Crypto exchange Bittrex obtains approval of novel Bitcoin-based debtor-in-possession lending facility

Bittrex Inc. and its three affiliates (Bittrex) filed chapter 11 petitions on May 8 in the Bankruptcy Court for the District of Delaware. Founded in 2014, Bittrex provided cryptocurrency exchange and trading services.

At its peak, Bittrex had over 600,000 active users, both retail and institutional, in 46 states, and 1.2 million customers overall. In 2018, Bittrex became a wholly owned subsidiary of its ultimate parent, Aquila Holdings Inc.

Events leading to the bankruptcy

On April 17, 2023, the Securities and Exchange Commission (SEC) filed a complaint against Bittrex for securities violations, alleging six of the crypto assets listed on the Bittrex platform were securities. Bittrex had previously settled a $29 million fine with the US Treasury Department for alleged violations of sanctions and anti-money laundering laws. According to a declaration Bittrex filed in support of its chapter 11 cases, the lack of regulatory clarity in the US and overlapping regulatory burdens created a substantial negative economic burden on the digital asset industry. On March 8, 2023, Silvergate Capital, one of the crypto market’s most frequently used banks, was shut down as a result of undercapitalization.

Silvergate Capital was a critical banking partner of Bittrex, and its closure made it difficult for Bittrex to secure long-term banking service providers necessary to run an optimal trading platform for customers. Those regulatory headwinds and limited access to US dollar fiat currency lending proved insurmountable for Bittrex, which is now seeking to effectuate an orderly wind down of their business operations in the US. 

Debtor in possession (DIP) funding

At the same time the chapter 11 cases were filed, Bittrex sought approval from the bankruptcy court for a Bitcoin (BTC) based DIP loan facility, which was approved on May 10, 2023.  This appears to be the first time a cryptocurrency-based loan facility has been approved by a bankruptcy court. 

Although crypto lending is common outside of bankruptcy, none of the previous cryptocurrency bankruptcy cases sought crypto-native financing. 

DIP loan summary:

DIP lender	Aquila Holdings Inc.
DIP loan amount	700 BTC
Maturity date	9 months from closing date
Interest	4.00% per annum
Default interest	1.00% above contract rate

The DIP loan, which is provided by parent Aquila Holdings, Inc., will be used to fund wind-down operations during the chapter 11 proceedings. The DIP loan is an amount up to 700 BTC, the first draw down of 250 BTC upon interim approval and a second draw down of 450 BTC upon final approval. Bittrex intend to convert the BTC into US dollars to minimize risk of currency rate fluctuations and use the proceeds to pay administrative expenses in the proceedings. The DIP loan has administrative expense priority, with no other security granted.

Repayment terms

On maturity of the DIP loan, Bittrex will repay the principal in BTC, all other obligations will be repaid at the option of Bittrex: in BTC, US dollars or a combination.

If Bittrex is not able to repay at maturity the full principal amount of the DIP loan in BTC and there is a shortfall, Bittrex will have to use the currencies they possess at that time of repayment to acquire the additional BTC to pay that shortfall. The amount of BTC Bittrex may be required to acquire to pay the shortfall is capped at a number of BTC equal to 110 percent of the value of the shortfall on the petition date.

At the May 10, 2023 hearing at which approval of the DIP loan was requested, the Bankruptcy Court acknowledged the novel nature of the currency at issue, but it approved the loan because it was on terms generally very favorable to Bittrex and, more specifically, because Bittrex would be largely protected from the effects of BTC volatility at the time of repayment.

If you have further questions about the Bittrex chapter 11 proceedings or DIP financing in general, please contact the authors or your DLA Piper relationship partner.