WEBVTT - It's Your Crypto. Until The Platform Goes Bust

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<v Speaker 1>This is Bloomberg Crypto and Daily Bloomberg. I heard podcast,

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<v Speaker 1>and I'm Stacy Marie Ishmael, Managing editor of Crypto for

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<v Speaker 1>Bloomberg News. It's Thursday, September eight. When we talk about

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<v Speaker 1>crypto winter on this show, we don't only mean the

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<v Speaker 1>months long decline in prices of different coins and tokens,

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<v Speaker 1>or the generally negative sentiment. We're also referring to actual

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<v Speaker 1>organizational failures, crypto CEOs losing their jobs, and of course,

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<v Speaker 1>bankruptcy filings. In July, two of the major crypto players,

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<v Speaker 1>Voyager and Celsius, both to chill a bankruptcy. These filings

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<v Speaker 1>have opened up something of a Pandora's box surrounding the

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<v Speaker 1>interpretation of US bankruptcy law as it relates to crypto

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<v Speaker 1>acid holders, lenders, even the courts themselves are navigating pretty

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<v Speaker 1>uncharted legal waters, and whatever the courts decide now could

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<v Speaker 1>set landmark precedents for billions of dollars worth of crypto.

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<v Speaker 1>To tackle these important and complicated legal questions, I'm joined

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<v Speaker 1>today by Adam Levitton. The meme of not your keys,

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<v Speaker 1>not your coins has been around for quite some time.

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<v Speaker 1>It's not as if this was a completely unknown risk

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<v Speaker 1>in the cryptocurrency world. Adam is a professor at Georgetown

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<v Speaker 1>Law and a principle at Gordion not Crypto Advisors. Professor,

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<v Speaker 1>Welcome to the show. I'm so glad that you're here

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<v Speaker 1>because in a weird I don't know if it was

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<v Speaker 1>prescience or paranoia or what. But months and months ago,

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<v Speaker 1>way back in the wilds of February, you wrote a

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<v Speaker 1>blog post about what would happen if a crypto exchange

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<v Speaker 1>filed for bankruptcy, and this was months before actual crypto

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<v Speaker 1>companies started filing for bankruptcy. And one of the things

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<v Speaker 1>that you said, essentially, if I were to summarize that post,

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<v Speaker 1>is customers would get hosed in sort of the grand

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<v Speaker 1>scheme of things. And I'd love for you to just

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<v Speaker 1>elaborate a little more on what we're seeing in terms

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<v Speaker 1>of companies like Voyager and Celsius and what folks should

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<v Speaker 1>really be expecting in the months and years to come.

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<v Speaker 1>The problem we have here is that there is not

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<v Speaker 1>a lot of clarity about the nature of the legal

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<v Speaker 1>relationship between customers of different types of crypto platforms. And

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<v Speaker 1>we can call them exchanges for shorthand, but they all

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<v Speaker 1>do somewhat different things have different functionalities, and there are

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<v Speaker 1>a lot of different ways that relationship can be characterized.

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<v Speaker 1>But at core, there's a question about whether the cryptocurrency

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<v Speaker 1>that is held by the platform for the customers is

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<v Speaker 1>that property of the customers or is it property of

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<v Speaker 1>the platform. If it's property of the platform, then the

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<v Speaker 1>customers are merely creditors in a bankruptcy. They have to

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<v Speaker 1>stand their unsecured creditors, which means they have to stand

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<v Speaker 1>in line with all of the other creditors, and they

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<v Speaker 1>get basically a pro rated share of what what of

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<v Speaker 1>what the assets that are available. On the other hand,

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<v Speaker 1>if the cryptocurrency that is deposited with the platform remains

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<v Speaker 1>property of the customers and it's just basically being held

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<v Speaker 1>in trust or something by the platform for them, that

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<v Speaker 1>then it's the customers property and the customers should get

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<v Speaker 1>it back. They won't get it back on day one

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<v Speaker 1>of the bankruptcy. And with you know that that's something

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<v Speaker 1>that the voyager and Celsius customers can can tell you

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<v Speaker 1>right already. Even if it turns out to be their property,

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<v Speaker 1>they're not going to get it back immediately, but they

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<v Speaker 1>should get it back, you know, within a few months,

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<v Speaker 1>one would expect if it's their proper And that's the

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<v Speaker 1>real question, what is this stuff? And there's probably not

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<v Speaker 1>a one size fits all answer, because determining whether any

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<v Speaker 1>particular customers assets, or whether the cryptocurrency that any particular

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<v Speaker 1>customer deposited is the property of that customer or the

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<v Speaker 1>property of the exchange is going to depend on some

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<v Speaker 1>particular facts and circumstances, the terms of the user agreement

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<v Speaker 1>that governed the relationship, for example, and we can get

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<v Speaker 1>some twists and turns when the user agreement changes over time,

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<v Speaker 1>and you might end up with different answers for different

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<v Speaker 1>types of customers for the same exchange. So, for example,

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<v Speaker 1>Celsius has several different types of customers, and it's got

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<v Speaker 1>some custody customers, it's got earned customers, it's got customers

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<v Speaker 1>who took out loans from Celsius, and then it's got

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<v Speaker 1>another group called withdrawal customers. Celsius just filed emotion this

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<v Speaker 1>week for opposing to release the cryptocurrency of a subset

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<v Speaker 1>of the custody customers, but it hasn't made any such

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<v Speaker 1>motion about any of the other groups of customers. And

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<v Speaker 1>that seems to imply that Celsius thinks that at least

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<v Speaker 1>the other groups of customers their coins are probably actually

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<v Speaker 1>Celsius is property. That seems to be a position. So

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<v Speaker 1>that motion that they filed is interesting for two reasons.

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<v Speaker 1>The first is, as you note, it was their first

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<v Speaker 1>kind of explicit declaration of like, Okay, these particular tokens

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<v Speaker 1>we don't consider to be our property. But it does

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<v Speaker 1>follow an earlier filing in July when they were pretty

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<v Speaker 1>much like, oh, but everybody else's we totally do consider

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<v Speaker 1>to be our property. I mean, I remember that was

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<v Speaker 1>it was one of the first times that people who had,

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<v Speaker 1>as you mentioned, the Urn accounts and another type of

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<v Speaker 1>account they're called borrow accounts, were told by you know,

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<v Speaker 1>Celsius's lawyers, Hey, you transferred the title of your coins

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<v Speaker 1>to us. It's in this terms of service that you

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<v Speaker 1>probably did not read, but you know, by that definition,

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<v Speaker 1>these are hours and we're going to hold onto them.

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<v Speaker 1>And I think if I were to summarize the reaction

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<v Speaker 1>of various of those folks that would have been shocked up,

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<v Speaker 1>pulled and gobsmacked to hear that these things that they

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<v Speaker 1>thought was their crypto had been you know, claimed as

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<v Speaker 1>it were, and is now subject to this distribution method

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<v Speaker 1>that you've described. Should those folks have been surprised. On

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<v Speaker 1>the one hand, the whole sort of meme of not

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<v Speaker 1>your keys, not your coins has been around for quite

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<v Speaker 1>some time. It's not as if this was a completely

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<v Speaker 1>unknown risk in the cryptocurrency world. That said, I'm not

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<v Speaker 1>sure how much your typical retail investor paid attention to

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<v Speaker 1>that insider focus a risk focus. You know, it was

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<v Speaker 1>a noable risk, but you'd have to know to go

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<v Speaker 1>look for it that if you were not aware that

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<v Speaker 1>this kind of risk could exist, and I'm not sure

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<v Speaker 1>that you're you know, least sophisticated customer out there would

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<v Speaker 1>have known that. So even if you read the agreement,

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<v Speaker 1>you might not understand the implications. The bankruptcy rules on

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<v Speaker 1>this stuff are really technical, and they're not something I

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<v Speaker 1>would expect a lay person to understand. Most people are

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<v Speaker 1>not themselves bankruptcy lawyers with what you're saying. No, unfortunately,

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<v Speaker 1>not everyone's in the club. As a representative of the

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<v Speaker 1>folks in this club, And given that you know, it

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<v Speaker 1>sounds like you spend days, nights, and weekends pouring over

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<v Speaker 1>the intricacies of these things. What are some of the

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<v Speaker 1>other types of considerations that folks misunderstand? The bankruptcy process

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<v Speaker 1>is not set up for dealing with the individual circumstances

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<v Speaker 1>of creditors. If you're a creditor, it doesn't matter if

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<v Speaker 1>you need the money for your kids college education or

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<v Speaker 1>to take care of a six spouse. We trade. Bankruptcy

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<v Speaker 1>law is going to treat vendors the same way as depositors,

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<v Speaker 1>the same way as bond holders. They're just all creditors

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<v Speaker 1>and bankruptcy losses. Look, there's some money that's owed at

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<v Speaker 1>the end of the day, and everything gets reduced to

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<v Speaker 1>dollars and cents. It's what are you owed? And we

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<v Speaker 1>don't care why you're out it. It's just this is

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<v Speaker 1>what your owed. At least that's the case in the

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<v Speaker 1>corporate bankruptcy context. When you're dealing with an individual bankruptcy,

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<v Speaker 1>the nature of the debt can affect things like can

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<v Speaker 1>you get a discharge of your student loan, the drunk

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<v Speaker 1>driving liability, things like that. It's different, But for corporate

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<v Speaker 1>bankruptcy there's really no way to make the system work.

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<v Speaker 1>Though if we try and do, everyone's with their own

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<v Speaker 1>special pleading because the nature of bankruptcies, there's not enough

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<v Speaker 1>assets to go around to satisfy all the creditors, and

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<v Speaker 1>everyone's going to have to bear some part of that loss.

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<v Speaker 1>It's a loss spreading device in some way. There's no

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<v Speaker 1>easy way to say, well, this customer is more deserving

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<v Speaker 1>than this one, and to rank them. That's an impossible exercise.

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<v Speaker 1>I think. In addition to what you're describing around the

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<v Speaker 1>fact that folks should be prepared to not be made

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<v Speaker 1>whole as it were, it also sounds like this is

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<v Speaker 1>going to be a fairly drawn out process. Yes, so

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<v Speaker 1>there's kind of to two dimensions. One is how much

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<v Speaker 1>are you going to get back? And in crypto there's

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<v Speaker 1>a subsidiary question of what form are you going to

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<v Speaker 1>get distribution? And it's going to be in cash, is

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<v Speaker 1>it going to be in crypto? Is it going to

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<v Speaker 1>be an equity of a reorganized company? Is going to

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<v Speaker 1>be the same kind of crypto you put in right?

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<v Speaker 1>Maybe you're getting a new token then you may or

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<v Speaker 1>may not think as valuable. There's a question of what

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<v Speaker 1>you're going to get paid, but there's also a question

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<v Speaker 1>of when and when can matter just as much as what,

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<v Speaker 1>because you're not getting interest in the interim. So if

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<v Speaker 1>it takes three years for distribution, or take the case

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<v Speaker 1>of Mountain Ox where it's you know, like a decade

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<v Speaker 1>for a distribution and there's no interest to cruing, that

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<v Speaker 1>is actually affecting the value of the distribution you're getting.

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<v Speaker 1>Coming up more from Professor Adam Levitton about how crypto

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<v Speaker 1>bankruptcy is like Celsia's Voyager and three hours capital could

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<v Speaker 1>shape bankruptcy law. We'll be right back. I want to

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<v Speaker 1>go back to something that you said about employees. I

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<v Speaker 1>remember there was, you know, a headline coming at the

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<v Speaker 1>end of August that Voyager, who like Selsia's, filed for

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<v Speaker 1>bankruptcy and July was arguing that they should be allowed

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<v Speaker 1>to pay out millions of dollars I think it was

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<v Speaker 1>sixteen million dollars worth of retention bonuses two employees, because

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<v Speaker 1>they were like, if we don't pay people these bonuses,

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<v Speaker 1>they're all going to leave and then the outcomes are

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<v Speaker 1>going to be even worse for the people on the

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<v Speaker 1>other side of this situation. And again folks were like,

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<v Speaker 1>we don't understand, how can you be paying bonuses. You're

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<v Speaker 1>cutting into you know, my claims on voyage. Could you

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<v Speaker 1>give a sense of whether these kinds of payments, these

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<v Speaker 1>kinds of transactions are like typical in bankruptcies and corporates. Sure,

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<v Speaker 1>it actually is not to say that they're not controversial.

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<v Speaker 1>So what I was saying before that you've got to

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<v Speaker 1>distinguish between two things. One is employees who were owed

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<v Speaker 1>money for work they did before the bankruptcy. That's very

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<v Speaker 1>clear that up to a limited amount that gets prioritized.

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<v Speaker 1>And the reason why we do that is we don't

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<v Speaker 1>want employees running right before the bankruptcy because if they

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<v Speaker 1>thought that they wouldn't be able to get paid, they'd

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<v Speaker 1>leave the sinking ship. And we hope that maybe they

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<v Speaker 1>stick around, maybe you know, maybe they keep the ship afloat.

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<v Speaker 1>This issue is about, once there's been a bankruptcy filing,

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<v Speaker 1>can you pay the employees extra to stick around? And

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<v Speaker 1>the bankruptcy code makes it very difficult to do that

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<v Speaker 1>for at least your senior most type of employees, for

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<v Speaker 1>your kind of line employees, you absolutely can. For very

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<v Speaker 1>senior employees, pretty much, they have to show that they

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<v Speaker 1>have an equally good job offer somewhere else, so they

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<v Speaker 1>have to go out and shop the resume it's it's impossible.

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<v Speaker 1>There are two standard workarounds for this. One is to

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<v Speaker 1>pay out retention bonuses just before the bankruptcy filing, and

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<v Speaker 1>that looks really bad, but it happens sometimes. Toys r Us,

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<v Speaker 1>for example, did this. Um. The other move is what's

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<v Speaker 1>called a key employee incentive plan, where the debtor sets

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<v Speaker 1>certain performance targets and if those targets are met, then

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<v Speaker 1>the employees get a bonus. Now, you can have an

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<v Speaker 1>incentive plan where you set the goals too low, where're

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<v Speaker 1>you know, just they're obviously going to be met, and

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<v Speaker 1>that ends up working like a disguised retention payment as

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<v Speaker 1>opposed to an incentive payment. These things are done frequently,

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<v Speaker 1>they are, you know, not without controversy. Whether they need

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<v Speaker 1>to be done in any particular case to retain employees,

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<v Speaker 1>that's that's going to depend on the facts on circumstances, right.

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<v Speaker 1>So one of the arguments with Voyager is, hey, right now,

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<v Speaker 1>it's not as if this is a great time to

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<v Speaker 1>go out and look for a job in the crypto industry.

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<v Speaker 1>There's another big bankruptcy affected crypto company, or I would

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<v Speaker 1>say I should say crypto hedge fund. Three arrows Capital

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<v Speaker 1>and these folks are complicated. They are facing you know,

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<v Speaker 1>bankruptcy claims in multiple jurisdictions. You know, like the original

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<v Speaker 1>order for liquidation of assets was filed out of the

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<v Speaker 1>British Virgin Islands. The two founders of Three Arrows, Susu

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<v Speaker 1>and Kyle Davies, are arguing that their Singapore assets should

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<v Speaker 1>be off limits and it's only like this b v

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<v Speaker 1>I shell company that should be affected. They are in

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<v Speaker 1>a fairly public spect with the courts up point to

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<v Speaker 1>liquid Data's, you know, the folks who are assigned to

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<v Speaker 1>kind of resolve these issues. It reminds me of a

0:14:05.440 --> 0:14:09.400
<v Speaker 1>very ugly, very public divorce where you know, the folks

0:14:09.400 --> 0:14:12.760
<v Speaker 1>on either side of this are in theory they have

0:14:12.840 --> 0:14:17.880
<v Speaker 1>aligned incentives around distribution. In practice that's not exactly playing

0:14:17.880 --> 0:14:21.600
<v Speaker 1>out that way. The biggest problem in Three Arrows is

0:14:21.640 --> 0:14:24.600
<v Speaker 1>that most no one knows where most of the assets are.

0:14:26.080 --> 0:14:27.840
<v Speaker 1>So you know, the last I saw was that the

0:14:27.880 --> 0:14:31.120
<v Speaker 1>liquidators that managed to find about forty million in assets,

0:14:31.440 --> 0:14:34.720
<v Speaker 1>you know, and half completed yacht or something with that.

0:14:34.920 --> 0:14:38.960
<v Speaker 1>Unless they can recover substantially more assets, this is not

0:14:39.120 --> 0:14:41.800
<v Speaker 1>really a meaningful fight because the forty million that they

0:14:41.920 --> 0:14:44.720
<v Speaker 1>found so far, I guarantee you every one of those

0:14:44.720 --> 0:14:48.040
<v Speaker 1>dollars is going to go to pay professionals fees. Not

0:14:48.040 --> 0:14:50.120
<v Speaker 1>not a single one of those forty million dollars will

0:14:50.120 --> 0:14:52.240
<v Speaker 1>ever be seen by a creditor. I'm so glad you

0:14:52.280 --> 0:14:54.640
<v Speaker 1>mentioned that, because it does seem like there is a

0:14:54.680 --> 0:14:59.960
<v Speaker 1>particular category of user, as it were in bank or

0:15:00.000 --> 0:15:02.960
<v Speaker 1>see filings always makes money. It feels like it's lawyers.

0:15:03.840 --> 0:15:08.040
<v Speaker 1>Well yeah, and you know, and I'm obviously a member

0:15:08.040 --> 0:15:11.560
<v Speaker 1>of that tribe. Here's here's here's the way that this

0:15:12.000 --> 0:15:15.680
<v Speaker 1>I think it can be very credibly defended. You have

0:15:15.760 --> 0:15:17.760
<v Speaker 1>to pay the grave diggers. If you don't pay them,

0:15:17.920 --> 0:15:22.800
<v Speaker 1>no one diggs the grave. Now, the problem that exists

0:15:22.840 --> 0:15:27.320
<v Speaker 1>in bankruptcy is you don't have normal kind of cost controls. Normally,

0:15:27.360 --> 0:15:30.120
<v Speaker 1>if a company has legal counsel and legal counsels running

0:15:30.120 --> 0:15:32.400
<v Speaker 1>the bills up too high, the company will talk to them,

0:15:32.520 --> 0:15:34.280
<v Speaker 1>maybe get them to knock down the bills, or will

0:15:34.360 --> 0:15:37.560
<v Speaker 1>take the business elsewhere. On the debtor side, you pretty

0:15:37.640 --> 0:15:40.880
<v Speaker 1>much have a captive audience, right, The debtor is not

0:15:41.880 --> 0:15:46.400
<v Speaker 1>captive client. It's extremely rare for a debtor to switch

0:15:46.640 --> 0:15:50.240
<v Speaker 1>counsel mid case and part it's not the debtor's money.

0:15:50.240 --> 0:15:52.120
<v Speaker 1>At this point, the debtor is playing with the crew

0:15:52.240 --> 0:15:55.880
<v Speaker 1>with predators money. In theory, there are supposed to be

0:15:55.920 --> 0:16:00.360
<v Speaker 1>some checks, right, so the fees of the debtor's professors

0:16:00.440 --> 0:16:02.960
<v Speaker 1>and the professionals of any official committee, they have to

0:16:02.960 --> 0:16:06.600
<v Speaker 1>submit those their fee applications to the court for approval.

0:16:07.240 --> 0:16:09.800
<v Speaker 1>Something the U S Trustees Office does regularly is to

0:16:09.920 --> 0:16:14.520
<v Speaker 1>challenge fee applications. Bankruptcies are expensive, There's no there's no

0:16:14.560 --> 0:16:16.640
<v Speaker 1>way around it. I would not be shocked if you

0:16:16.680 --> 0:16:20.040
<v Speaker 1>see professionals fees that total, you know, over a hundred million.

0:16:20.400 --> 0:16:23.840
<v Speaker 1>Voyager is I think probably the most straightforward of cases.

0:16:24.320 --> 0:16:29.560
<v Speaker 1>Voyager just had like ridiculously bad risk management. It seems

0:16:29.600 --> 0:16:32.400
<v Speaker 1>that they know to have a single borrow or exposure

0:16:32.640 --> 0:16:34.960
<v Speaker 1>of the size that they did with Three Arrows Capital

0:16:35.200 --> 0:16:38.760
<v Speaker 1>is like beyond shocking, right, But that's that was kind

0:16:38.760 --> 0:16:41.160
<v Speaker 1>of Voyagers problem, right, that they made a bad loaning

0:16:41.160 --> 0:16:44.000
<v Speaker 1>Three Ars Capital. But for that, Voyagers seems like it

0:16:44.040 --> 0:16:49.640
<v Speaker 1>was doing okay. Celsius seems more complicated. It's not entirely

0:16:49.680 --> 0:16:52.760
<v Speaker 1>clear what you know, there's some different stories of what

0:16:52.800 --> 0:16:57.120
<v Speaker 1>went wrong with Celsius and Three Arrows Capital. Is you know,

0:16:57.160 --> 0:16:59.600
<v Speaker 1>the hottest mess you can find. You know, what you

0:16:59.640 --> 0:17:02.240
<v Speaker 1>see think here is that there's really tremendous variety and

0:17:02.320 --> 0:17:05.560
<v Speaker 1>why companies end up in bankruptcy and how these bankruptcies

0:17:05.560 --> 0:17:08.520
<v Speaker 1>are going to play out. Voyager, there's gonna be some litigation,

0:17:08.720 --> 0:17:12.680
<v Speaker 1>you know, against presumably all of the promoters of Voyager

0:17:13.359 --> 0:17:15.560
<v Speaker 1>and anyone else that you can put a target on.

0:17:15.720 --> 0:17:20.000
<v Speaker 1>Essentially that's typical, but it doesn't have the complications that

0:17:20.240 --> 0:17:23.240
<v Speaker 1>Celsius has where there you know, there's a lot of

0:17:23.280 --> 0:17:28.640
<v Speaker 1>anger directed at Alex Maschinski for example, But massinsky situation

0:17:28.680 --> 0:17:32.560
<v Speaker 1>seems very different than Kyle and Sue. You can't expect

0:17:32.560 --> 0:17:35.160
<v Speaker 1>to see kind of cookie cutter results. These cases are

0:17:35.160 --> 0:17:37.879
<v Speaker 1>probably going to play out differently. I would expect Voyager

0:17:37.920 --> 0:17:41.040
<v Speaker 1>will be the first one resolved, and that three Arrows

0:17:41.640 --> 0:17:44.240
<v Speaker 1>ten years from now they might still be trying to

0:17:44.280 --> 0:17:48.760
<v Speaker 1>recover assets and three Arrows, Wow, I'm not sure that's

0:17:48.760 --> 0:17:53.840
<v Speaker 1>an optimistic note. On that note, well, thank you so

0:17:53.920 --> 0:17:55.960
<v Speaker 1>much for taking this. I really appreciate having you on

0:17:55.960 --> 0:18:02.080
<v Speaker 1>the show. Okay, my pleasure. On the next episode of

0:18:02.080 --> 0:18:05.359
<v Speaker 1>Bloomberg Crypto, the companies that mind bitcoin are starting to

0:18:05.400 --> 0:18:09.399
<v Speaker 1>show signs of financial distress. As the ongoing crypto winter

0:18:09.720 --> 0:18:12.640
<v Speaker 1>means that bitcoin prices are hovering well below their all

0:18:12.720 --> 0:18:16.040
<v Speaker 1>time highs. We'll hear more from Bloomberg, reported David Pan

0:18:16.560 --> 0:18:21.600
<v Speaker 1>and from Amanda Fabriano, head of Mining at Galaxy. This

0:18:21.680 --> 0:18:24.720
<v Speaker 1>is Bloomberg Crypto at Daily podcast from Bloomberg and I

0:18:24.800 --> 0:18:28.040
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<v Speaker 1>get your podcasts. Send us your comments, questions or suggestions

0:18:35.200 --> 0:18:38.199
<v Speaker 1>for the show to Crypto at Bloomberg dot net or

0:18:38.240 --> 0:18:42.760
<v Speaker 1>find us on Twitter. We're at Crypto. The supervising producer

0:18:42.760 --> 0:18:46.280
<v Speaker 1>of Bloomberg Crypto is Vicky Vergalina. Our senior producer is

0:18:46.359 --> 0:18:51.040
<v Speaker 1>Janet Babin. Our producer is Sharon Berriro Associate producer is

0:18:51.080 --> 0:18:55.399
<v Speaker 1>Thi Butler. Blake Maples is our engineer. Original music by

0:18:55.480 --> 0:18:59.120
<v Speaker 1>Leo Sidrin. I'm Stacy Marie Schml. We'll be back tomorrow

0:19:03.040 --> 0:19:03.399
<v Speaker 1>at