May 10 (Reuters) - Bankrupt cryptocurrency exchange Bittrex Inc received court permission Wednesday to borrow $7 million in bitcoin to fund the start of its Chapter 11 case.

Seattle-based Bittrex filed for bankruptcy Monday, saying it intended to return customer funds and wind down its U.S. operations. The company's international affiliates will continue to operate crypto exchanges for customers outside of the U.S., but Bittrex said that the U.S. regulatory environment had become untenable after the SEC sued the company for allegedly running an unregistered securities exchange.

Before filing for bankruptcy, Bittrex stopped accepting new deposits from U.S. customers and told its existing users to withdraw their crypto from the platform.

Bittrex's U.S. operations made up a minority of its overall users. Affiliated exchanges based in Liechtenstein and Bermuda accounted for about 77% of the company's 5.4 million users as of March 27, according to court filings.

Bittrex believes that it has enough cryptocurrency to fully repay all remaining customers, and the bankruptcy loan will ensure a smooth wind-down that protects customer assets, attorney Susheel Kirpalani told U.S. Bankruptcy Judge Brendan Shannon at a Wednesday court hearing in Wilmington, Delaware.

Shannon approved the loan on an interim basis, allowing Bittrex to borrow 250 bitcoin from its parent company Aquila Holdings, which is not filing for bankruptcy. Bittrex will seek permission to borrow an additional 450 bitcoin at a hearing in June, and the total value of its proposed loan is $19.7 million, based on bitcoin prices when it filed for bankruptcy.

Shannon said he was persuaded to accept a "novel currency" for the loan because it offered favorable terms compared to other bankruptcy loans, including a relatively low 4% interest rate and built-in protections related to bitcoin's price volatility. Bittrex intends to repay the loan in bitcoin, and it will not be forced to pay more than 110% of bitcoin's current value if it is later forced to acquire more bitcoin to make loan repayments, according to court documents.

Shannon also approved temporary privacy protections allowing Bittrex to remove customer names from court documents. Bittrex attorney Patricia Tomasco pointed out that one large accountholder has more than $14 million in crypto still on Bittrex's platform, saying that revealing that customer's name would subject them to a barrage of phishing emails.

"That's a pretty hefty prize for low-tech skullduggery," Tomasco said.

Shannon said he will revisit the privacy issue at a later hearing.

The case is Bittrex Inc, U.S. Bankruptcy Court for the District of Delaware, No. 23-10598.

For Bittrex: Susheel Kirpalani and Patricia Tomasco of Quinn Emanuel Urquhart & Sullivan

Read more:

Crypto exchange Bittrex files for bankruptcy after SEC complaint

US SEC charges Bittrex with operating unregistered securities exchange

Reporting by Dietrich Knauth

Our Standards: The Thomson Reuters Trust Principles.

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Bittrex approved to borrow $7 mln bankruptcy loan in bitcoin - Reuters