WEBVTT - Making Money On Crypto Bankruptcies

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,

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<v Speaker 1>and I'm annea Bloomberg Senior Crypto editor in today for

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<v Speaker 1>Stacy Marie Ishmael. It's Tuesday, October eighteenth. Bankruptcies can be

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<v Speaker 1>chaotic times for companies and for their creditors. Investors, vendors,

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<v Speaker 1>and former customers often end up jostling in court to

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<v Speaker 1>get their share of what they lost from what remains

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<v Speaker 1>of the firm. In the crypto space, bankruptcies can bring

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<v Speaker 1>even more questions. Some restructuring lawyers say that the US

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<v Speaker 1>Bankruptcy Code still does not adequately address how to handle

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<v Speaker 1>crypto assets. But just like other bankruptcy cases, there will

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<v Speaker 1>be winners and losers to explain what happens to crypto

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<v Speaker 1>assets during these times. I'm joined by bloom reporter Justina Lee. Crypto,

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<v Speaker 1>as we all know, is a lot more volatile than

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<v Speaker 1>most assets that the law typically applies to, and Thomas Brazil,

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<v Speaker 1>the founder of five oh seven Capital. There will be

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<v Speaker 1>definitely more dominoes to fall in the crypto space and

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<v Speaker 1>filings questions like how these firms will deal with it

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<v Speaker 1>the firm by bankruptcy claims and other types of distressed

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<v Speaker 1>assets from people who would rather receive funds earlier, even

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<v Speaker 1>at a discount. Hi, Justina and Thomas, thank you for

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<v Speaker 1>joining me today. Why did you reach out to Thomas

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<v Speaker 1>at first for your story? What's what's going on in crypto? Um?

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<v Speaker 1>There seemed to have been a lot of bankruptcies as

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<v Speaker 1>of late. Yeah, exactly, and uh a crypto fund manager

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<v Speaker 1>introduced me to Thomas, saying that there would be a

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<v Speaker 1>cool story, and he was right. I mean, bankruptcy last

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<v Speaker 1>sounds dry. With this first wave of crypto bankruptcies hitting

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<v Speaker 1>US courts, it was really interesting to see, you know,

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<v Speaker 1>judges and lawyers trying to draw parallels between the existing

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<v Speaker 1>laws and this weird new thing called crypto. And I

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<v Speaker 1>thought that Thomas was a really good character to tell

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<v Speaker 1>that story because he wasn't your typical hedge fund manager

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<v Speaker 1>in the sense that he doesn't really have a PR filter,

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<v Speaker 1>which is always helpful for journalists, and he seems to

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<v Speaker 1>only like look into the most niche cases and distressed investing.

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<v Speaker 1>You know, my parents were bankruptcy lawyers, so I knew

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<v Speaker 1>a lot about bankruptcy law. I never really worked a

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<v Speaker 1>big distress firm, but I knew enough to sort of

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<v Speaker 1>be dangerous and was always hunting around, like just insolving

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<v Speaker 1>seas and bankruptcies. Crypto is probably the most interesting because

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<v Speaker 1>there's so much unsettled law. I guess I've sort of

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<v Speaker 1>gotten fully sucked into the crypto rabbit hole, but there's

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<v Speaker 1>still a lot to come. I mean with the bankruptcies

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<v Speaker 1>we've seen in sort of the c FI institution, and

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<v Speaker 1>so you have like Celsius and Voyager, and then you

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<v Speaker 1>see Compute North recently filing, there's likely to be a

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<v Speaker 1>whole wave of minors that file, and the same probably

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<v Speaker 1>with other areas, uh, the whatever you want to call it,

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<v Speaker 1>the I don't know, picks and shovels, whatever, like crypto,

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<v Speaker 1>A t M companies, you name it. There's likely to

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<v Speaker 1>be more insolvencies. Even if they're not in court, they'll

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<v Speaker 1>be out of court. Can we take a step back,

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<v Speaker 1>Can you tell us just run us through how you

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<v Speaker 1>started with Mount Cox and what what you actually did there,

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<v Speaker 1>because many of our listeners might not really know what

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<v Speaker 1>you what you actually do. They might know distress investor

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<v Speaker 1>or what's that? Yeah, what is that? The cryptocurrency community

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<v Speaker 1>is watching the drama unraveled with mount Cox, as the

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<v Speaker 1>once dominant bitcoin exchange files for bankruptcy in Japan. Mount

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<v Speaker 1>Cox is now being sued in the United States by

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<v Speaker 1>one of its tin I'd run across mount Cox literally

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<v Speaker 1>read an article in the FT about the insolvency and

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<v Speaker 1>it's said in there that you know, some hedge funds

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<v Speaker 1>are you know, punting on the on these claims. And

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<v Speaker 1>I was like, I know a lot of the guys

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<v Speaker 1>that do this stuff. It's not rocket science, and how

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<v Speaker 1>cool would that be Japanese cryptocurrency bankruptcy claim? I mean,

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<v Speaker 1>that's like the highest inversion of buying a bankruptcy claim.

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<v Speaker 1>So that I got sucked into it, I guess the

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<v Speaker 1>sort of the the academic view of like, hey, this

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<v Speaker 1>will be interesting or fun to do. And then as

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<v Speaker 1>I did that, I just started accumulating more claims, you know,

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<v Speaker 1>for my clients. And from there I just got sucked

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<v Speaker 1>into the crypto rabbit hole. And then the legal questions

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<v Speaker 1>started coming up, you know, like how is this going

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<v Speaker 1>to be interpreted? In Malcox? So we just basically bought claims,

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<v Speaker 1>you bought customer account claims, so you have to go

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<v Speaker 1>actually find people who were either yeah, and also so

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<v Speaker 1>sourcing is just like we were doing a journalist. How

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<v Speaker 1>do you find a good story, how do you find

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<v Speaker 1>a good lead? How do you find someone that knows

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<v Speaker 1>about whatever you're working on. It's the art, you know,

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<v Speaker 1>it's like, oh, you find this guy who told you

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<v Speaker 1>about this person that told you about that person, and

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<v Speaker 1>this is like whatever the tin signal or gay that's

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<v Speaker 1>going to take you to the mountain top of your

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<v Speaker 1>story or whatever. So originally just started reaching out trying

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<v Speaker 1>to find people that were in the crypto and Mike

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<v Speaker 1>likely had to claim. So there was a leaked list

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<v Speaker 1>of creditors and it just had names, didn't have anything

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<v Speaker 1>really had amounts and names, and so you know literally

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<v Speaker 1>googling around like this guy's name is decently obscure and

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<v Speaker 1>he's into crypto or he's a computer science person. So yeah,

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<v Speaker 1>the early malc Cox you had sort of two profiles.

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<v Speaker 1>If you're going to profile there would be kind of

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<v Speaker 1>like crypto anarchists, like people that were very into like

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<v Speaker 1>alternative cultures, sometimes maybe illicit activity, and then you had

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<v Speaker 1>the other camp or just like people that were just

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<v Speaker 1>like computer nerds. The mot coxing is coming to a close, right,

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<v Speaker 1>So what are your expectations, and we had some crazy

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<v Speaker 1>eye catching percentage of returns in the in the headline

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<v Speaker 1>of the story, I think, so, what is your estimation

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<v Speaker 1>of when when are you expecting it to sort of

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<v Speaker 1>aiming to get paid back for the claims and then

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<v Speaker 1>maybe just see I can give us the the number

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<v Speaker 1>of the returns. Yeah, sure, sure, okay, So so early investors,

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<v Speaker 1>you know, our early investors did the sort of put

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<v Speaker 1>the trade on with us extremely well. And um, I

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<v Speaker 1>would say, mal Cox, there's gonna be like two or

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<v Speaker 1>three waves of distributions. One is like an early payout option,

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<v Speaker 1>and the second is a final payout option. So if

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<v Speaker 1>you did an early pay out option, you're capped a

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<v Speaker 1>little bit on the return you'll get. You're giving up

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<v Speaker 1>like a few percentage points to get your money early.

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<v Speaker 1>That will be probably early, and then the final payments

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<v Speaker 1>could be at the end of or maybe under. And

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<v Speaker 1>the other thing you think about distributions are some of

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<v Speaker 1>the distributions are going to go to I don't want

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<v Speaker 1>to call him captive sellers, but like Big Corner of

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<v Speaker 1>which is the biggest state going on in New Zealand,

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<v Speaker 1>they had all their coins on mac Cox and there

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<v Speaker 1>there a number of people like that that are big

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<v Speaker 1>whales that likely won't sell, So I don't know the

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<v Speaker 1>distribution is gonna be totally. I keep hearing this idea that, oh,

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<v Speaker 1>people always call me and say, oh, when is it happening,

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<v Speaker 1>Give me the breakdown of like how it's going to

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<v Speaker 1>affect the price of bitcoin, And I'm always like, I

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<v Speaker 1>really don't think it'll have as much effects people think,

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<v Speaker 1>because so much of the coins anybody that wanted to

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<v Speaker 1>sell sold over the years, not just ourselves but but Fortress.

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<v Speaker 1>So the two big buyers have claims ourselves and Fortress

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<v Speaker 1>over the years. So Thomas probably doesn't want to give

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<v Speaker 1>the percentage himself, but like, at least I think in

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<v Speaker 1>terms of the first sort of slate of claims that

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<v Speaker 1>he bought, I mean, he is kind of slated to

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<v Speaker 1>make like one tho seven on those and I guess

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<v Speaker 1>that's because in the nature of distress investing, you're buying

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<v Speaker 1>those claims at a discount to begin with, and it

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<v Speaker 1>so happens after the winding path that that case has

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<v Speaker 1>taken that at the end of the day, the users

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<v Speaker 1>will end up getting some upside from all that bit

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<v Speaker 1>Court appreciation over the years. Some of the issues or

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<v Speaker 1>questions that people had with Montox. One of the biggest

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<v Speaker 1>ones is will people get their money back UM or

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<v Speaker 1>will they get their crypto back? Right? So, Justina, can

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<v Speaker 1>you sort of walk us through and how that I

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<v Speaker 1>guess applies now to with Celsius and Voyager and some

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<v Speaker 1>of them you are, yeah. So, in most cases UM,

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<v Speaker 1>the value of the user's claim is fixed in dollar

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<v Speaker 1>terms at the moment of their petition. But it's kind

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<v Speaker 1>of controversial to just directly apply this to crypto because crypto,

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<v Speaker 1>as we all know, is a lot more volatile than

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<v Speaker 1>most assets that the law typically applies to. And one

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<v Speaker 1>interesting thing is, at least when I was speaking to

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<v Speaker 1>some of the Celsius users UM, it might seem surprising,

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<v Speaker 1>but many of them are still crypto believers, and in

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<v Speaker 1>their ideal world, they actually want their coins back, and

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<v Speaker 1>so this is really a huge unknown in these cases UM.

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<v Speaker 1>And one lawyer has told me that if the users

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<v Speaker 1>are able to make the claim that crypto is in

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<v Speaker 1>fact more like securities or commodities, there's a chance that

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<v Speaker 1>they could actually get their claims kind of valued at

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<v Speaker 1>the time of UM liquidation. But of course, as we

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<v Speaker 1>all know, that's sort of the big unknown, even beyond

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<v Speaker 1>bankrupt see law when it comes to crypto. We'll be

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<v Speaker 1>right back with more from Bloomberg reporter Justina Lee and

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<v Speaker 1>bankruptcy investor Thomas Brazil. What's different between working on a

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<v Speaker 1>crypto bankruptcy and another one? Uh? Gosh, is it more

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<v Speaker 1>fun or no? It's more interesting. It's more interesting. That's

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<v Speaker 1>it interesting because it is again a ton of unsettled

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<v Speaker 1>case law how crypto is treated. We talked about petition date,

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<v Speaker 1>value versus uplift. Who gets the uplift and value? You know,

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<v Speaker 1>what's unregistered security? Are these securities? Which one? Are securities

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<v Speaker 1>which one or not? You know, all kind of things

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<v Speaker 1>like even areas of traditional bankruptcy law which is called

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<v Speaker 1>their avoidance actions. One section is preferences, another's fraudulent conveyances

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<v Speaker 1>or transfers. I'll do the quick idea of a prefer

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<v Speaker 1>and says, if you've got a payment within ninety days

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<v Speaker 1>of prepetition, just before the bankruptcy petition, uh, they can

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<v Speaker 1>basically call that back. And the idea is like you

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<v Speaker 1>got a hundred cents in the dollar and in the

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<v Speaker 1>bankruptcy it's only fifty cents in the dollar recovery, so

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<v Speaker 1>it's not fair to everybody. So we call that back,

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<v Speaker 1>we give you a claim, and you get the fifty

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<v Speaker 1>cents that everybody else got, and that increases predator recoveries.

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<v Speaker 1>In a traditional bankruptcy, it's not boring, but it's quite

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<v Speaker 1>straightforward the way you'd handle it. But in crypto even

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<v Speaker 1>think of the idea like, well, when the transfer happened,

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<v Speaker 1>you know, I'm I'm making it up, but ethereum was

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<v Speaker 1>a sev now in set of thousand, so my preference

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<v Speaker 1>is much higher dollar amount than what I even have

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<v Speaker 1>today to pay back. So it's a very interesting question,

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<v Speaker 1>like is that equitable, Like that's kind of what the

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<v Speaker 1>code says. It says at the time of the transfer,

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<v Speaker 1>so you should be going after like the hundred you know,

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<v Speaker 1>ethereum times the price at the time of the transfer.

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<v Speaker 1>So these are all interesting bankruptcy questions that need to

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<v Speaker 1>be wrestled with, and I'm hopeful that the US Bankruptcy

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<v Speaker 1>Code can also push a lot of case law in

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<v Speaker 1>at least of the federal court system. I mean, the

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<v Speaker 1>opinion is they're not gonna use for everything, but federal

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<v Speaker 1>bankruptcy judges are extremely usually the top of their fields

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<v Speaker 1>or lawyers in their in their regions, and so do

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<v Speaker 1>you interesting to see how they wrestle some of these

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<v Speaker 1>so something as simple as their preference and crypto has

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<v Speaker 1>never been dealt with. How do you actually, you know,

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<v Speaker 1>deal with the amounts and how do you deal with offsets?

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<v Speaker 1>Because you do normally get offsets on those, So if

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<v Speaker 1>you have money you're still owed versus money you took off,

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<v Speaker 1>they can offset that claim. Well, in this instance, you

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<v Speaker 1>can potentially do offsets, but it's indebtedness, but it's it's

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<v Speaker 1>your customer, it's an account claim. And also like in

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<v Speaker 1>terms of crypto, like these Sea Fine institutions are great example.

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<v Speaker 1>These are kind of like unregulated banks, which would usually

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<v Speaker 1>be like a sipahi just simple liquidation that would be

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<v Speaker 1>and they have insurance and things, and so these are

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<v Speaker 1>very interesting questions we haven't really grappled with, and so

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<v Speaker 1>they're they're super interesting from a legal standpoint. If you're

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<v Speaker 1>let's start like a legal nerd, you're like, wow, this

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<v Speaker 1>is like, you know, super interesting, and um, have you

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<v Speaker 1>have you come across and f T s yet? In

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<v Speaker 1>in liquidations or bankruptcy because I think, you know, not

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<v Speaker 1>one big fund is being a really good well yeah,

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<v Speaker 1>three a C right, so they owned n f T s.

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<v Speaker 1>I think that there was some news recently about some

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<v Speaker 1>of the n f T s day and I wonder

0:12:16.120 --> 0:12:17.800
<v Speaker 1>if the issues will be the same, like how to

0:12:17.920 --> 0:12:20.880
<v Speaker 1>value of those that will be interesting. I mean, honestly,

0:12:20.920 --> 0:12:22.520
<v Speaker 1>this is there's a lot of stuff that has been

0:12:22.520 --> 0:12:24.800
<v Speaker 1>grappled with. There's always interesting stuff going on in the

0:12:24.800 --> 0:12:28.000
<v Speaker 1>bankruptcy and stressed. Uh, this is no different. This is

0:12:28.040 --> 0:12:32.439
<v Speaker 1>just on steroids like every single traditional bankruptcy thing you think,

0:12:32.480 --> 0:12:35.360
<v Speaker 1>you think, oh well, actually there's a new wrinkle. And

0:12:35.440 --> 0:12:36.920
<v Speaker 1>I don't know in three season. I mean, I just

0:12:36.920 --> 0:12:39.000
<v Speaker 1>gotta call the other day about a very large three

0:12:39.120 --> 0:12:41.640
<v Speaker 1>C claim. So I'm probably learning more about it soon.

0:12:42.280 --> 0:12:44.600
<v Speaker 1>But it's it's funny to watch the domino's drop. There's

0:12:44.640 --> 0:12:46.760
<v Speaker 1>so much liquidity that came out of the system so fast.

0:12:47.160 --> 0:12:48.640
<v Speaker 1>I don't know what that means for like the price

0:12:48.679 --> 0:12:50.400
<v Speaker 1>of anything, but it is kind of interesting to think about.

0:12:50.440 --> 0:12:52.480
<v Speaker 1>There will be definitely more dominoes to fall in the

0:12:52.559 --> 0:12:55.439
<v Speaker 1>crypto space and filings. Questions like how these firms will

0:12:55.480 --> 0:12:57.240
<v Speaker 1>deal with it. I think in a lot of spaces

0:12:57.240 --> 0:12:59.719
<v Speaker 1>that will be even some pre packs and things like that,

0:13:00.080 --> 0:13:02.480
<v Speaker 1>prepack bankruptcies because they have a lot of secure lenders

0:13:02.480 --> 0:13:05.680
<v Speaker 1>in there. They're basically underwater on their loans and they're

0:13:05.679 --> 0:13:07.000
<v Speaker 1>not you know, they don't want to tell the street

0:13:07.000 --> 0:13:10.120
<v Speaker 1>they're underwater, and you know they'll be some out of court,

0:13:10.160 --> 0:13:12.360
<v Speaker 1>but they'll definitely have to be some more filings. It

0:13:12.360 --> 0:13:14.959
<v Speaker 1>in a weird way. Every filing there's automatic stay and

0:13:14.960 --> 0:13:17.240
<v Speaker 1>it's sort of like pulls supply offline. I mean, think

0:13:17.240 --> 0:13:20.400
<v Speaker 1>about it like Selsie's Voyager. When they file, they can

0:13:20.400 --> 0:13:23.760
<v Speaker 1>automatic day. So instead of the crypto basically like you know,

0:13:23.800 --> 0:13:25.559
<v Speaker 1>flooding out into the market and lots of sales, is

0:13:25.559 --> 0:13:27.920
<v Speaker 1>actually locks up the crypto for the time of case.

0:13:28.520 --> 0:13:30.719
<v Speaker 1>I mean, not entirely. They can petition the court to

0:13:30.800 --> 0:13:33.480
<v Speaker 1>sell certain cryptos, but it's kind of interesting. An impact

0:13:33.520 --> 0:13:35.640
<v Speaker 1>on price too, Yeah, that's what I mean. The impact

0:13:35.720 --> 0:13:39.120
<v Speaker 1>on price could be interesting. Thank you, just Tina and

0:13:39.160 --> 0:13:42.040
<v Speaker 1>Thomas for joining me today. You can find more of

0:13:42.080 --> 0:13:45.439
<v Speaker 1>just Tina Lee's reporting on the Bloomberg Terminal on Bloomberg

0:13:45.440 --> 0:13:48.839
<v Speaker 1>dot com and on Twitter at j U S t

0:13:49.120 --> 0:13:56.680
<v Speaker 1>I n A k n O p e. On the

0:13:56.720 --> 0:13:59.560
<v Speaker 1>next episode of Bloomberg Crypto, there's an old joke about

0:13:59.559 --> 0:14:02.200
<v Speaker 1>billionaires and politics, but this isn't that kind of podcast.

0:14:02.440 --> 0:14:04.520
<v Speaker 1>This is a podcast about crypto though, so we're gonna

0:14:04.520 --> 0:14:06.920
<v Speaker 1>be talking about all of the ways that crypto billions

0:14:06.960 --> 0:14:12.719
<v Speaker 1>are pouring into US elections. This is Bloomberg Crypto, a

0:14:12.840 --> 0:14:16.240
<v Speaker 1>daily podcast from Bloomberg and I Heart Radio. For more

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0:14:29.360 --> 0:14:34.760
<v Speaker 1>at Crypto. The supervising producer of Bloomberg Crypto is Vicky

0:14:34.880 --> 0:14:38.880
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0:14:38.960 --> 0:14:42.840
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0:14:46.960 --> 0:15:00.880
<v Speaker 1>I'm Stacy Marie Shmall. We'll be back tomorrow.