders whose account balances are now frozen.

In his ruling, Dorsey agreed with expert witnesses who warned that FTX customers would be exposed to online scams and cyberattacks if their personal data and their status as creditors of the exchange were disclosed. But data sealing is growing even in bankruptcies that aren’t crypto-related, because of the same privacy and cybersecurity concerns that Dorsey cited.

“Any effort to seal information from the public deserves scrutiny,” said Melissa Root, managing partner at law firm Jenner & Block. “But the courts granting motions to seal have made clear that they are doing so because of the actual and imminent threat to customers.”

The ruling in the FTX case rejected arguments by media outlets including The Wall Street Journal, the New York Times, the Financial Times and Bloomberg, which pushed for disclosure. They argued that the public and press have a right to transparency in major bankruptcies and that customer names alone don’t constitute confidential commercial information. The Office of the US Trustee, the federal government’s watchdog in Chapter 11 cases, also opposed FTX’s sealing request.

In his decision, the judge said customers are “the most important issue” in the Chapter 11 case and “we want to make sure they’re protected.”

Unlike FTX, crypto lender Celsius Network wasn’t able to preserve its customers’ anonymity. Last year, the judge overseeing its bankruptcy ordered the publication of its users’ names, as well as the amount they claimed to be owed from the bankrupt firm, which is now trying to reorganize under new management.

Sealing customer names would have risked “transforming the open and transparent bankruptcy process into something very different,” Judge Martin Glenn of the bankruptcy court in New York wrote in his decision. He declined to unseal users’ identities “without a strong showing of real and not speculative risks.”

There were some unexpected consequences. Scammers launched phishing attacks against Celsius customers using emails and phone calls, posing as bankruptcy lawyers and including doctored court orders to give the appearance of legitimacy, Celsius’s lawyers said in court.

“A list of exchange users amounts to a list of people who might make for good robbery targets,” said Neeraj Agrawal, director of communications at the Coin Center, a nonprofit research and advocacy center focused on the public-policy issues facing cryptocurrency.

Customers’ privacy isn’t the only reason to keep their names confidential. Some judges have determined that names of creditors to crypto firms are proprietary data, capable of generating value that would be lost if they were revealed.

Kevin Cofsky of Perella Weinberg Partners, FTX’s investment banker responsible for selling the company’s assets, recently said in court papers that the names of customers of a cryptocurrency exchange should be considered a valuable asset given how costly it can be for these companies to identify potential customers. .

“A hallmark feature of cryptocurrency is a holder’s ability to remain anonymous to the public,” Cofsky said in a January affidavit to the court, adding that competing exchanges could try to poach customers if their names were made public.

Bankruptcy courts have been increasingly sensitive to data misuse even outside of crypto cases. After retailer Charming Charlie filed for bankruptcy in 2017, an employee’s abusive former partner used the information filed in its bankruptcy case to find her address and track her down, forcing the employee to move again, according to court records in a subsequent chapter 11 case filed company. Other bankrupt companies have since cited the incident in their requests to seal individuals’ addresses.

Last year, Judge James Garrity in New York allowed drugmaker Endo International to redact from court records the names of individual claimants who alleged the drugmaker fueled opioid addiction. They faced a “societal reaction” and could lose their jobs or housing if they were publicly linked to opioid addiction, according to the decision.

Judge David Jones of the US Bankruptcy Court in Houston, one of the nation’s busiest bankruptcy courts for large companies, recently began issuing broad sealing orders in chapter 11 cases after reading about online attacks facing cryptocurrency users.

“Somebody’s figured out this is an opportunity,” Jones said in an interview. “If I go out and steal 10,000 identities I’m going to make a lot of money, if I’m a professional criminal. going to be used as a road map not just in the crypto cases but in the next big case.”

His recent sealing orders cover “the names, home and email addresses, and other personally identifiable information of any natural person,” and authorize their redaction from any statement of financial affairs, schedule of payments or other documents filed on the public docket, court records show. The judge said he is open to other ways to protect individual privacy and respect transparency requirements, but he would continue to order similar blanket sealing until there is an alternative.

“Everyone’s trying to find the right constitutional, transparent legal approach,” Jones said. “This is me putting a Band-Aid on something because I don’t know what else to do.”

Write to Alexander Saeedy at alexander.saeedy@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com