Ethan Ostroff welcomes Deb Kovsky and Alex Rovira, partners in Troutman Pepper Locke's Bankruptcy and Restructuring practice, to explore the Genius Act's approach to stablecoin insolvency.
In this episode of The Crypto Exchange, Ethan Ostroff welcomes Deb Kovsky and Alex Rovira, partners in Troutman Pepper Locke's Bankruptcy and Restructuring practice, to explore the GENIUS Act's approach to stablecoin insolvency. The discussion highlights the complexities and gaps within the current regulatory framework.
The episode provides a historical perspective on crypto bankruptcies, examining the GENIUS Act's amendments to the bankruptcy code designed to safeguard stablecoin holders. It addresses the practical challenges of implementing these changes, particularly regarding the automatic stay and the exclusion of reserves from the debtor's estate.
Deb and Alex offer insights into potential regulatory solutions, stressing the importance of establishing clear frameworks to build confidence among stablecoin holders. They also consider the feasibility of self-funded insurance models and capital requirements as ways to bridge existing gaps in the system.
The Crypto Exchange — Ensuring Stability: The GENIUS Act's Impact on Stablecoin Insolvency
Host: Ethan Ostroff
Guests: Deborah Kovsky-Apap and Alex Riviera
Date Aired: September 9, 2025
Ethan Ostroff:
Welcome to another episode of The Crypto Exchange, a Troutman Pepper Locke podcast, focusing on the world of digital assets. I'm Ethan Ostroff, one of the co-hosts of The Crypto Exchange and a partner with Troutman Pepper Locke.
Before we jump into today's episode, let me remind you to visit and subscribe to our blogs, ConsumerFinancialServicesLawMonitor.com and TroutmanFinancialServices.com. And don't forget to check out our other podcasts on Troutman.com/Podcasts.
Today, I'm really happy to be joined by my colleagues, Deb Kovsky and Alex Riviera, to explore how the GENIUS Act addresses issues related to insolvency and bankruptcy, essentially guiding us on managing situations when things go terribly wrong. And one might question whether or not it's a "if things go terribly wrong" versus a "when things go terribly wrong". But I think that depends on the shade of the lenses you might be viewing this through, as we'll talk about as we get through this today.
Deb is a partner in our firm's bankruptcy and restructuring practice and focuses her practice on advising clients in bankruptcy matters, out-of-court workouts, and distressed M&A transactions, and has had a lot of experience in the world of crypto and its intersection with bankruptcy proceedings. And Alex is also a member of our bankruptcy and restructuring practice who represents clients across a range of sophisticated transactions and restructurings, including workouts and cross-border transactions involving distressed debt, assets, and targets.
Deb and Alex, thanks very much for joining me today. I think one aspect that has not been getting a lot of attention is the bankruptcy process and what the GENIUS Act does and does not say, and what it does and does not address in the likelihood that there is some sort of bankruptcy involving a stablecoin issuer. And so I thought we might talk a little bit about some of these issues, and perhaps we might start with getting y'all's thoughts on just some background here. How have stablecoins been impacted or involved in insolvency proceedings prior to the GENIUS Act's passage?
Deb Kovsky:
Ethan, thanks so much for having us on. It's great to be back on your podcast again, talking about bankruptcy and crypto. You mentioned what color lens you're viewing things through. My first real introduction to the world of crypto was in 2022, and it came in the context of bankruptcies where things had gone terribly wrong. One of the big issues that came up in case after case after case, and these included both stable coins and crypto, such as Bitcoin, Ethereum, all kinds of tokens and coins, is whose crypto is it anyway?
And that really went beyond the basic question of not your keys, not your coins, as everyone knows, but getting into contractual matters. What do the contracts between a crypto platform and its users actually say about who owns the coins? And I think one of the things that Congress was really focused on in passing the GENIUS Act and some of the debate and the different iterations of the drafts that we got to see as the sausage was being made was ensuring that if there's another insolvency that holders of stablecoins don't get left holding the bag as just general, unsecured creditors in the bankruptcy. That if you are depositing your money and taking a stablecoin that's supposed to be a one-to-one payment thing in exchange, that you have the ability to redeem, and that you're not going to just be a regular creditor stuck for months or years in the bankruptcy unable to get your assets back.
Alex Rovira:
I agree with that, Deb. And this is Alex Rovira. And, Ethan, happy to be on this podcast. I think what we saw and what Deb provides, and as restructuring lawyers, we definitely think this is a matter of when, not if, because things will go wrong. And we saw that historically, in the many bankruptcies starting in 2022, with the winter of crypto bankruptcies. And it caused a lot of uncertainty. And Deb is right. It was specifically as to who owned those rights to stablecoins? And the bankruptcy code just was not prepared or set up for it.
You can have the bankruptcy code and determine the rights of parties pursuant to the bankruptcy code, but there were no protections for crypto holders or customers of these issuers. And that's what really was the concern. There was delays in recoveries. There was questions about ownership. There was long litigation, including clawbacks and avoidance actions. It was a mess. And that created from one bankruptcy to a domino effect that caused other crypto platforms to go into destruction because a lot of them were interconnected. And if you can't access value from your crypto coin, from your stablecoin, then that triggers your default into another product that you may have. And so that caused the domino effect on many crypto bankruptcies.
Deb Kovsky:
And of course, it was a stablecoin that triggered the crypto winter of 2022 to begin with. That's one of the big problems with having an algorithmic stable coin, one that is backed by, I'd say, wishes and prayers as opposed to hard assets. And I think that also played into the thinking about the reserves that are required under the GENIUS Act and trying to avoid any kind of situation like the Terra Luna implosion that can close to taking down an entire industry, and certainly put a serious damper on it for years.
Ethan Ostroff:
It is an interesting situation. Obviously, the GENIUS Act is specifically about one type of stablecoin, right? And about permitted payment stablecoin issuers. But understanding that there are lots of other stablecoins and questions about how they fit into the current regulatory regime, right? Because they're not specifically provided for nor outlawed in the GENIUS Act, right?
Perhaps you guys could talk a little bit about what could possibly go wrong with a regulated payment stablecoin issuer. And in that context, why were amendments to the bankruptcy code needed as part of the GENIUS Act, and maybe an overview about the insolvency provisions of the GENIUS Act?
Deb Kovsky:
You might look at the GENIUS Act and the requirements for the reserves and basically having to hold one-to-one reserves either in hard cash or highly, highly liquid investments. And then, well, what could possibly go wrong? This is safest houses. If you want to go and redeem your stablecoin for cash, it's going to be there. Either that day or the next day, not a problem.
Then you look at banks, which are even more highly regulated, far more highly regulated. The GENIUS Act takes a pretty light touch in terms of regulation. You look at highly regulated banks that nonetheless can fail. Banks have a serious mismatch between demand deposits versus the investments that they're making with those demand deposits. And so you have a timing mismatch that can very easily, if confidence is lost, lead to a run on the bank.
The stablecoin issuers are going to be subject to the same kinds of risks that we've seen in other crypto platforms where you can have intentional malfeasance, you can have negligence, you can have carelessness, poor record keeping. We're hopeful that with this level of regulations scrutiny, maybe you'll see less of that. But you can't regulate away fraud. If you could, there wouldn't be a role for the SEC, or the DOJ, or any of the government entities that are supposed to suss out that type of activity.
You can have something that goes wrong, whether it's a simple loss of confidence that leads to a run on the bank or a Sam Bankman-Fried type of situation. You have something that goes wrong, and then you say, "All right. Well, what happens now? How do we ensure that customers, that holders of these payments, stablecoins, who do not have FDIC insurance?" Right? They can't say, "Ah, it's fine. I can put my $250,000 and park with a stablecoin issuer and take their payments, stablecoins, and go on my merry way. Knowing that if something goes wrong, there's insurance to make me whole." They didn't go that route. Congress chose not to do that.
How do you instill some measure of confidence? You have to have an exit plan so that if things – as Alex said, not if, when. When things go wrong. And they're not going to go wrong for everybody, but they're going to go wrong for somebody. When that happens, what's the exit strategy? How do I know that I'm going to be able to get out whole or as close to whole as possible so that I can have the confidence to participate in the system? Because if the goal is to make stablecoin something that are widely adopted and an integral part of the economy, people have to trust it, and they have to know that there's a plan in place when things go sideways.
Alex Rovira:
Just to add on what could go wrong, and, obviously, you touched on the fraud or misappropriation. But it could be as simple as a mistake in calculating the reserve. Or it could be a change in technology. Or anything that disturbs the crypto market could cause a regulator stablecoin issuer.
Deb mentioned banks, and I will mention because I have familiarity with broker-dealers going into bankruptcy, which is heavily regulated by the SEC. And so there's broker-dealer failures on various grounds. Whether it's fraud or mistakes, it will happen. And so we needed these amendments just like we needed more regulation on securities when broker-dealers were going into bankruptcy. And this instills that confidence to customers, to holders of stablecoin that you can rely on being able to have a stronger recovery when the provisions provide for reserves and provide for one-on-one, and you can get access to those quickly. That's what the amendments were really – to the bankrupts, really focused on. Because, as we learned in the earlier bankruptcy cases, they were treated as general and secured creditors with very little recovery, significant financial losses, and a significant and substantial amount of time delay before there was any recovery. And some did not recover at all.
Deb Kovsky:
One of the things that I think is really interesting about the GENIUS Act, it prohibits the payment of interest with respect to these payment stablecoins, which makes a lot of sense. One, they don't want stablecoin issuers competing with banks. Fine. That's one piece of it. It's a little bit protectionist, but it's also protective of holders. Because one of the things that we saw in the earlier crypto bankruptcies, where you had these platforms that were offering yield to customers who would park their crypto there, if you want to offer yield, you have to engage in conduct. It can be perfectly legitimate conduct, but you have to do things that are riskier than investing in treasuries. You're not going to be able to pay the kind of yield to customers that they're going to want unless you're out there really generating a significant amount of yield yourself. And that involves a level of risk that Congress said, "Ah-ah. We don't want that." Totally get that.
But you're going to have really creative attempts, and we're already seeing it in the market, and debates over, "Well, does this count as interest?" What about if we're paying you in kind rewards? You use our stablecoins, and you're going to get sort of the equivalent of frequent flyer miles. What are the things that count as interest? What are the things that kind of skirt around the regulations? And what kind of activities will be involved in offering rewards and benefits that aren't "interest" that could create the types of risks that could lead to relevancy that were intended to be prohibited under the GENIUS Act, but they left some loopholes. And, definitely, there are smart, creative people out there who are going to find ways to exploit them.
Ethan Ostroff:
It's interesting. You mentioned sort of the analogy to traditional banks, right? And one thing that is really interesting is the term "payment stablecoin" is defined specifically as not a deposit, right? As defined under section three of the FDI Act. It sort of becomes a question about, "Well, what are stablecoins then?" Demand note? A receipt for money held for the benefit of a holder in, I guess, in bailment or in trust? And then commodities that issuers have pledged to repurchase.
And you can think about those in the context of, have they created a situation where payment stablecoins are being created, where there's this real practical impossibility for some token holders to receive payment at par in bankruptcy, even if there are sufficient reserve assets available?
As I sort of understand it, the GENIUS Act amends the bankruptcy code in a couple of ways, and I'm interested to hear y'all's thoughts about this and whether or not there's some more nuance here to add in, right? But it's basically you exclude the required payment stablecoin reserves from the property of the debtor's estate. But nonetheless, the stablecoin holders' redemption rights are referred to his claims in bankruptcy, and the automatic stay under 362 applies to the reserves. Is that essentially what we're looking at?
Deb Kovsky:
The amendments to the bankruptcy code are done in sort of an odd way. You're correct. The reserves are excluded from being property of the estate. And Alex and I spent a lot of time working on various iterations of drafts of this section of the statute and going back and forth with congressional staffers and providing comments, some of which were taken, some of which were not. And some of our really, I think, important comments were not taken, but that's a story for another day. Even though these reserves are not property of the estate, they are nonetheless going to be administered somehow in this bankruptcy case, which is unusual.
Normally, the bankruptcy court only has jurisdiction over the property of the estate. The automatic stay is going to apply. And that was actually made really clear that notwithstanding the fact that the reserves are not part of the bankruptcy estate, the automatic stay applies. But it does so in a sort of limited way. And the way this kind of evolved was in initial drafts, Congress was really thinking, "Okay, we do not want this to be part of the bankruptcy estate. We don't want this to be subject to the automatic stay. We want to make sure the reserves are completely – let's call it bankruptcy remote. Because we want holders to be able to go and redeem. We don't want any disruption. We don't want any concerns that there's lack of liquidity or anything like that."
And then the comments that they started getting from bankruptcy lawyers, including us, was, "Well, hold on a second. If the automatic stay doesn't apply and everybody is rushing to redeem, you're going to have some folks who are sophisticated and know what's going on, and they're paying attention, and they're going to be much quicker, they're going to go and redeem everything that they want to, everything that they can. And they may not need enough for the regular mom and pops who are just the little guys who, essentially, ended up getting screwed by not being able to redeem at par. That's not fair.
The thought was, "Okay, well, let's put the brakes on for a minute, and we're going to pause everything so that there can be a pro rata distribution. If it turns out there's not enough to pay everybody at par, if there's not enough to pay all holders at par, then everybody's going to get their pro rata share of whatever is available. So at least it's fair to everybody."
And there were provisions put in that Alex and I had actually worked on about like, "Okay, well, how is that going to work?" Because we don't want the automatic stay apply sort of ad infinitum. We don't want folks tied up for months, stuck in a bankruptcy, unable to redeem. The idea was, okay, you go in as a debtor on day one, you have to file a motion, file an attestation saying, "Okay, here's what we have available to us. Here's how much we can actually distribute out on a pro rata basis." The court has to have a hearing in very short order and use best efforts basically to ensure that these distributions get going as quickly after the required hearing as possible. And this all should be happening in the first days of the case.
Whether that's even going to be feasible is yet to be seen. Because if an issuer goes into bankruptcy and kind of a free fall on an emergency basis, something has gone terribly wrong, there's been a massive hack, or a theft, or fraud, or something, and you may not know – it may not be possible to do this. We just haven't seen it yet. So, it still remains to be seen how feasible this is. But that's the goal, is to ensure equality of distribution to all holders and to get it out as quickly as possible.
But then there's a really weird thing that they've done. Two things. One, they treat the "claims against the reserves." And claim is the term of art in bankruptcy, right? It means a debt owed by the debtor. But we're not talking about a debtor-creditor relationship here. Those reserves are not even property of the estate, so it's not like you are a claimant with an I owe you to the reserve. That's your money. It's not property of the state. It doesn't belong to the debtor. It belongs to the holders, or at least on a pro rata basis. Yet, the amendment to the bankruptcy code still talks in terms of claims. As to whatever reserves are there, the holders come absolutely first. Nobody else can come ahead of the holders.
And then if there's a shortfall, then they get a – I wouldn't even call it a super priority claim. It's like a super, super priority claim to the extent that the reserves should have had more money in them than the holders get their super, super priority claim with respect to those amounts as well that are even outside of the reserves, that otherwise might have been just property of the debtor's estate. They're coming first above everybody.
But here's the problem. There may not be any other money, right? The reserves may be all there is, or the reserves plus any money to make up the shortfall, that may not even satisfy everybody in full who's a holder of the stablecoin. How is the debtor supposed to pay for this? How do you administer the bankruptcy estate? How do you administer the redemptions? How do you go out and liquidate any investments that have been made to bring more money into those reserves to satisfy the holders? How do you actually determine who's a legitimate holder? What if the records are a mess? It's going to take some time to come through it.
Look at the fees that were incurred in the FTX case, in Celsius, in BlockFi, in Voyager. We're talking hundreds and hundreds of millions of dollars in professional fees. It's not cheap to go through a complex Chapter 11. And Congress has set this up in such a way that there is literally no way to pay for what it was they want to have happen. And I think that's a major gap.
Ethan Ostroff:
Right. In other words, I think another way to think about this might be the GENIUS Act does not encourage stablecoin issuers to be placed into bankruptcy before they become insolvent, right? And that's one of the things that traditionally you would see one of the roles of bank regulators is to place banks into receivership before they become insolvent, right, in order to help depositors who are both insured and uninsured to be made fully whole.
And so GENIUS Act says, "Well, stablecoin issues are not banks," although the bill does allow banks to issue stablecoins through wholly-owned subsidiaries. But then, at the same time, if you've got stablecoin issues that are bank subsidiaries, do federal banking regulators then place the entire bank into conservatorship in order to begin the bankruptcy process for the stablecoin issuing subsidiary? Is that something that we foresee happening?
Deb Kovsky:
I'd be very surprised. I think the whole reason that you're going to have subsidiaries doing it is so that they can operate independently of that type of oversight. And if they're going to file for bankruptcy, you're going to an insolvency proceeding. And they're clearly being given access to just regular old Chapter 11, which, as Alex had pointed out earlier, it really was not a good fit for these types of platforms. This is going to be a deterrent possession situation, not being taken over by a regulator, just you maybe have a CRO appointed or some kind of fiduciary for the creditors. And you'll have them going into bankruptcy, but again, with no way of paying for it, which is really counterintuitive and counterproductive.
And there were different suggestions that were made, and I know because I saw some of the drafts that were not taken up by Congress as to how to ensure that there actually would be the ability to fund a Chapter 11 or at least fund the administration of these required reserves themselves. The rest of the Chapter 11 may have to sort itself out or get converted to a seven in short order. But unless you have some kind of a requirement in the regulations that say like, "Okay, if you want to be a permitted payment stablecoin issuer, you have to set aside some chunk of money in a separate account out of your money, not your depositor's money, and that is what is going to pay for any insolvency or anything that's required to administer those reserves, to do that first-day attestation, to figure out who is owed what. Who are the legitimate holders of the stablecoins? How do we get the money back to them? Put that aside. And then if you file for bankruptcy, that is part of the bankruptcy estate, but you now at least have the ability to fund. It’s sort of earmarked for that purpose.
And Alex, you had had some thoughts about different potential regimes that would be completely outside of what they actually went with, which is just sort of modifying Chapter 11 around the edges, or modifying the bankruptcy code around the edges. What are your thoughts?
Alex Rovira:
Yeah, I think the amendments try to create a balance, and I think tips over too much to giving holders of stablecoins too much protections and therefore don't allow for a restructuring because those reserves are not accessible. And even if there's not enough in the reserves, they get super priority, as you said. And so that makes it untenable for it to restructure and is much more likely to be a liquation.
And so some of the things that I initially was for a much more separate type of proceeding that would govern the pot of customer stablecoin. They could have several businesses, and one could be in stablecoin bankruptcy for that business. And the non-stablecoin assets could be restructured in a different method if there is that ability. And so, leaning on and looking at kind of like the SIPA, which is the Securities Investor Protection Act, they require all members of SIPC, which they created, and they require them to chip in, to put in.
Any stablecoin issuer or any in that sense, a broker-dealer, would have to put in on an annual basis a percentage of funds that they have in order to reserve in case any one of their members. Not even just for themselves. But they will collectively be able to use that pot that all of those members are provided for restructuring. And so that would be separate and apart from kind of the reserves that are allowed for stablecoins.
And so I think that's a more fulsome approach. And I understand, we need it, and Congress wanted to get something as quick as possible. But I fear that we're going to run into situations like the obvious one that you said, Deb, which is how do we finance this? And that may not be possible when stablecoin holders will have the top priorities. I think it does a job of starting the process, but it doesn't provide enough ability for restructuring.
Ethan Ostroff:
Let me ask you this. Is this effectively like a type of bonding requirement that you're talking about?
Alex Rovira:
No, it's more like a self-funded insurance type of coverage. Everyone who is a stablecoin issuer would agree that they're going to create an organization that they're all going to be members to, and they're each going to fund a certain amount every year, and that pot will continue to grow. And if one of their members goes into bankruptcy, then that can be used, that pot. Not even only their portion, but that can be used for assisting with that restructuring, and could also be used to pay where there is an insufficiency in reserves. It covers where if there aren't enough reserves and there's no other assets in the estate to get from, then there's just other pot. And that could work as like an insurance to help provide payments to customers and holders of the stablecoins in an expedited process.
Deb Kovsky:
I thought Alex's approach was really the smart one. And it's not like Congress would have had to reinvent the wheel. Because, as he said, there is a model out there already that you can look to. There are multiple models out there that you can look to for these types of self-funded, industry-specific insurance schemes. But the feedback that we got was there just wasn't the appetite to create something that fulsome. And that the desire was to get something across that could actually get passed in short order. And this is what we got. But unfortunately, because of the way it's structured, any stablecoin issuer that files for bankruptcy is likely to be administratively insolvent from day one. Really, it's not good for holders, it's not good for issuers. Certainly, not good for any prospects of restructuring.
Ethan Ostroff:
It's almost as if the GENIUS Act sort of presupposes that permitted payment stablecoin issuers will actually voluntarily place themselves in the bankruptcy before they become insolvent. But that, practically speaking, seems unlikely to occur, right?
Deb Kovsky:
That would make them fairly unique among debtors in my experience.
Ethan Ostroff:
Yeah, exactly. Right? And then you've got this priority. Holders claims having priority over any other creditor effectively means if the permitted stablecoin issuer waits until it's insolvent to go into bankruptcy, and then you have this priority, I think, as you were talking about before, right, how does the trustee have funds available to perform the actual things the trustee has to do in the bankruptcy process?
Deb Kovsky:
Well, he doesn't. And remember, it's not going to be a trustee from day one unless it's filed as a Chapter 7. If this is filed as an 11, it's going to be a debtor in possession. That means you've got management who has to get paid. You've got lawyers who have to get paid, financial advisors. Somebody actually has to do the logistical actual work of figuring out how much is in the reserves versus how many holders are owed money from those reserves. Is there a shortfall? If so, how much?
You've got to have somebody draft an attestation, show up in court, argue to the judge and make representations, put on evidence. Bankruptcy professionals don't work for free, and that's just the reality. Unless you find a way to pay the freight, you're not going to have access to the bankruptcy. I mean, it's not doable. Or every case is just automatically going to have to be a Chapter 7. But then the Chapter 7 trustee won't get paid either.
Ethan Ostroff:
Yeah, it's a very strange sort of – you can sort of see like dominoes falling in a very strange sort of pattern, it seems like, in a way that really deviates from traditional bankruptcy schemes?
Deb Kovsky:
Well, even if you want to look at an ordinary bankruptcy, normally the costs of administration have to get paid if you want to be an 11. Or you're administratively insolvent, you get converted to a 7. And even if, let's say, you're a secured creditor, of course, you're entitled to the value of your collateral. But Section 506 (c) of the bankruptcy code says that the trustee can surcharge the secured lender's collateral because there's a cost involved in actually administering that collateral for the benefit of the secured creditor, and somebody's got to pay it.
Alex Rovira:
Yeah. I think we focused on that super priority being an issue. And I think what we were attempting was not to give it a super priority over all of the assets. And I'll refer again to SIPA. What SIPA does is it provides – if there's not enough customer property, that you can look to the general pool of property and enhance the amount of reserves that's available for customers. It's kind of taking money away from a certain pot where the debtor was required to reserve for those, but didn't.
And so, because of that, they are allowed to augment that reserve pot, but that doesn't give a super priority to everyone. It just kind of augments the pool of available proceeds for customers. But even in a SIPA process, that is a liquidation. And I think we're probably over on that edge of most of these would likely be a liquidation or quickly turned into, as you said, Deb, a Chapter 7 liquidation.
Deb Kovsky:
Well, on that happy note.
Ethan Ostroff:
These are all very interesting issues that you all have identified and things that certainly, in my mind, are going to require further fleshing out. I wonder, do y'all have any thoughts about what the GENIUS Act instructs regulators to do and the regulations to be issued? And is there a way for these gaps to be addressed through regulation? I think one of the things that came to mind was, under the GENIUS Act, regulators are allowed to impose capital requirements on issuers. And is there some way in that context to allow regulators to require issuers to become part of some sort of self-insured pool, or post a bond, or do something to address these issues you guys have explained?
Deb Kovsky:
That's a little outside my field of expertise, but I think something's going to have to be done, whether it's on the regulator side, through rulemaking on the bankruptcy side. But they're going to have to figure out what an actual insolvency proceeding of a stablecoin issuer is going to look like and how it's going to function on a really practical level. Because this goes back to what I said at the beginning. If you want customers to have confidence in the system, if you want this to be widely adopted, assuming that use cases can be found, and that's a different conversation. But you have to have a clear exit strategy that makes sense and gives holders confidence. And right now, I don't think we're quite there.
Alex Rovira:
Nathan, I think you hit it on the head in terms of – again, sorry to go back to kind of the SIPA model. But the SIPA model is what happens if there's a bankruptcy? But there's a whole regulatory side under 15c3-3 that provides customer protection. And they're called the customer protection rules on the 15C33. And that requires capital contributions. It requires having fully paid securities or, in this instance, fully paid stablecoins. Having those in your possession and having the ability to be able to pay that to the customer at any point in time. And that is regularly checked. And I know there's some of that here in the GENIUS Act, but it probably needs to go a little bit further.
There's a concept of treating stablecoin and the reserves as if they were secure creditors. And the bankruptcy code does have a balance between the treatment of secure creditors, where they would allow them to use the collateral or the reserves to be able to fund the case. And they'll provide things that you and I both know. Adequate protection may not be sufficient. But there may be a way of trying to bring a little bit of secure creditor rights to stablecoin rights. And maybe they will need to consent to the use of the reserves.
Deb Kovsky:
Yeah, I imagine providing adequate protection for the diminution and any of the value of the collateral would be tough because the issuer is not going to have or likely is not going to have new money coming in. I mean, the more I think about this, the likelier it is that these are really going to be liquidations.
Ethan Ostroff:
Right? No one's going to reorganize. They're going to wait till they become insolvent, and they'll go into a seven.
Deb Kovsky:
The only reason I can see them trying to push to an 11, to be honest – and you know, you can do a liquidating plan in an 11. So you can have a liquidation that still takes place in a Chapter 11. You don't get a discharge, but you get a plan in junction. But the thing that – particularly if there has been some – let's call it questionable activity at the top, you're going to see folks who are going to want the bells and whistles of a chapter 11 plan, including releases, including getting some coverage for directors and officers, and some protection from liability.
Obviously, post-purdue, you're not going to be able to have non-consensual third-party releases. But the bankruptcy courts have been pretty flexible by and large as to what constitutes consent. And so, I imagine that if it's possible and if it can be funded, even if it's a liquidation or perhaps a sale followed by a liquidating plan, that there will be a push towards Chapter 11. Whether it's doable or not is another story.
Ethan Ostroff:
Well, all good thoughts, Alex and Deb. And really appreciate you all joining me today on this episode. And I want to thank our audience, as always, for listening to today's episode. Don't forget to visit our blogs and subscribe so you can get the latest updates. And please also make sure to subscribe to this podcast via Apple Podcasts, Google Play, Stitcher, or whatever platform you use. And we look forward to our next episode. Thanks so much.
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