Speaker 1: This is Bloomberg Crypto, a dearly Bloomberg I heard podcast
Speaker 1: and I'm Emily Nicole Bloomberg, crypto blogger. I'm in today
Speaker 1: for Stace Marie Ishmael. It's Thursday Janum. You've probably heard
Speaker 1: financial regulators refer to crypto as the wild West. But
Speaker 1: instead of shootouts, sheriffs and Lucky Luke, in crypto, you
Speaker 1: can get financial experimentation, hackers, and pretty extreme risk taking
Speaker 1: in the hopes of yielding extreme returns. In some cases
Speaker 1: with people with their hard earned savings, people allegedly wronged
Speaker 1: by crypto are increasingly turning to the law for redress.
Speaker 1: The only problem is how do you fit something so
Speaker 1: new into laws that are often centuries old. That's the
Speaker 1: conundrum that lawyers and creditors are confronting in the case
Speaker 1: of ft X, the crypto exchange that collapsed into bankruptcy
Speaker 1: last year. In this episode, we discussed the legal complexities
Speaker 1: underlying the ft X bankruptcy and how the rules change
Speaker 1: across jurisdictions from the sunny Bahamas to the cloudy skies
Speaker 1: of England. Today I am joined by Fisa Osman, a
Speaker 1: UK barrister. My practice is a cross border litigation and
Speaker 1: asset recovery with a spin on crypto related matters, and
Speaker 1: Way Lawyer, a pseudonymous animated penguin who in real life
Speaker 1: is actually a lawyer at a top UK law firm.
Speaker 1: Way Lawyer asked not to be identified by name because
Speaker 1: he's not authorized to speak on the record by the
Speaker 1: company he works for. I mean, the reason that anonymous
Speaker 1: is largely because this is a lot of fun. Being
Speaker 1: darks is such a big deal. In two you go, oh,
Speaker 1: you know, you know the farming team, But it turns
Speaker 1: out they all scan do you anywhere? And when do
Speaker 1: we did by? And I finally quite musing that one
Speaker 1: of the leading cryptal Twitter authorities. It's just a penguin
Speaker 1: in the suit. So let's set the scene so fire style.
Speaker 1: When the Bahamas based fd X filed for bankruptcy in November,
Speaker 1: it kicked off a chain of events that in brold
Speaker 1: quite a few different legal systems. Can you explain a
Speaker 1: bit for us what that mishmash looks like? You know,
Speaker 1: where are we talking about here? Well? I think mishmash
Speaker 1: is probably exactly the right word. Although orbit not a
Speaker 1: technical term, it's probably the best description you can get
Speaker 1: as we know, if I can call it if you like,
Speaker 1: the Mothership entity was a Bahamas based company which is
Speaker 1: regulated in the Bahamas under their regime, and of course
Speaker 1: SPF did reside there for at the material time, so
Speaker 1: all concentration was upon the Bahamas for the right reasons,
Speaker 1: the actual governing law when it's a government law. The
Speaker 1: agreements that were between users and f t X were
Speaker 1: actually English law agreements, and if you look at the
Speaker 1: user agreements, it does actually stipulate that the law of
Speaker 1: those user of gives is the law of England. So
Speaker 1: you have English law which is governing the relationships between
Speaker 1: the entity and the users in a company which is
Speaker 1: domicid in the Bahamas. And that really perhaps was the
Speaker 1: first opening salvos to the whole train of litigation that
Speaker 1: took place. Afterwards, you then have the twist where because
Speaker 1: SPF was effectively ejected from the board, then moves to
Speaker 1: the US and into US bankruptcy, and that really was
Speaker 1: the start of the jurisdiction dispute between the US and
Speaker 1: the Bahamas. And as much to be said as to
Speaker 1: whether the Bahamas were the right jurisdiction to actually start
Speaker 1: the process of insolvency and liquidation or whether it was
Speaker 1: right to move to the US under a Chapter eleven
Speaker 1: and for the new directors of FTX to commence over there.
Speaker 1: And that's a question which is still yet to be
Speaker 1: fully resolved, although it's got there. It's a lot further
Speaker 1: forward than it than it was, say even a few
Speaker 1: days ago. And we'll see if we look at the
Speaker 1: way that ft X was structured, at least in terms
Speaker 1: of the big pairent entity, it had reaches all across
Speaker 1: the globe really like we had ft EXTRA pan and
Speaker 1: ft X Europe. And how complicated is that making this
Speaker 1: situation right now? There is a lot of international relations
Speaker 1: and international diplomacy in place here, because when you've got
Speaker 1: a company that's gone under UM, you need to have
Speaker 1: one you know what we call it is quite a
Speaker 1: main proceeding, but essentially you need one jurisdiction to take
Speaker 1: the lead on the insolvency because otherwise, if you had,
Speaker 1: you know, multiple jurisdictions claiming to lead in song at
Speaker 1: the same time, then how do you administer the assets
Speaker 1: of the mountinational group UM. Many sort of jurisdictions that
Speaker 1: have very fairly developed legal structures have signed up to
Speaker 1: something called the Instantral model law in cross Bordel insolvency,
Speaker 1: which it's it's sort of the international treaty where which
Speaker 1: determines who gets to run which insolvency and sets the
Speaker 1: sort sets the rules of the game. Unfortunately, the Bahamas
Speaker 1: is not a party to that, so we end up
Speaker 1: in this position where we're kind of going back to default. Uh,
Speaker 1: you know default common law ruse as to who gets
Speaker 1: to claim jurisdiction. But at the same time, UM, the
Speaker 1: US is often able to claim very wide jurisdiction when
Speaker 1: it comes to, you know, someone filing for Chapter eleven.
Speaker 1: For instance, when when this all kicked off, there was
Speaker 1: a lot of questions, UM in the spaces to how
Speaker 1: can FTX file for Chapter eleven when it's not even
Speaker 1: in the US. And the answer to that is, well,
Speaker 1: pretty much anyone and everyone can fill from Chapter eleven.
Speaker 1: Is fairly established case law in the US that if
Speaker 1: you have assets in the US, any sort of assets whatsoever,
Speaker 1: you can fall from Chapter eleven, even if that asset
Speaker 1: is a bank account which you've set up in order
Speaker 1: to pay a US lawyer. So you could be in
Speaker 1: Latin America running a you know, business in Latin America
Speaker 1: with your suppliers in Europe and Asia and whatnot, and
Speaker 1: never do anything the US until you go under. You
Speaker 1: call us lawyer and say, hey, I want to do
Speaker 1: a Chapter eleven? Can I pay your retainer? By paying
Speaker 1: the retainer, you become eligible for the Chapter eleven process.
Speaker 1: It's a difficult one and what we've seen so far
Speaker 1: is exactly as you kind of said like that. There's
Speaker 1: been a bit of a dispute I guess we'd say
Speaker 1: between the different reagions as to how they want to
Speaker 1: approach this, with tex As new executives in Delaware being
Speaker 1: very vehement that they are in charge, but the Bahama
Speaker 1: is saying that they're in charge and and f ire Star.
Speaker 1: How have they been getting along so far and what
Speaker 1: what kind of moves that they made to date that
Speaker 1: kind of sees them working together to solve these issues. Well,
Speaker 1: they haven't really been getting on. That has changed is
Speaker 1: probably a slight, thank thankfully, thank thankfully, it's there has changed.
Speaker 1: I'll come on too that in the moment. But when
Speaker 1: I say historically, I mean it's not in terms of time.
Speaker 1: This hasn't been a history or event because it's it's
Speaker 1: really started to implode within the matter what weeks ago,
Speaker 1: but still in the compass of what we're talking about.
Speaker 1: I refer to historically the relationship between the US debtors
Speaker 1: and the liquidators in the Bahamas. I think there are
Speaker 1: three points to make here. First of all, I have
Speaker 1: sympathy with the Bahamas in this sense. It is a
Speaker 1: Bahamian regulated entity, and I think it is right for
Speaker 1: the Bahamas and regulated entity regulators to say, look, we
Speaker 1: have given this thing a license. It is supposed to
Speaker 1: comply with our licensing conditions. It hasn't. Therefore, we have
Speaker 1: taken appropriate steps that are in our law in order
Speaker 1: to resolve that issue, and in order to keep the
Speaker 1: integrity of the Bahamas as a jurisdiction, which is good
Speaker 1: for crypto and good for users as well, I think
Speaker 1: it is right for the Balhams to say, you know what,
Speaker 1: we'll deal with this. Uh. The second point is this,
Speaker 1: without significant information sharing between the Bahamas and the US,
Speaker 1: you're going to have Bahamian activity which is sitting in
Speaker 1: a silo in respect and in comparison to what's happening
Speaker 1: in the US, and that is not good for recovery.
Speaker 1: The third point is this it does cause a risk
Speaker 1: of inconsistent rulings between two different jurisdictions, the Bahamas and
Speaker 1: the US, and that is quite important. I'll give one
Speaker 1: very important example of that. It's probably the most important example,
Speaker 1: and it's this. There is a live argument as to
Speaker 1: whether the digital assets are in fact assets which belong
Speaker 1: to the estate, whether they fall out that, whether they
Speaker 1: fall out of the bankruptcy estate, or they do not.
Speaker 1: Now there's been a lot of debate about this. I
Speaker 1: have a particular point of view. Um some legal analysists
Speaker 1: do agree with me. Others take a take a different view.
Speaker 1: But there needs to be some sort of determination as
Speaker 1: to whether those digital assets for within the estate. Now
Speaker 1: where should that determination be made? Number One, there is
Speaker 1: already an action for the claratory judgment as to whether
Speaker 1: these assets fall out of the estate or not, which
Speaker 1: has already started in the US. That's on foot. But
Speaker 1: because again we're looking at English law, there is a
Speaker 1: good argument to say that the best jurisdiction to determine
Speaker 1: what we have termed that trust argument, whether the assets
Speaker 1: digital assets are held on trust, is in fact the Bahamas.
Speaker 1: Because the Bahamas is a common law jurisdiction which looks
Speaker 1: at Bohemian case or first, but if it does not
Speaker 1: find English case law highly persuasive because of these agreements
Speaker 1: are English English law agreements, there is a very good
Speaker 1: argument I suggest that in fact, the right jurisdiction and
Speaker 1: the right judiciary to determine that particular point is the
Speaker 1: Bahamas instead of the US. After the break, I'll be
Speaker 1: talking with Fissile and Vassie about the changes being made
Speaker 1: to English law that could affect crypto in future. And
Speaker 1: so then, Lassie, I mean, it's not as simple, I
Speaker 1: guess as the you know, looking at where these different
Speaker 1: jurisdictions are. Because also in the Bahamas, liquidators there took
Speaker 1: a certain amount of assets for themselves were not too
Speaker 1: sure how much exactly, with potentially the permission of sand
Speaker 1: Bank of Freed back when this bankruptcy process first started.
Speaker 1: And that's also kind of worsening the spat, right I
Speaker 1: think I wouldn't say that the liquid dators took the
Speaker 1: money for themselves, not for themselves, but for the like
Speaker 1: it is in for customers. Yeah, local customers. Correct if
Speaker 1: you're if you're referring to the amount they claim they
Speaker 1: see three point five billion dollars at the point of
Speaker 1: value Tree or five billion dollars in early November. The
Speaker 1: market value of it is now apparently around three hundred
Speaker 1: million dollars if you're referring to debtporol of assets. Considering
Speaker 1: the company legitimately went into a Bahamas provisional liquidation process,
Speaker 1: it is you know, not strange at all that the
Speaker 1: provisional liquid is should be in control of their amount
Speaker 1: of money. Of that sum of money that the issue
Speaker 1: arises because exactly as we've discussed, when you've got the
Speaker 1: US and the Bahamas both certain jurisdiction, someone has to
Speaker 1: administer how you deal with that money. And there are
Speaker 1: many sort of operational issues, and they're also the legal arguments,
Speaker 1: which is Faisal has just you know, laid out, and
Speaker 1: it's made a very very good point, um, just to
Speaker 1: add on to that as well, um that there certainly
Speaker 1: is politics at play here. Both jurisdictions have a very
Speaker 1: vested interest not to be embarrassed by this whole FTX situation.
Speaker 1: So there certainly is you know, pressure on both ends
Speaker 1: to do something about it. And it's also worth noting
Speaker 1: that I think fis alluded to be earlier about Samding
Speaker 1: effectively kicked out from the board. The timeline of events
Speaker 1: that's happened is the Bahamas put the Mahman entity into
Speaker 1: provisional liquidation and then a couple of days later after
Speaker 1: the extented in the chapter eleven process, and it's a
Speaker 1: voluntary Chapter eleven process. So Sam signed the papers to
Speaker 1: give up power and put in the chapter eleven process,
Speaker 1: and he didn't spend the weeks afterwards saying I wish
Speaker 1: I hadn't done that. So clearly there was some sort
Speaker 1: of pressure on Sam to, you know, step aside, let
Speaker 1: these guys run it, and these guys want to run
Speaker 1: in the US, so that's as usual. That's a really
Speaker 1: important point. Just two quick points. I've alluded to the
Speaker 1: fact that this is historic, but all of the particular
Speaker 1: issues that I have raised, I have patently been recognized
Speaker 1: by the parties, and there seems to be now sensible
Speaker 1: coordination and understanding about how the process you should run
Speaker 1: in parallel. So that's that's a very important thing. And
Speaker 1: just one other point to touch on very briefly. We
Speaker 1: haven't spoken about how the criminal prosecutions, which are definitely
Speaker 1: taking place in the United States and may well take
Speaker 1: place in the Bahamas will touch upon all these issues
Speaker 1: in regards to the jurisdictional spat in respective insolvency. And
Speaker 1: the reason I say that is because host criminal conviction
Speaker 1: in either one or both jurisdictions there maybe have locations
Speaker 1: for confiscation and for for tua of oursets how that
Speaker 1: will intersect with one or other of the insolvency proceedings
Speaker 1: are going on. It is something to be seen. So
Speaker 1: it's not just a rivalry between the Bahamas in the US.
Speaker 1: There's a right between the insolvency jurisdiction and the criminal
Speaker 1: jurisdiction in the US and in the Bahamas. And this
Speaker 1: is what makes this uniquely interesting and complex. And you've
Speaker 1: been both probably kept quite busy this year by the
Speaker 1: spate of high profile crypto bankruptcies that have been happening.
Speaker 1: And then yeah, see, I'm interested to understand how you
Speaker 1: think that the international bit of FTX, how all of
Speaker 1: this like multiple jurisdictions that we're facing here, How does
Speaker 1: that look similar or not similar to the bankruptcies we've
Speaker 1: seen before, like Celsius and three hours all. Oh, that
Speaker 1: is a very very try and keep I'll try, I'll
Speaker 1: try and I'll try and keep it shot shot and
Speaker 1: seat is possible. I think in short, when you look
Speaker 1: at Sales and Voyager and they were acting very much
Speaker 1: like you know, quote unquote crypto banks, where you would
Speaker 1: deposit money with them, and when you've disposited money with them,
Speaker 1: it gives them the right to, you know, go and
Speaker 1: un yield on an interest on it um. With FTS,
Speaker 1: it's very different. FTX had no right to deal with
Speaker 1: the client's assets in that way. The terms make it
Speaker 1: very clear that FTS not allowed to land up their
Speaker 1: customers money. They were not allowed to rehypothegate or do
Speaker 1: anything with those assets. But they did. And that's what
Speaker 1: turned a case of it all poor management, you know,
Speaker 1: essentially poor risk management into what looks like alright, fraud
Speaker 1: and theft also within that, I guess. Far a start,
Speaker 1: we've been talking a lot about how English or is
Speaker 1: very key in this case, but because of the way
Speaker 1: the ft x is terms of service was structured. But
Speaker 1: English law itself is kind of undergoing a bit of
Speaker 1: a transformation at the moment when it comes to shassets.
Speaker 1: We had an episode earlier this year where we talked
Speaker 1: to the Law Commission about the proposals they've made to
Speaker 1: reassess how we view digital assets as property, at least
Speaker 1: in this country. What will those kinds of changes mean
Speaker 1: for if we have bankruptcies like this in future and
Speaker 1: English straw, as they hope, becomes a little bit of
Speaker 1: an international de facto for this area. Yeah, again, it's
Speaker 1: an interesting question, and without going into too much depth,
Speaker 1: I think the best way to deal with it is
Speaker 1: as follows that there the Law Commission has looked at
Speaker 1: whether the law in effect needs to be for want
Speaker 1: of better term, updated with respects with respect to crypto,
Speaker 1: digital assets and so on. And the conclusion it came to,
Speaker 1: especially in regards to the treatment of crypto was property,
Speaker 1: is that in fact the English jurisprudence is it's it um,
Speaker 1: it is sufficient in order to deal with aspects such
Speaker 1: as this. And if we look at what's happening here,
Speaker 1: a lot of this is trust based related legal arguments. Now,
Speaker 1: trust law and equity is not exactly a modern invention
Speaker 1: of English jurisprudence, so it's been around for quite a
Speaker 1: while and I know we're reaching the end of this,
Speaker 1: but I just wanted to add on to what Faiso
Speaker 1: was saying and it's often been said that, you know,
Speaker 1: the trust is the greatest creation of English law, and
Speaker 1: I fully agree with that, and trust law is in
Speaker 1: my opinion, from what I've seen in the in the
Speaker 1: space generally, it's going to become very relevant because in
Speaker 1: the crypto space, you know, the legal infrastructure often isn't
Speaker 1: in place to document on chain arrangements, commercial arrangements, and
Speaker 1: therefore that there often is a default to using a
Speaker 1: trust argument whenever something goes wrong. For instance, you know, if,
Speaker 1: if and when we get to the point where a
Speaker 1: massive now implodes inherently, there's going to be a trust
Speaker 1: argument is to you know, who's been acting as a
Speaker 1: trust you for the doubt being a decentralized autonomous organization
Speaker 1: a bit like a little crypto company without any of
Speaker 1: the structure. It's like a little cryptal company, except it
Speaker 1: doesn't have any real legal structure or wrapper to it. Yeah,
Speaker 1: and everything's governed on change. Yeah, I mean lactually, and
Speaker 1: I've been geeking out on the legal implications of dolls
Speaker 1: for a little while now, such as it's so much
Speaker 1: so I think people are just getting bored of us.
Speaker 1: They haven't got bored of us already, but he makes
Speaker 1: an excellent point that if there is to be a
Speaker 1: development in the law, it's how probably how dolls it
Speaker 1: to be treated. Are they unincorporated corporated associations? Are their
Speaker 1: partnerships and there's something different, etcetera. So there is some
Speaker 1: development law regards to that, and I think as well
Speaker 1: when it comes to tracing of assets and intern remedies
Speaker 1: and freezing orders and disclosure and so on, that's probably
Speaker 1: more procedural than it is hard edged law substantive. But
Speaker 1: I think that's something which is already starting to develop
Speaker 1: here in England and probably developed even more just getting
Speaker 1: the right tools in place in order to recover assets
Speaker 1: and get information in a work because those are assessments.
Speaker 1: That information is held in a different way with crypto
Speaker 1: than it is with judicial last great, well, thank you
Speaker 1: both for joining me. That was really interesting, absolute pleasure.
Speaker 1: Thank you very much. Thank you fire Style and Wasassie.
Speaker 1: You can find more of my reporting on the Bloomberg
Speaker 1: Terminal and on Bloomberg dot com. For more, be sure
Speaker 1: to check out our twice weekly newsletter, Bloomberg Crypto. This
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Speaker 1: I'm Stacy Maria Shmael. We'll be back tomorrow