Tether’s (USDT) liquidation of the $840 million loan it provided to Celsius could be reviewed under bankruptcy law to determine if the process was valid, the FinancialTimes reported July 26.
The stablecoin issuer had revealed that it had recouped its loan to Celsius by selling the Bitcoin (BTC) the embattled firm had pledged as collateral.
Celsius’s legal representatives had asked the court whether the bankrupt lender could recover the value of collateral sold by Tether and other lenders to the company.
In a presentation In New York bankruptcy court, Celsius’ attorney raised the question: “Can Celsius recovery . . . loan liquidations completed within 90 days of filing?”
The answer to this question would determine whether Tether must repay the funds it recovered from the sale of Bitcoin collateral and the status of collateralized digital asset loans during bankruptcy.
Typically, secured loans require the borrower to pledge assets to the lender.
The common belief within the crypto space is that a lender can take possession of crypto assets pledged as collateral, which will be protected by bankruptcy law.
But legal experts say the process is not so simple. Bankruptcy lawyer Brandon Hammer told the FT that:
We are in an area where the law is quite uncertain and quite out of step with general market expectations.
In his view, Tether could be forced to return the assets if it has an unsecured claim on the loan.
Another bankruptcy expert at Hunton Andrews Kurth, Tad Davidson, said:
“One of the things that is going to be looked at is whether Tether has been fully secured or not. Has Tether properly honed its security in its safeguards?”
This raises the question of whether Tether had properly established its claim to the assets. If not, the stablecoin issuer could be among the unsecured creditors, leading to litigation.
However, another bankruptcy lawyer, Jonathan Cho, pointed out that there is not yet a conventional way to have “perfect security on Bitcoin”.