Bankrupt cryptocurrency lender Celsius Network LLC recently sought permission to sell some of its “stablecoin” for U.S. dollars to continue operations through its Chapter 11. Celsius requires court approval for the sale pursuant to an earlier order requiring court authorization to convert its cryptocurrency to cash. According to Celsius, the sale of its stablecoins would pose no risk to creditors due to the relative stability provided by stablecoins versus traditional cryptocurrencies. Stablecoins are fiat-pegged cryptocurrency meant to track government issued currencies, usually the U.S. dollar. By pegging its value, stablecoins seek to reduce volatility and offer a stable crypto option not subject to market fluctuation. This allows investors to trade digital assets potentially free of the big swings inherent in assets like Bitcoin and Ethereum which are both down over 70% since last November.

According to Celsius, the proposed sale of stablecoin should be authorized because stablecoin sales are in the ordinary course of Celsius’s business pursuant to Section 363(c)(1) of the Bankruptcy Code. A transaction may be considered ordinary course if (a) the transaction in question is of the sort commonly undertaken by companies in the relevant industry or (b) from the perspective of a hypothetical creditor, the transaction subjects that creditor to an economic risk of a nature different from those it accepted when it entered into a contract with the debtor. Celsius argues that both tests are met, in part, because of the 1:1 peg with currencies. As Celsius put it in the motion: “Because stablecoins do not fluctuate in value, selling and/or exchanging stablecoins for U.S. dollars will not increase, but likely decreases, a creditor’s exposure to risk.”

That’s probably right in this case (despite an objection filed by a Celsius investor), and if anything a creditor should prefer a sale of a stablecoin with the intended 1:1 peg. But just because stablecoins are designed to mirror currency value doesn’t mean it can do so perfectly. Just this May, the U.S. dollar pegged TerraUSD, an algorithmic stablecoin backed by other crypto asset, collapsed completely when the algorithm could not maintain the peg after the underlying coin lost value. There is less risk with asset-backed coins like USD Coin, where each coin is backed by a corresponding dollar held in reserves. But even asset-backed coins have some risk of losing the peg when they are not fully backed. Tether, the largest stablecoin in circulation, is backed by cash, but not 100% backed. In fact, following TerraUSD’s collapse, Tether briefly fell from its 1:1 peg down to as low as $0.96 per coin before quickly recovering.

Although it is tempting to treat stablecoins as dollars, there is always some risk they will lose value relative to their peg. And as cryptocurrency trading becomes more popular, we can expect bankruptcy courts to refine their treatment and how the assets fit into the larger Chapter 11 scheme.

A hearing on this motion is scheduled for October 6, 2022.

The case is In re Celsius Network LLC, No. 22-10964 (Bankr. S.D.N.Y).