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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.

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Speaker 1: And this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.

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Speaker 1: It's Tuesday, July. There's an old joke in finance. When

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Speaker 1: companies fight, lawyers win, and right now in crypto, lots

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Speaker 1: of companies are fighting, some for their corporate lives. Enter

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Speaker 1: the lawyers. Kirkland and Ellis, one of the biggest law

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Speaker 1: firms in the world by revenue, has emerged as a

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Speaker 1: major player in crypto. Earlier this month, the firms signed

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Speaker 1: on to work on the bankruptcy filings for both Celsius

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Speaker 1: Network and Voyage of Digital. There's relatively little case law

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Speaker 1: that addresses how crypto assets and their holders should be

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Speaker 1: treated in a bankruptcy. That means any legal precedent set

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Speaker 1: in these cases could shape the future of crypto lending

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Speaker 1: and crypto bankruptcy and determine how distressed crypto companies pay

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Speaker 1: back their creditors. Form on this joining me now you'll

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Speaker 1: hear from Bloomberg report to Jeremy Hill. He'll share his

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Speaker 1: reporting on big Laws entry into the world of krypto. Jeremy,

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Speaker 1: thank you so much for being on the show. Thank

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Speaker 1: you for having me. So, before we get into the

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Speaker 1: weeds of krypto and bankruptcy and bankruptcy filings, what is

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Speaker 1: it that lawyers do in these sorts of situations? What

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Speaker 1: is Kirkland's rule here? Sure, so Kirkland Analysis is representing

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Speaker 1: the company in these bankruptcies. There are lots of different

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Speaker 1: roles that lawyers can play when a company falls into

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Speaker 1: distress um and one of the most important ones is

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Speaker 1: giving advice to the bankrupt company itself and its management.

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Speaker 1: So here Kirkland has come in. They've been hired by

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Speaker 1: the company to sort through how much money it has

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Speaker 1: or doesn't have, where the biggest problems are, and give

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Speaker 1: them advice on how they can and can't behave as

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Speaker 1: a bankrupt company. In the United States, there are very

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Speaker 1: specific and criss crossing rules about things you can and

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Speaker 1: can't do. Do they do is for free? They certainly

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Speaker 1: don't do it for free, the opposite of free if

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Speaker 1: you can, if you can imagine so. Colleagues on Bloomberg

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Speaker 1: Globe published a story earlier about you know Kirkland, which

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Speaker 1: has been involved in multiple difference at this point, crypto companies, bankruptcy,

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Speaker 1: filings that they made something like three million dollars in

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Speaker 1: a relatively short amount of time. I would like to

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Speaker 1: make three million dollars in a relatively short amount of time.

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Speaker 1: But what are the kinds of tasks? What's the kind

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Speaker 1: of advice as you mentioned that they would possibly be

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Speaker 1: giving to these companies, What does that look like? Sure,

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Speaker 1: so let's start with the kinds of things that need

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Speaker 1: to be understood. Once a team of lawyers is brought

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Speaker 1: under the hood of a company hires Kirkland Annalys or

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Speaker 1: any other big law firm UM to to give them

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Speaker 1: advice on their financial situation, these lawyers are going to

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Speaker 1: need to get up to speed on UM the kinds

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Speaker 1: of holes that may exist in their balance sheet, how

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Speaker 1: much money is coming in, how much as going out,

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Speaker 1: what kind of actions have been taken in the weeks

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Speaker 1: leading up to the hiring of this law firm, and

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Speaker 1: are those problematic? All of this stuff just takes um

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Speaker 1: time crucially and a certain amount of knowledge about things

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Speaker 1: that are important in the context of a of a

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Speaker 1: failing company, a distressed company. And when you're charging something

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Speaker 1: like an hour as more senior people at Kirkland do UM,

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Speaker 1: the builds add up fast they have. You even seen

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Speaker 1: some associates, some lower level big law attorneys charging more

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Speaker 1: than a thousand dollars an hour. Good work if you

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Speaker 1: can get it well. There's a lot of work to

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Speaker 1: go around at this moment. Voyager is one of the

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Speaker 1: companies that's been hit hard by the bad tab from

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Speaker 1: Three Arrows Capital, which is a cryptal hash fund, and

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Speaker 1: Voyager provides trading of staking services and then most importantly

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Speaker 1: lending services. So this is where they take cryptal deposits

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Speaker 1: from retail users and then they landed out to institutional

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Speaker 1: borrowers such as Three Arrows Capital in order to generate

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Speaker 1: a yield. The issue here is as Windows three Arrows

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Speaker 1: Capital has been defaulting on islan. The company is set

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Speaker 1: for liquidation in British Virgin Silence, and Voyager was not

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Speaker 1: unable to get back the loan from Three Arrows Capital,

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Speaker 1: which triggered this bankruptcy proceeding for Voyager. Sometimes when people

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Speaker 1: hear bankruptcy they think, oh, no, this company is like

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Speaker 1: shutting down immediately, or that means that I as a person,

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Speaker 1: I am completely out of luck. I have no claim left.

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Speaker 1: What in practice is bankruptcy shaping up to be like

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Speaker 1: for these crypto companies, like, what are the next steps?

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Speaker 1: I am Voyager, I'm Celsius. I filed for bankruptcy protection,

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Speaker 1: Like what does that mean if I'm somebody who had

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Speaker 1: crypto with one of these companies? Right, So, bankruptcy is

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Speaker 1: not a good thing. I think everyone knows that, but

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Speaker 1: as saying, it's not the end of everything. Something that

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Speaker 1: you'll hear a lot from lawyers and judges to like,

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Speaker 1: is this phrase breathing spell. When you file for bankruptcy

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Speaker 1: in the United States, it gives a company or a

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Speaker 1: person legal protections that they don't otherwise have, where they're

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Speaker 1: protected from people that they owe money to suing them

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Speaker 1: or otherwise just trying to seize their assets. So this

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Speaker 1: gives you time to sort of, Okay, what's going on,

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Speaker 1: what can we do and how can we repay our

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Speaker 1: debts in the best way possible. It gives them a

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Speaker 1: breathing spell. It's too early to say how much creditors

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Speaker 1: of Voyager or Celsius are going to get back and

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Speaker 1: even in what form they'll be repaid, if that's cash,

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Speaker 1: if that's crypto, but it's going to be more than zero.

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Speaker 1: Usually everybody gets a little something unless you are like

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Speaker 1: a stockholder, and I don't think that's the biggest concern here,

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Speaker 1: not at the moment. It's more people who are like,

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Speaker 1: I had a million dollars in bitcoin with Celsius, what

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Speaker 1: do I do now? There's something that you said at

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Speaker 1: the very beginning that I want to go back to,

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Speaker 1: which is the idea of where are the holes. The

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Speaker 1: recent Bloomberg Crypto conference in New York, we heard Sam

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Speaker 1: bankmunt Freed very colorfully described the fact that when you know,

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Speaker 1: he's Mr Bilouds at the moment, and so when he

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Speaker 1: was being called up by various crypto companies to get

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Speaker 1: either rescued or advice, he would ask them questions that included, well,

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Speaker 1: tell me about your positions, like what do your books

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Speaker 1: look like right now? Do you know where your assets are?

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Speaker 1: Do you know what your liabilities are? And one of

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Speaker 1: the things he said that really struck me was some

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Speaker 1: folks just couldn't answer that question, like they didn't really

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Speaker 1: have a good sense of their holdings or who their

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Speaker 1: creditors were, who their debtors were. As the case may be,

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Speaker 1: is that an area that these lawyers are having to

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Speaker 1: spend perhaps an above average amount of time on When

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Speaker 1: it comes to crypto companies compared with maybe other firms

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Speaker 1: and other sectors, difficult to say precisely what they're doing

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Speaker 1: behind the scenes these platforms, though, Voyagers Celsius, they seem

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Speaker 1: more complicated than your average bankruptcy. If you're like a retailer,

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Speaker 1: you know the supply chain might be complicated. J C.

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Speaker 1: Penny went bankrupt a few years ago. Big stores all

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Speaker 1: over the country, vendors overseas. But at the end of

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Speaker 1: the day, you have uh people spending money at the

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Speaker 1: store and you have inventory that is sold. It's like

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Speaker 1: pretty intuitive what's going on there? Lots of crashed questions

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Speaker 1: um around crypto about what these assets actually are, who

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Speaker 1: has a claim to them, what does it mean to

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Speaker 1: be a depositor? Um, Who should we be talking to?

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Speaker 1: So things are just a bit more complex than they

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Speaker 1: are in a run of the mill bankruptcy. And to

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Speaker 1: go back to what you said about this bankruptcy not

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Speaker 1: being the end, like J C. Penny is in business now,

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Speaker 1: so you know they have come back from from that claim.

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Speaker 1: It may not have played out the way that everybody

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Speaker 1: wanted it, but you can still buy things from them.

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Speaker 1: I do think the point that you make about complex

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Speaker 1: asy is really really important. And in additional parts of

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Speaker 1: that complexity is there just haven't been a ton of

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Speaker 1: crypto bankruptcies prior to this one. So you know, as reposes,

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Speaker 1: certainly we're getting the impression that folks are like slightly

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Speaker 1: figuring things out as they go. Is that something that

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Speaker 1: you have seen as well in your reporting. Yes, it

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Speaker 1: seems like a little bit of on the fly sort

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Speaker 1: of sort of advice um. In the case of Voyager,

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Speaker 1: for example, Kirkland and Elis, as soon as the case

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Speaker 1: was filed, they uploaded what they called a stocking horse

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Speaker 1: bankruptcy plan, the idea being, uh, if we can't figure

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Speaker 1: out anything better, here's how we're going to repay people,

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Speaker 1: and this is how it works. And this is our

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Speaker 1: view on the law. Now, as I've done some more

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Speaker 1: reporting since then, interesting questions have emerged. Voyager is assuming

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Speaker 1: that the user agreement that people signed when they deposited

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Speaker 1: their crypto onto the platform, that that has effect, that

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Speaker 1: that is binding because the user agreements said basically, you

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Speaker 1: put your crypto here or it belongs to us. Now

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Speaker 1: that's just part of the deal. But perhaps if users

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Speaker 1: didn't think that's what was going on. Even if they

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Speaker 1: signed it, if enough of them say I really thought

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Speaker 1: this was more like a bank situation. I thought you

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Speaker 1: were just holding my stuff. It may be the case

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Speaker 1: that that agreement is not all and a judge is

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Speaker 1: going to have to decide that. And if the whole

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Speaker 1: bankruptcy plan is premised on this idea that the user

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Speaker 1: agreement was legit changes everything. That's just one of the questions.

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Speaker 1: Just nobody knows the answer. I don't know that the

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Speaker 1: judge knows the answer. It comes spooky, It's quite spooky.

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Speaker 1: I mean, it's such a fundamental question whose crypto is it?

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Speaker 1: That seems like a major thing to hash out. Right,

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Speaker 1: we'll be right back with more from Bloomberg Reports or

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Speaker 1: Jeremy Hill on the legal team tackling crypto bankruptcies. And

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Speaker 1: so when you say the judge decides, you know, it's

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Speaker 1: basically you're going to have the lawyers for the company

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Speaker 1: making arguments to the judge in one direction. But you

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Speaker 1: know what, I think when people think about court cases,

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Speaker 1: there's like a prosecution and a defense. So who's representing

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Speaker 1: the other side of that argument? Right, bankruptcies are a

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Speaker 1: little bit different in that way, because often there are

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Speaker 1: little skirmishes UM rather than there's like a villain and

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Speaker 1: a hero, or this side and that side. The company

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Speaker 1: is working with creditors usually like the company has a

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Speaker 1: duty to maximize the value of its assets for the

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Speaker 1: benefit of creditors, and creditors are the people they owe

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Speaker 1: money to, exactly right. So in the case of Voyager

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Speaker 1: and Celsius, the people who use the platform their creditors.

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Speaker 1: Now it's not the best life ever. So okay, that's

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Speaker 1: a very helpful explanation. So when it comes to Voyager,

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Speaker 1: you know they've got Kirkland on one side, but who's

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Speaker 1: going to represent the creditors? Right? The creditors are going

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Speaker 1: to be represented by a law firm called McDermott, Will

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Speaker 1: and Emory. It's a big law firm base three to

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Speaker 1: I'm sure presumably. So that is who Voyage your customers

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Speaker 1: UM will have on their side and engaging with Kirkland

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Speaker 1: and engaging with Kirkland's financial advisors about what the best

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Speaker 1: way to repay creditors is and how do they get picked.

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Speaker 1: Did the creditors get together and decide it's a it's

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Speaker 1: a pitching process. So this arm of the Department of

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Speaker 1: Justice called the US Trustee. They act like we we

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Speaker 1: we say they police bankruptcy court, but basically they like

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Speaker 1: kind of referee um. At the beginning of a case,

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Speaker 1: they will put out mail asking for people who want

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Speaker 1: to serve on the creditor committee. People will respond, The

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Speaker 1: US Trustee will select some people to serve on the committee,

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Speaker 1: and then there's a pitching process to decide which law

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Speaker 1: firm gets to represent the committee. And if you're a

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Speaker 1: person that has money on these platforms, you can reach

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Speaker 1: out to this lawyer. You don't have to pay for them.

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Speaker 1: The company pays for this lawyer and they kind of

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Speaker 1: have to listen to you. So wait, the company has

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Speaker 1: to pay two sets of lawyers. It has to pay

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Speaker 1: the lawyers that are advising them and what they should do,

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Speaker 1: and it has to pay lawyers who are going to

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Speaker 1: advise creditors on what they should do. That's absolutely right.

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Speaker 1: That seems wild. Yeah, it's a it's a pretty nice

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Speaker 1: like side benefit. So when a company goes bankrupt, it

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Speaker 1: stops being like you know, Voyager or Celsius, and now

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Speaker 1: it's the estate a Voyager or Celsius. So it sounds

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Speaker 1: very fancy and old now that I think about it.

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Speaker 1: So the estate pays for the lawyer that represents the

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Speaker 1: official committee of unsecured creditors, and those are going to

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Speaker 1: be people that have used Celsius and Voyager. And in

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Speaker 1: the meantime, the estate is paying all of these lawyers

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Speaker 1: with money that would otherwise potentially be recovered by creditors. Yes,

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Speaker 1: this comes up all the time. It's a source subject.

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Speaker 1: But the thinking is, the thinking is in theory, if

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Speaker 1: you have really good lawyers who really understand bankruptcy law

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Speaker 1: and are good negotiators, everybody's better off, because probably it's

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Speaker 1: better than if the company just liquidated. We just sold

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Speaker 1: everything that Celsius owns and distributed them according to everyone,

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Speaker 1: slice up the pie. That would be okay, probably pretty sad.

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Speaker 1: If you can do even just a penny better than

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Speaker 1: that by having really fancy lawyers do get out and

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Speaker 1: come up with some plan for the future, why not

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Speaker 1: do it? I'm sure that's what the lawyers would argue.

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Speaker 1: And you know, you make a good point about liquidation.

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Speaker 1: This is a pretty aggressively negative market right now, and

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Speaker 1: so it doesn't seem like selling off crypto assets when

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Speaker 1: you know Bitcoin is hovering below eighteen is is the

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Speaker 1: move that the creditor is probably one that's exactly right,

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Speaker 1: And um, it's something that is going to come up

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Speaker 1: in court. I'm sure. UM. I really do not want

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Speaker 1: to compare this to Lehman Brothers, but I'll just make

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Speaker 1: everyone's doing it. I would just make the point that

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Speaker 1: Lehman Brothers was also unusual because it took many years

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Speaker 1: for its bankruptcy to to play out. It's technically not

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Speaker 1: over yet, there's still a little bit of stuff to

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Speaker 1: sort out. The reason it took so long is in

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Speaker 1: part because the people involved took a look at the

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Speaker 1: assets that they had to distribute and said, now is

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Speaker 1: not a good time. Two thousand eight, thousand nine is

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Speaker 1: not a good time to sell these off. So let's

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Speaker 1: hold on and wait for things to improve, and then

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Speaker 1: we will sell these and distribute the proceeds to creditors.

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Speaker 1: And of course, things improved fairly dramatically in the following

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Speaker 1: years compared to what the markets were trading out in

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Speaker 1: two thousand and eight two thousand nine. I know no

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Speaker 1: one who is currently making well, that's not true. There's

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Speaker 1: a few people who are, like Bitcoin will definitely go

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Speaker 1: back to a hundred thousand dollars, but they may not

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Speaker 1: be as confident in those predictions as they were six

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Speaker 1: months ago. You know, you've mentioned some interesting misconceptions that

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Speaker 1: folks might have about bankruptcy and how this works. I

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Speaker 1: imagine at parties when people hear what you do, you

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Speaker 1: become the most interesting man in the room. I'm sure

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Speaker 1: that's what your life is like. But is there anything

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Speaker 1: you find yourself sort of explaining to non bankruptcy experts

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Speaker 1: Often I think a lot of people are under the

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Speaker 1: impression that, as you alluded to earlier, company files for

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Speaker 1: bankruptcy and then it's over. They just throw in the

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Speaker 1: towel um. But actually the action just starts when a

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Speaker 1: company files that Chapter eleven petition. There's so much interesting stuff,

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Speaker 1: both legally and just like you know, little knife fights

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Speaker 1: that occur between creditors and the company after the petition

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Speaker 1: is filed. It's worth following along because the company's fortunes

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Speaker 1: can change dramatically while they're in core protection. I want

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Speaker 1: to come back to what you said about leban Leman

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Speaker 1: file for bankruptcy on September eight. So is the takeaway

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Speaker 1: here that the folks who are creditors to Celsius and

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Speaker 1: voyagers should maybe expect a long journey. Probably not that long,

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Speaker 1: that is, uh Lehman is like it might have said

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Speaker 1: some kind of records for for how long things have

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Speaker 1: been playing out. I mean, it's the biggest bankruptcy of

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Speaker 1: all time. But in general, these things do you take

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Speaker 1: a while to play out because if there's especially if

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Speaker 1: there's any kind of litigation, if somebody wants to sue

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Speaker 1: the company or its founders. Oh man, things just really

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Speaker 1: start to get kicked out timeline wise. Takes forever to

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Speaker 1: dig through all these documents, make people sit for depositions

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Speaker 1: and then get a trial date and all of this.

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Speaker 1: At the end of it, um, maybe the judge is

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Speaker 1: just like, oh, I don't know, maybe fifty million dollars

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Speaker 1: to the creditors. What a fascinating time. Thank you so much, Jeremy,

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Speaker 1: I really appreciate you being here today. Problem On the

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Speaker 1: next episode of Bloomberg Crypto, we're going to explore a

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Speaker 1: fascinating tension. Fascinating to me at least, on the one hand,

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Speaker 1: there's a belief in the necessity, indeed the superiority of decentralization.

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Speaker 1: On the other hand, there's the reality that when things

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Speaker 1: hit the fan, which happens often, folks respond by seeking

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Speaker 1: a bailout or by demanding that someone, anyone, even a regulator,

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Speaker 1: hold frauds does accountable. In an industry so prone to

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Speaker 1: spectacular scams and expensive hacks, this tension is ever present.

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Speaker 1: Can you simultaneously reject all forms of centralized control and

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Speaker 1: then seek help from big centralized authorities in times of trouble.

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Speaker 1: For more on this, you'll hear from Bloomberg reporter Emily

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Speaker 1: Nicole m I'm Stacy Marie Ishmael, and this is Bloomberg Crypto,

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Speaker 1: a daily podcast from Bloomberg and I Heart Radio. For

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Speaker 1: more shows from I Heart Radio, visit the I Heart

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Speaker 1: Radio app, Apple Podcasts, or wherever you get your podcasts.

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Speaker 1: Email your questions, comments, or suggestions for the show to

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Speaker 1: Crypto at Bloomberg dot net, and you'll find us on

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Speaker 1: Twitter at Crypto. The supervising producer of Bloomberg Crypto is

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Speaker 1: Vicky very Galina. Our senior producer is Janet Babin. Our

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Speaker 1: producer is Sharon Burriro, associate producer is Ty Butler. Desta

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Speaker 1: wonder At is our engineer. Original music by Leo Sidrin,