Speaker 1: This is Bloomberg Crypto and Daily Bloomberg. I heard podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Thursday, September eight. When we talk about
Speaker 1: crypto winter on this show, we don't only mean the
Speaker 1: months long decline in prices of different coins and tokens,
Speaker 1: or the generally negative sentiment. We're also referring to actual
Speaker 1: organizational failures, crypto CEOs losing their jobs, and of course,
Speaker 1: bankruptcy filings. In July, two of the major crypto players,
Speaker 1: Voyager and Celsius, both to chill a bankruptcy. These filings
Speaker 1: have opened up something of a Pandora's box surrounding the
Speaker 1: interpretation of US bankruptcy law as it relates to crypto
Speaker 1: acid holders, lenders, even the courts themselves are navigating pretty
Speaker 1: uncharted legal waters, and whatever the courts decide now could
Speaker 1: set landmark precedents for billions of dollars worth of crypto.
Speaker 1: To tackle these important and complicated legal questions, I'm joined
Speaker 1: today by Adam Levitton. The meme of not your keys,
Speaker 1: not your coins has been around for quite some time.
Speaker 1: It's not as if this was a completely unknown risk
Speaker 1: in the cryptocurrency world. Adam is a professor at Georgetown
Speaker 1: Law and a principle at Gordion not Crypto Advisors. Professor,
Speaker 1: Welcome to the show. I'm so glad that you're here
Speaker 1: because in a weird I don't know if it was
Speaker 1: prescience or paranoia or what. But months and months ago,
Speaker 1: way back in the wilds of February, you wrote a
Speaker 1: blog post about what would happen if a crypto exchange
Speaker 1: filed for bankruptcy, and this was months before actual crypto
Speaker 1: companies started filing for bankruptcy. And one of the things
Speaker 1: that you said, essentially, if I were to summarize that post,
Speaker 1: is customers would get hosed in sort of the grand
Speaker 1: scheme of things. And I'd love for you to just
Speaker 1: elaborate a little more on what we're seeing in terms
Speaker 1: of companies like Voyager and Celsius and what folks should
Speaker 1: really be expecting in the months and years to come.
Speaker 1: The problem we have here is that there is not
Speaker 1: a lot of clarity about the nature of the legal
Speaker 1: relationship between customers of different types of crypto platforms. And
Speaker 1: we can call them exchanges for shorthand, but they all
Speaker 1: do somewhat different things have different functionalities, and there are
Speaker 1: a lot of different ways that relationship can be characterized.
Speaker 1: But at core, there's a question about whether the cryptocurrency
Speaker 1: that is held by the platform for the customers is
Speaker 1: that property of the customers or is it property of
Speaker 1: the platform. If it's property of the platform, then the
Speaker 1: customers are merely creditors in a bankruptcy. They have to
Speaker 1: stand their unsecured creditors, which means they have to stand
Speaker 1: in line with all of the other creditors, and they
Speaker 1: get basically a pro rated share of what what of
Speaker 1: what the assets that are available. On the other hand,
Speaker 1: if the cryptocurrency that is deposited with the platform remains
Speaker 1: property of the customers and it's just basically being held
Speaker 1: in trust or something by the platform for them, that
Speaker 1: then it's the customers property and the customers should get
Speaker 1: it back. They won't get it back on day one
Speaker 1: of the bankruptcy. And with you know that that's something
Speaker 1: that the voyager and Celsius customers can can tell you
Speaker 1: right already. Even if it turns out to be their property,
Speaker 1: they're not going to get it back immediately, but they
Speaker 1: should get it back, you know, within a few months,
Speaker 1: one would expect if it's their proper And that's the
Speaker 1: real question, what is this stuff? And there's probably not
Speaker 1: a one size fits all answer, because determining whether any
Speaker 1: particular customers assets, or whether the cryptocurrency that any particular
Speaker 1: customer deposited is the property of that customer or the
Speaker 1: property of the exchange is going to depend on some
Speaker 1: particular facts and circumstances, the terms of the user agreement
Speaker 1: that governed the relationship, for example, and we can get
Speaker 1: some twists and turns when the user agreement changes over time,
Speaker 1: and you might end up with different answers for different
Speaker 1: types of customers for the same exchange. So, for example,
Speaker 1: Celsius has several different types of customers, and it's got
Speaker 1: some custody customers, it's got earned customers, it's got customers
Speaker 1: who took out loans from Celsius, and then it's got
Speaker 1: another group called withdrawal customers. Celsius just filed emotion this
Speaker 1: week for opposing to release the cryptocurrency of a subset
Speaker 1: of the custody customers, but it hasn't made any such
Speaker 1: motion about any of the other groups of customers. And
Speaker 1: that seems to imply that Celsius thinks that at least
Speaker 1: the other groups of customers their coins are probably actually
Speaker 1: Celsius is property. That seems to be a position. So
Speaker 1: that motion that they filed is interesting for two reasons.
Speaker 1: The first is, as you note, it was their first
Speaker 1: kind of explicit declaration of like, Okay, these particular tokens
Speaker 1: we don't consider to be our property. But it does
Speaker 1: follow an earlier filing in July when they were pretty
Speaker 1: much like, oh, but everybody else's we totally do consider
Speaker 1: to be our property. I mean, I remember that was
Speaker 1: it was one of the first times that people who had,
Speaker 1: as you mentioned, the Urn accounts and another type of
Speaker 1: account they're called borrow accounts, were told by you know,
Speaker 1: Celsius's lawyers, Hey, you transferred the title of your coins
Speaker 1: to us. It's in this terms of service that you
Speaker 1: probably did not read, but you know, by that definition,
Speaker 1: these are hours and we're going to hold onto them.
Speaker 1: And I think if I were to summarize the reaction
Speaker 1: of various of those folks that would have been shocked up,
Speaker 1: pulled and gobsmacked to hear that these things that they
Speaker 1: thought was their crypto had been you know, claimed as
Speaker 1: it were, and is now subject to this distribution method
Speaker 1: that you've described. Should those folks have been surprised. On
Speaker 1: the one hand, the whole sort of meme of not
Speaker 1: your keys, not your coins has been around for quite
Speaker 1: some time. It's not as if this was a completely
Speaker 1: unknown risk in the cryptocurrency world. That said, I'm not
Speaker 1: sure how much your typical retail investor paid attention to
Speaker 1: that insider focus a risk focus. You know, it was
Speaker 1: a noable risk, but you'd have to know to go
Speaker 1: look for it that if you were not aware that
Speaker 1: this kind of risk could exist, and I'm not sure
Speaker 1: that you're you know, least sophisticated customer out there would
Speaker 1: have known that. So even if you read the agreement,
Speaker 1: you might not understand the implications. The bankruptcy rules on
Speaker 1: this stuff are really technical, and they're not something I
Speaker 1: would expect a lay person to understand. Most people are
Speaker 1: not themselves bankruptcy lawyers with what you're saying. No, unfortunately,
Speaker 1: not everyone's in the club. As a representative of the
Speaker 1: folks in this club, And given that you know, it
Speaker 1: sounds like you spend days, nights, and weekends pouring over
Speaker 1: the intricacies of these things. What are some of the
Speaker 1: other types of considerations that folks misunderstand? The bankruptcy process
Speaker 1: is not set up for dealing with the individual circumstances
Speaker 1: of creditors. If you're a creditor, it doesn't matter if
Speaker 1: you need the money for your kids college education or
Speaker 1: to take care of a six spouse. We trade. Bankruptcy
Speaker 1: law is going to treat vendors the same way as depositors,
Speaker 1: the same way as bond holders. They're just all creditors
Speaker 1: and bankruptcy losses. Look, there's some money that's owed at
Speaker 1: the end of the day, and everything gets reduced to
Speaker 1: dollars and cents. It's what are you owed? And we
Speaker 1: don't care why you're out it. It's just this is
Speaker 1: what your owed. At least that's the case in the
Speaker 1: corporate bankruptcy context. When you're dealing with an individual bankruptcy,
Speaker 1: the nature of the debt can affect things like can
Speaker 1: you get a discharge of your student loan, the drunk
Speaker 1: driving liability, things like that. It's different, But for corporate
Speaker 1: bankruptcy there's really no way to make the system work.
Speaker 1: Though if we try and do, everyone's with their own
Speaker 1: special pleading because the nature of bankruptcies, there's not enough
Speaker 1: assets to go around to satisfy all the creditors, and
Speaker 1: everyone's going to have to bear some part of that loss.
Speaker 1: It's a loss spreading device in some way. There's no
Speaker 1: easy way to say, well, this customer is more deserving
Speaker 1: than this one, and to rank them. That's an impossible exercise.
Speaker 1: I think. In addition to what you're describing around the
Speaker 1: fact that folks should be prepared to not be made
Speaker 1: whole as it were, it also sounds like this is
Speaker 1: going to be a fairly drawn out process. Yes, so
Speaker 1: there's kind of to two dimensions. One is how much
Speaker 1: are you going to get back? And in crypto there's
Speaker 1: a subsidiary question of what form are you going to
Speaker 1: get distribution? And it's going to be in cash, is
Speaker 1: it going to be in crypto? Is it going to
Speaker 1: be an equity of a reorganized company? Is going to
Speaker 1: be the same kind of crypto you put in right?
Speaker 1: Maybe you're getting a new token then you may or
Speaker 1: may not think as valuable. There's a question of what
Speaker 1: you're going to get paid, but there's also a question
Speaker 1: of when and when can matter just as much as what,
Speaker 1: because you're not getting interest in the interim. So if
Speaker 1: it takes three years for distribution, or take the case
Speaker 1: of Mountain Ox where it's you know, like a decade
Speaker 1: for a distribution and there's no interest to cruing, that
Speaker 1: is actually affecting the value of the distribution you're getting.
Speaker 1: Coming up more from Professor Adam Levitton about how crypto
Speaker 1: bankruptcy is like Celsia's Voyager and three hours capital could
Speaker 1: shape bankruptcy law. We'll be right back. I want to
Speaker 1: go back to something that you said about employees. I
Speaker 1: remember there was, you know, a headline coming at the
Speaker 1: end of August that Voyager, who like Selsia's, filed for
Speaker 1: bankruptcy and July was arguing that they should be allowed
Speaker 1: to pay out millions of dollars I think it was
Speaker 1: sixteen million dollars worth of retention bonuses two employees, because
Speaker 1: they were like, if we don't pay people these bonuses,
Speaker 1: they're all going to leave and then the outcomes are
Speaker 1: going to be even worse for the people on the
Speaker 1: other side of this situation. And again folks were like,
Speaker 1: we don't understand, how can you be paying bonuses. You're
Speaker 1: cutting into you know, my claims on voyage. Could you
Speaker 1: give a sense of whether these kinds of payments, these
Speaker 1: kinds of transactions are like typical in bankruptcies and corporates. Sure,
Speaker 1: it actually is not to say that they're not controversial.
Speaker 1: So what I was saying before that you've got to
Speaker 1: distinguish between two things. One is employees who were owed
Speaker 1: money for work they did before the bankruptcy. That's very
Speaker 1: clear that up to a limited amount that gets prioritized.
Speaker 1: And the reason why we do that is we don't
Speaker 1: want employees running right before the bankruptcy because if they
Speaker 1: thought that they wouldn't be able to get paid, they'd
Speaker 1: leave the sinking ship. And we hope that maybe they
Speaker 1: stick around, maybe you know, maybe they keep the ship afloat.
Speaker 1: This issue is about, once there's been a bankruptcy filing,
Speaker 1: can you pay the employees extra to stick around? And
Speaker 1: the bankruptcy code makes it very difficult to do that
Speaker 1: for at least your senior most type of employees, for
Speaker 1: your kind of line employees, you absolutely can. For very
Speaker 1: senior employees, pretty much, they have to show that they
Speaker 1: have an equally good job offer somewhere else, so they
Speaker 1: have to go out and shop the resume it's it's impossible.
Speaker 1: There are two standard workarounds for this. One is to
Speaker 1: pay out retention bonuses just before the bankruptcy filing, and
Speaker 1: that looks really bad, but it happens sometimes. Toys r Us,
Speaker 1: for example, did this. Um. The other move is what's
Speaker 1: called a key employee incentive plan, where the debtor sets
Speaker 1: certain performance targets and if those targets are met, then
Speaker 1: the employees get a bonus. Now, you can have an
Speaker 1: incentive plan where you set the goals too low, where're
Speaker 1: you know, just they're obviously going to be met, and
Speaker 1: that ends up working like a disguised retention payment as
Speaker 1: opposed to an incentive payment. These things are done frequently,
Speaker 1: they are, you know, not without controversy. Whether they need
Speaker 1: to be done in any particular case to retain employees,
Speaker 1: that's that's going to depend on the facts on circumstances, right.
Speaker 1: So one of the arguments with Voyager is, hey, right now,
Speaker 1: it's not as if this is a great time to
Speaker 1: go out and look for a job in the crypto industry.
Speaker 1: There's another big bankruptcy affected crypto company, or I would
Speaker 1: say I should say crypto hedge fund. Three arrows Capital
Speaker 1: and these folks are complicated. They are facing you know,
Speaker 1: bankruptcy claims in multiple jurisdictions. You know, like the original
Speaker 1: order for liquidation of assets was filed out of the
Speaker 1: British Virgin Islands. The two founders of Three Arrows, Susu
Speaker 1: and Kyle Davies, are arguing that their Singapore assets should
Speaker 1: be off limits and it's only like this b v
Speaker 1: I shell company that should be affected. They are in
Speaker 1: a fairly public spect with the courts up point to
Speaker 1: liquid Data's, you know, the folks who are assigned to
Speaker 1: kind of resolve these issues. It reminds me of a
Speaker 1: very ugly, very public divorce where you know, the folks
Speaker 1: on either side of this are in theory they have
Speaker 1: aligned incentives around distribution. In practice that's not exactly playing
Speaker 1: out that way. The biggest problem in Three Arrows is
Speaker 1: that most no one knows where most of the assets are.
Speaker 1: So you know, the last I saw was that the
Speaker 1: liquidators that managed to find about forty million in assets,
Speaker 1: you know, and half completed yacht or something with that.
Speaker 1: Unless they can recover substantially more assets, this is not
Speaker 1: really a meaningful fight because the forty million that they
Speaker 1: found so far, I guarantee you every one of those
Speaker 1: dollars is going to go to pay professionals fees. Not
Speaker 1: not a single one of those forty million dollars will
Speaker 1: ever be seen by a creditor. I'm so glad you
Speaker 1: mentioned that, because it does seem like there is a
Speaker 1: particular category of user, as it were in bank or
Speaker 1: see filings always makes money. It feels like it's lawyers.
Speaker 1: Well yeah, and you know, and I'm obviously a member
Speaker 1: of that tribe. Here's here's here's the way that this
Speaker 1: I think it can be very credibly defended. You have
Speaker 1: to pay the grave diggers. If you don't pay them,
Speaker 1: no one diggs the grave. Now, the problem that exists
Speaker 1: in bankruptcy is you don't have normal kind of cost controls. Normally,
Speaker 1: if a company has legal counsel and legal counsels running
Speaker 1: the bills up too high, the company will talk to them,
Speaker 1: maybe get them to knock down the bills, or will
Speaker 1: take the business elsewhere. On the debtor side, you pretty
Speaker 1: much have a captive audience, right, The debtor is not
Speaker 1: captive client. It's extremely rare for a debtor to switch
Speaker 1: counsel mid case and part it's not the debtor's money.
Speaker 1: At this point, the debtor is playing with the crew
Speaker 1: with predators money. In theory, there are supposed to be
Speaker 1: some checks, right, so the fees of the debtor's professors
Speaker 1: and the professionals of any official committee, they have to
Speaker 1: submit those their fee applications to the court for approval.
Speaker 1: Something the U S Trustees Office does regularly is to
Speaker 1: challenge fee applications. Bankruptcies are expensive, There's no there's no
Speaker 1: way around it. I would not be shocked if you
Speaker 1: see professionals fees that total, you know, over a hundred million.
Speaker 1: Voyager is I think probably the most straightforward of cases.
Speaker 1: Voyager just had like ridiculously bad risk management. It seems
Speaker 1: that they know to have a single borrow or exposure
Speaker 1: of the size that they did with Three Arrows Capital
Speaker 1: is like beyond shocking, right, But that's that was kind
Speaker 1: of Voyagers problem, right, that they made a bad loaning
Speaker 1: Three Ars Capital. But for that, Voyagers seems like it
Speaker 1: was doing okay. Celsius seems more complicated. It's not entirely
Speaker 1: clear what you know, there's some different stories of what
Speaker 1: went wrong with Celsius and Three Arrows Capital. Is you know,
Speaker 1: the hottest mess you can find. You know, what you
Speaker 1: see think here is that there's really tremendous variety and
Speaker 1: why companies end up in bankruptcy and how these bankruptcies
Speaker 1: are going to play out. Voyager, there's gonna be some litigation,
Speaker 1: you know, against presumably all of the promoters of Voyager
Speaker 1: and anyone else that you can put a target on.
Speaker 1: Essentially that's typical, but it doesn't have the complications that
Speaker 1: Celsius has where there you know, there's a lot of
Speaker 1: anger directed at Alex Maschinski for example, But massinsky situation
Speaker 1: seems very different than Kyle and Sue. You can't expect
Speaker 1: to see kind of cookie cutter results. These cases are
Speaker 1: probably going to play out differently. I would expect Voyager
Speaker 1: will be the first one resolved, and that three Arrows
Speaker 1: ten years from now they might still be trying to
Speaker 1: recover assets and three Arrows, Wow, I'm not sure that's
Speaker 1: an optimistic note. On that note, well, thank you so
Speaker 1: much for taking this. I really appreciate having you on
Speaker 1: the show. Okay, my pleasure. On the next episode of
Speaker 1: Bloomberg Crypto, the companies that mind bitcoin are starting to
Speaker 1: show signs of financial distress. As the ongoing crypto winter
Speaker 1: means that bitcoin prices are hovering well below their all
Speaker 1: time highs. We'll hear more from Bloomberg, reported David Pan
Speaker 1: and from Amanda Fabriano, head of Mining at Galaxy. This
Speaker 1: is Bloomberg Crypto at Daily podcast from Bloomberg and I
Speaker 1: Heart Radio. For more shows from I heeart Radio, visit
Speaker 1: the I Heart Radio app, Apple Podcasts, or wherever you
Speaker 1: get your podcasts. Send us your comments, questions or suggestions
Speaker 1: for the show to Crypto at Bloomberg dot net or
Speaker 1: find us on Twitter. We're at Crypto. The supervising producer
Speaker 1: of Bloomberg Crypto is Vicky Vergalina. Our senior producer is
Speaker 1: Janet Babin. Our producer is Sharon Berriro Associate producer is
Speaker 1: Thi Butler. Blake Maples is our engineer. Original music by
Speaker 1: Leo Sidrin. I'm Stacy Marie Schml. We'll be back tomorrow
Speaker 1: at