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Speaker 1: This is Bloomberg Crypto, a dearly Bloomberg I heard podcast

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Speaker 1: and I'm Emily Nicole Bloomberg, crypto blogger. I'm in today

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Speaker 1: for Stace Marie Ishmael. It's Thursday Janum. You've probably heard

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Speaker 1: financial regulators refer to crypto as the wild West. But

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Speaker 1: instead of shootouts, sheriffs and Lucky Luke, in crypto, you

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Speaker 1: can get financial experimentation, hackers, and pretty extreme risk taking

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Speaker 1: in the hopes of yielding extreme returns. In some cases

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Speaker 1: with people with their hard earned savings, people allegedly wronged

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Speaker 1: by crypto are increasingly turning to the law for redress.

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Speaker 1: The only problem is how do you fit something so

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Speaker 1: new into laws that are often centuries old. That's the

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Speaker 1: conundrum that lawyers and creditors are confronting in the case

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Speaker 1: of ft X, the crypto exchange that collapsed into bankruptcy

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Speaker 1: last year. In this episode, we discussed the legal complexities

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Speaker 1: underlying the ft X bankruptcy and how the rules change

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Speaker 1: across jurisdictions from the sunny Bahamas to the cloudy skies

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Speaker 1: of England. Today I am joined by Fisa Osman, a

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Speaker 1: UK barrister. My practice is a cross border litigation and

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Speaker 1: asset recovery with a spin on crypto related matters, and

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Speaker 1: Way Lawyer, a pseudonymous animated penguin who in real life

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Speaker 1: is actually a lawyer at a top UK law firm.

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Speaker 1: Way Lawyer asked not to be identified by name because

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Speaker 1: he's not authorized to speak on the record by the

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Speaker 1: company he works for. I mean, the reason that anonymous

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Speaker 1: is largely because this is a lot of fun. Being

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Speaker 1: darks is such a big deal. In two you go, oh,

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Speaker 1: you know, you know the farming team, But it turns

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Speaker 1: out they all scan do you anywhere? And when do

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Speaker 1: we did by? And I finally quite musing that one

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Speaker 1: of the leading cryptal Twitter authorities. It's just a penguin

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Speaker 1: in the suit. So let's set the scene so fire style.

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Speaker 1: When the Bahamas based fd X filed for bankruptcy in November,

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Speaker 1: it kicked off a chain of events that in brold

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Speaker 1: quite a few different legal systems. Can you explain a

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Speaker 1: bit for us what that mishmash looks like? You know,

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Speaker 1: where are we talking about here? Well? I think mishmash

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Speaker 1: is probably exactly the right word. Although orbit not a

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Speaker 1: technical term, it's probably the best description you can get

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Speaker 1: as we know, if I can call it if you like,

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Speaker 1: the Mothership entity was a Bahamas based company which is

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Speaker 1: regulated in the Bahamas under their regime, and of course

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Speaker 1: SPF did reside there for at the material time, so

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Speaker 1: all concentration was upon the Bahamas for the right reasons,

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Speaker 1: the actual governing law when it's a government law. The

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Speaker 1: agreements that were between users and f t X were

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Speaker 1: actually English law agreements, and if you look at the

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Speaker 1: user agreements, it does actually stipulate that the law of

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Speaker 1: those user of gives is the law of England. So

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Speaker 1: you have English law which is governing the relationships between

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Speaker 1: the entity and the users in a company which is

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Speaker 1: domicid in the Bahamas. And that really perhaps was the

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Speaker 1: first opening salvos to the whole train of litigation that

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Speaker 1: took place. Afterwards, you then have the twist where because

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Speaker 1: SPF was effectively ejected from the board, then moves to

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Speaker 1: the US and into US bankruptcy, and that really was

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Speaker 1: the start of the jurisdiction dispute between the US and

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Speaker 1: the Bahamas. And as much to be said as to

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Speaker 1: whether the Bahamas were the right jurisdiction to actually start

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Speaker 1: the process of insolvency and liquidation or whether it was

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Speaker 1: right to move to the US under a Chapter eleven

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Speaker 1: and for the new directors of FTX to commence over there.

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Speaker 1: And that's a question which is still yet to be

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Speaker 1: fully resolved, although it's got there. It's a lot further

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Speaker 1: forward than it than it was, say even a few

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Speaker 1: days ago. And we'll see if we look at the

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Speaker 1: way that ft X was structured, at least in terms

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Speaker 1: of the big pairent entity, it had reaches all across

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Speaker 1: the globe really like we had ft EXTRA pan and

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Speaker 1: ft X Europe. And how complicated is that making this

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Speaker 1: situation right now? There is a lot of international relations

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Speaker 1: and international diplomacy in place here, because when you've got

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Speaker 1: a company that's gone under UM, you need to have

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Speaker 1: one you know what we call it is quite a

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Speaker 1: main proceeding, but essentially you need one jurisdiction to take

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Speaker 1: the lead on the insolvency because otherwise, if you had,

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Speaker 1: you know, multiple jurisdictions claiming to lead in song at

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Speaker 1: the same time, then how do you administer the assets

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Speaker 1: of the mountinational group UM. Many sort of jurisdictions that

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Speaker 1: have very fairly developed legal structures have signed up to

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Speaker 1: something called the Instantral model law in cross Bordel insolvency,

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Speaker 1: which it's it's sort of the international treaty where which

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Speaker 1: determines who gets to run which insolvency and sets the

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Speaker 1: sort sets the rules of the game. Unfortunately, the Bahamas

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Speaker 1: is not a party to that, so we end up

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Speaker 1: in this position where we're kind of going back to default. Uh,

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Speaker 1: you know default common law ruse as to who gets

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Speaker 1: to claim jurisdiction. But at the same time, UM, the

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Speaker 1: US is often able to claim very wide jurisdiction when

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Speaker 1: it comes to, you know, someone filing for Chapter eleven.

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Speaker 1: For instance, when when this all kicked off, there was

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Speaker 1: a lot of questions, UM in the spaces to how

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Speaker 1: can FTX file for Chapter eleven when it's not even

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Speaker 1: in the US. And the answer to that is, well,

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Speaker 1: pretty much anyone and everyone can fill from Chapter eleven.

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Speaker 1: Is fairly established case law in the US that if

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Speaker 1: you have assets in the US, any sort of assets whatsoever,

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Speaker 1: you can fall from Chapter eleven, even if that asset

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Speaker 1: is a bank account which you've set up in order

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Speaker 1: to pay a US lawyer. So you could be in

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Speaker 1: Latin America running a you know, business in Latin America

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Speaker 1: with your suppliers in Europe and Asia and whatnot, and

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Speaker 1: never do anything the US until you go under. You

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Speaker 1: call us lawyer and say, hey, I want to do

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Speaker 1: a Chapter eleven? Can I pay your retainer? By paying

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Speaker 1: the retainer, you become eligible for the Chapter eleven process.

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Speaker 1: It's a difficult one and what we've seen so far

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Speaker 1: is exactly as you kind of said like that. There's

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Speaker 1: been a bit of a dispute I guess we'd say

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Speaker 1: between the different reagions as to how they want to

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Speaker 1: approach this, with tex As new executives in Delaware being

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Speaker 1: very vehement that they are in charge, but the Bahama

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Speaker 1: is saying that they're in charge and and f ire Star.

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Speaker 1: How have they been getting along so far and what

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Speaker 1: what kind of moves that they made to date that

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Speaker 1: kind of sees them working together to solve these issues. Well,

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Speaker 1: they haven't really been getting on. That has changed is

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Speaker 1: probably a slight, thank thankfully, thank thankfully, it's there has changed.

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Speaker 1: I'll come on too that in the moment. But when

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Speaker 1: I say historically, I mean it's not in terms of time.

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Speaker 1: This hasn't been a history or event because it's it's

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Speaker 1: really started to implode within the matter what weeks ago,

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Speaker 1: but still in the compass of what we're talking about.

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Speaker 1: I refer to historically the relationship between the US debtors

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Speaker 1: and the liquidators in the Bahamas. I think there are

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Speaker 1: three points to make here. First of all, I have

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Speaker 1: sympathy with the Bahamas in this sense. It is a

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Speaker 1: Bahamian regulated entity, and I think it is right for

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Speaker 1: the Bahamas and regulated entity regulators to say, look, we

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Speaker 1: have given this thing a license. It is supposed to

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Speaker 1: comply with our licensing conditions. It hasn't. Therefore, we have

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Speaker 1: taken appropriate steps that are in our law in order

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Speaker 1: to resolve that issue, and in order to keep the

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Speaker 1: integrity of the Bahamas as a jurisdiction, which is good

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Speaker 1: for crypto and good for users as well, I think

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Speaker 1: it is right for the Balhams to say, you know what,

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Speaker 1: we'll deal with this. Uh. The second point is this,

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Speaker 1: without significant information sharing between the Bahamas and the US,

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Speaker 1: you're going to have Bahamian activity which is sitting in

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Speaker 1: a silo in respect and in comparison to what's happening

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Speaker 1: in the US, and that is not good for recovery.

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Speaker 1: The third point is this it does cause a risk

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Speaker 1: of inconsistent rulings between two different jurisdictions, the Bahamas and

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Speaker 1: the US, and that is quite important. I'll give one

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Speaker 1: very important example of that. It's probably the most important example,

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Speaker 1: and it's this. There is a live argument as to

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Speaker 1: whether the digital assets are in fact assets which belong

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Speaker 1: to the estate, whether they fall out that, whether they

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Speaker 1: fall out of the bankruptcy estate, or they do not.

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Speaker 1: Now there's been a lot of debate about this. I

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Speaker 1: have a particular point of view. Um some legal analysists

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Speaker 1: do agree with me. Others take a take a different view.

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Speaker 1: But there needs to be some sort of determination as

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Speaker 1: to whether those digital assets for within the estate. Now

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Speaker 1: where should that determination be made? Number One, there is

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Speaker 1: already an action for the claratory judgment as to whether

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Speaker 1: these assets fall out of the estate or not, which

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Speaker 1: has already started in the US. That's on foot. But

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Speaker 1: because again we're looking at English law, there is a

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Speaker 1: good argument to say that the best jurisdiction to determine

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Speaker 1: what we have termed that trust argument, whether the assets

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Speaker 1: digital assets are held on trust, is in fact the Bahamas.

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Speaker 1: Because the Bahamas is a common law jurisdiction which looks

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Speaker 1: at Bohemian case or first, but if it does not

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Speaker 1: find English case law highly persuasive because of these agreements

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Speaker 1: are English English law agreements, there is a very good

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Speaker 1: argument I suggest that in fact, the right jurisdiction and

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Speaker 1: the right judiciary to determine that particular point is the

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Speaker 1: Bahamas instead of the US. After the break, I'll be

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Speaker 1: talking with Fissile and Vassie about the changes being made

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Speaker 1: to English law that could affect crypto in future. And

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Speaker 1: so then, Lassie, I mean, it's not as simple, I

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Speaker 1: guess as the you know, looking at where these different

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Speaker 1: jurisdictions are. Because also in the Bahamas, liquidators there took

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Speaker 1: a certain amount of assets for themselves were not too

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Speaker 1: sure how much exactly, with potentially the permission of sand

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Speaker 1: Bank of Freed back when this bankruptcy process first started.

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Speaker 1: And that's also kind of worsening the spat, right I

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Speaker 1: think I wouldn't say that the liquid dators took the

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Speaker 1: money for themselves, not for themselves, but for the like

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Speaker 1: it is in for customers. Yeah, local customers. Correct if

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Speaker 1: you're if you're referring to the amount they claim they

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Speaker 1: see three point five billion dollars at the point of

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Speaker 1: value Tree or five billion dollars in early November. The

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Speaker 1: market value of it is now apparently around three hundred

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Speaker 1: million dollars if you're referring to debtporol of assets. Considering

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Speaker 1: the company legitimately went into a Bahamas provisional liquidation process,

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Speaker 1: it is you know, not strange at all that the

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Speaker 1: provisional liquid is should be in control of their amount

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Speaker 1: of money. Of that sum of money that the issue

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Speaker 1: arises because exactly as we've discussed, when you've got the

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Speaker 1: US and the Bahamas both certain jurisdiction, someone has to

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Speaker 1: administer how you deal with that money. And there are

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Speaker 1: many sort of operational issues, and they're also the legal arguments,

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Speaker 1: which is Faisal has just you know, laid out, and

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Speaker 1: it's made a very very good point, um, just to

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Speaker 1: add on to that as well, um that there certainly

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Speaker 1: is politics at play here. Both jurisdictions have a very

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Speaker 1: vested interest not to be embarrassed by this whole FTX situation.

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Speaker 1: So there certainly is you know, pressure on both ends

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Speaker 1: to do something about it. And it's also worth noting

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Speaker 1: that I think fis alluded to be earlier about Samding

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Speaker 1: effectively kicked out from the board. The timeline of events

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Speaker 1: that's happened is the Bahamas put the Mahman entity into

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Speaker 1: provisional liquidation and then a couple of days later after

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Speaker 1: the extented in the chapter eleven process, and it's a

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Speaker 1: voluntary Chapter eleven process. So Sam signed the papers to

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Speaker 1: give up power and put in the chapter eleven process,

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Speaker 1: and he didn't spend the weeks afterwards saying I wish

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Speaker 1: I hadn't done that. So clearly there was some sort

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Speaker 1: of pressure on Sam to, you know, step aside, let

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Speaker 1: these guys run it, and these guys want to run

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Speaker 1: in the US, so that's as usual. That's a really

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Speaker 1: important point. Just two quick points. I've alluded to the

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Speaker 1: fact that this is historic, but all of the particular

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Speaker 1: issues that I have raised, I have patently been recognized

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Speaker 1: by the parties, and there seems to be now sensible

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Speaker 1: coordination and understanding about how the process you should run

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Speaker 1: in parallel. So that's that's a very important thing. And

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Speaker 1: just one other point to touch on very briefly. We

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Speaker 1: haven't spoken about how the criminal prosecutions, which are definitely

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Speaker 1: taking place in the United States and may well take

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Speaker 1: place in the Bahamas will touch upon all these issues

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Speaker 1: in regards to the jurisdictional spat in respective insolvency. And

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Speaker 1: the reason I say that is because host criminal conviction

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Speaker 1: in either one or both jurisdictions there maybe have locations

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Speaker 1: for confiscation and for for tua of oursets how that

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Speaker 1: will intersect with one or other of the insolvency proceedings

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Speaker 1: are going on. It is something to be seen. So

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Speaker 1: it's not just a rivalry between the Bahamas in the US.

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Speaker 1: There's a right between the insolvency jurisdiction and the criminal

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Speaker 1: jurisdiction in the US and in the Bahamas. And this

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Speaker 1: is what makes this uniquely interesting and complex. And you've

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Speaker 1: spate of high profile crypto bankruptcies that have been happening.

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Speaker 1: And then yeah, see, I'm interested to understand how you

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Speaker 1: think that the international bit of FTX, how all of

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Speaker 1: this like multiple jurisdictions that we're facing here, How does

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Speaker 1: that look similar or not similar to the bankruptcies we've

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Speaker 1: seen before, like Celsius and three hours all. Oh, that

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Speaker 1: is a very very try and keep I'll try, I'll

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Speaker 1: try and I'll try and keep it shot shot and

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Speaker 1: seat is possible. I think in short, when you look

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Speaker 1: at Sales and Voyager and they were acting very much

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Speaker 1: like you know, quote unquote crypto banks, where you would

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Speaker 1: deposit money with them, and when you've disposited money with them,

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Speaker 1: it gives them the right to, you know, go and

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Speaker 1: un yield on an interest on it um. With FTS,

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Speaker 1: it's very different. FTX had no right to deal with

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Speaker 1: the client's assets in that way. The terms make it

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Speaker 1: very clear that FTS not allowed to land up their

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Speaker 1: customers money. They were not allowed to rehypothegate or do

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Speaker 1: anything with those assets. But they did. And that's what

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Speaker 1: turned a case of it all poor management, you know,

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Speaker 1: essentially poor risk management into what looks like alright, fraud

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Speaker 1: and theft also within that, I guess. Far a start,

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Speaker 1: we've been talking a lot about how English or is

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Speaker 1: very key in this case, but because of the way

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Speaker 1: the ft x is terms of service was structured. But

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Speaker 1: English law itself is kind of undergoing a bit of

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Speaker 1: a transformation at the moment when it comes to shassets.

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Speaker 1: We had an episode earlier this year where we talked

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Speaker 1: to the Law Commission about the proposals they've made to

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Speaker 1: reassess how we view digital assets as property, at least

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Speaker 1: in this country. What will those kinds of changes mean

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Speaker 1: for if we have bankruptcies like this in future and

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Speaker 1: English straw, as they hope, becomes a little bit of

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Speaker 1: an international de facto for this area. Yeah, again, it's

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Speaker 1: an interesting question, and without going into too much depth,

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Speaker 1: I think the best way to deal with it is

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Speaker 1: as follows that there the Law Commission has looked at

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Speaker 1: whether the law in effect needs to be for want

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Speaker 1: of better term, updated with respects with respect to crypto,

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Speaker 1: digital assets and so on. And the conclusion it came to,

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Speaker 1: especially in regards to the treatment of crypto was property,

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Speaker 1: is that in fact the English jurisprudence is it's it um,

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Speaker 1: it is sufficient in order to deal with aspects such

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Speaker 1: as this. And if we look at what's happening here,

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Speaker 1: a lot of this is trust based related legal arguments. Now,

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Speaker 1: trust law and equity is not exactly a modern invention

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Speaker 1: of English jurisprudence, so it's been around for quite a

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Speaker 1: while and I know we're reaching the end of this,

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Speaker 1: but I just wanted to add on to what Faiso

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Speaker 1: was saying and it's often been said that, you know,

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Speaker 1: the trust is the greatest creation of English law, and

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Speaker 1: I fully agree with that, and trust law is in

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Speaker 1: my opinion, from what I've seen in the in the

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Speaker 1: space generally, it's going to become very relevant because in

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Speaker 1: the crypto space, you know, the legal infrastructure often isn't

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Speaker 1: in place to document on chain arrangements, commercial arrangements, and

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Speaker 1: therefore that there often is a default to using a

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Speaker 1: trust argument whenever something goes wrong. For instance, you know, if,

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Speaker 1: if and when we get to the point where a

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Speaker 1: massive now implodes inherently, there's going to be a trust

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Speaker 1: argument is to you know, who's been acting as a

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Speaker 1: trust you for the doubt being a decentralized autonomous organization

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Speaker 1: a bit like a little crypto company without any of

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Speaker 1: the structure. It's like a little cryptal company, except it

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Speaker 1: doesn't have any real legal structure or wrapper to it. Yeah,

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Speaker 1: and everything's governed on change. Yeah, I mean lactually, and

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Speaker 1: I've been geeking out on the legal implications of dolls

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Speaker 1: for a little while now, such as it's so much

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Speaker 1: so I think people are just getting bored of us.

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Speaker 1: They haven't got bored of us already, but he makes

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Speaker 1: an excellent point that if there is to be a

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Speaker 1: development in the law, it's how probably how dolls it

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Speaker 1: to be treated. Are they unincorporated corporated associations? Are their

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Speaker 1: partnerships and there's something different, etcetera. So there is some

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Speaker 1: development law regards to that, and I think as well

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Speaker 1: when it comes to tracing of assets and intern remedies

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Speaker 1: and freezing orders and disclosure and so on, that's probably

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Speaker 1: more procedural than it is hard edged law substantive. But

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Speaker 1: I think that's something which is already starting to develop

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Speaker 1: here in England and probably developed even more just getting

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Speaker 1: the right tools in place in order to recover assets

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Speaker 1: and get information in a work because those are assessments.

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Speaker 1: That information is held in a different way with crypto

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Speaker 1: than it is with judicial last great, well, thank you

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Speaker 1: both for joining me. That was really interesting, absolute pleasure.

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Speaker 1: Thank you very much. Thank you fire Style and Wasassie.

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Speaker 1: You can find more of my reporting on the Bloomberg

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Speaker 1: Terminal and on Bloomberg dot com. For more, be sure

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Speaker 1: producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer

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Speaker 1: the Blake Maples is our engineer. Original music by Leo Sidron.

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Speaker 1: I'm Stacy Maria Shmael. We'll be back tomorrow