Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,
Speaker 1: and I'm annea Bloomberg Senior Crypto editor in today for
Speaker 1: Stacy Marie Ishmael. It's Tuesday, October eighteenth. Bankruptcies can be
Speaker 1: chaotic times for companies and for their creditors. Investors, vendors,
Speaker 1: and former customers often end up jostling in court to
Speaker 1: get their share of what they lost from what remains
Speaker 1: of the firm. In the crypto space, bankruptcies can bring
Speaker 1: even more questions. Some restructuring lawyers say that the US
Speaker 1: Bankruptcy Code still does not adequately address how to handle
Speaker 1: crypto assets. But just like other bankruptcy cases, there will
Speaker 1: be winners and losers to explain what happens to crypto
Speaker 1: assets during these times. I'm joined by bloom reporter Justina Lee. Crypto,
Speaker 1: as we all know, is a lot more volatile than
Speaker 1: most assets that the law typically applies to, and Thomas Brazil,
Speaker 1: the founder of five oh seven Capital. There will be
Speaker 1: definitely more dominoes to fall in the crypto space and
Speaker 1: filings questions like how these firms will deal with it
Speaker 1: the firm by bankruptcy claims and other types of distressed
Speaker 1: assets from people who would rather receive funds earlier, even
Speaker 1: at a discount. Hi, Justina and Thomas, thank you for
Speaker 1: joining me today. Why did you reach out to Thomas
Speaker 1: at first for your story? What's what's going on in crypto? Um?
Speaker 1: There seemed to have been a lot of bankruptcies as
Speaker 1: of late. Yeah, exactly, and uh a crypto fund manager
Speaker 1: introduced me to Thomas, saying that there would be a
Speaker 1: cool story, and he was right. I mean, bankruptcy last
Speaker 1: sounds dry. With this first wave of crypto bankruptcies hitting
Speaker 1: US courts, it was really interesting to see, you know,
Speaker 1: judges and lawyers trying to draw parallels between the existing
Speaker 1: laws and this weird new thing called crypto. And I
Speaker 1: thought that Thomas was a really good character to tell
Speaker 1: that story because he wasn't your typical hedge fund manager
Speaker 1: in the sense that he doesn't really have a PR filter,
Speaker 1: which is always helpful for journalists, and he seems to
Speaker 1: only like look into the most niche cases and distressed investing.
Speaker 1: You know, my parents were bankruptcy lawyers, so I knew
Speaker 1: a lot about bankruptcy law. I never really worked a
Speaker 1: big distress firm, but I knew enough to sort of
Speaker 1: be dangerous and was always hunting around, like just insolving
Speaker 1: seas and bankruptcies. Crypto is probably the most interesting because
Speaker 1: there's so much unsettled law. I guess I've sort of
Speaker 1: gotten fully sucked into the crypto rabbit hole, but there's
Speaker 1: still a lot to come. I mean with the bankruptcies
Speaker 1: we've seen in sort of the c FI institution, and
Speaker 1: so you have like Celsius and Voyager, and then you
Speaker 1: see Compute North recently filing, there's likely to be a
Speaker 1: whole wave of minors that file, and the same probably
Speaker 1: with other areas, uh, the whatever you want to call it,
Speaker 1: the I don't know, picks and shovels, whatever, like crypto,
Speaker 1: A t M companies, you name it. There's likely to
Speaker 1: be more insolvencies. Even if they're not in court, they'll
Speaker 1: be out of court. Can we take a step back,
Speaker 1: Can you tell us just run us through how you
Speaker 1: started with Mount Cox and what what you actually did there,
Speaker 1: because many of our listeners might not really know what
Speaker 1: you what you actually do. They might know distress investor
Speaker 1: or what's that? Yeah, what is that? The cryptocurrency community
Speaker 1: is watching the drama unraveled with mount Cox, as the
Speaker 1: once dominant bitcoin exchange files for bankruptcy in Japan. Mount
Speaker 1: Cox is now being sued in the United States by
Speaker 1: one of its tin I'd run across mount Cox literally
Speaker 1: read an article in the FT about the insolvency and
Speaker 1: it's said in there that you know, some hedge funds
Speaker 1: are you know, punting on the on these claims. And
Speaker 1: I was like, I know a lot of the guys
Speaker 1: that do this stuff. It's not rocket science, and how
Speaker 1: cool would that be Japanese cryptocurrency bankruptcy claim? I mean,
Speaker 1: that's like the highest inversion of buying a bankruptcy claim.
Speaker 1: So that I got sucked into it, I guess the
Speaker 1: sort of the the academic view of like, hey, this
Speaker 1: will be interesting or fun to do. And then as
Speaker 1: I did that, I just started accumulating more claims, you know,
Speaker 1: for my clients. And from there I just got sucked
Speaker 1: into the crypto rabbit hole. And then the legal questions
Speaker 1: started coming up, you know, like how is this going
Speaker 1: to be interpreted? In Malcox? So we just basically bought claims,
Speaker 1: you bought customer account claims, so you have to go
Speaker 1: actually find people who were either yeah, and also so
Speaker 1: sourcing is just like we were doing a journalist. How
Speaker 1: do you find a good story, how do you find
Speaker 1: a good lead? How do you find someone that knows
Speaker 1: about whatever you're working on. It's the art, you know,
Speaker 1: it's like, oh, you find this guy who told you
Speaker 1: about this person that told you about that person, and
Speaker 1: this is like whatever the tin signal or gay that's
Speaker 1: going to take you to the mountain top of your
Speaker 1: story or whatever. So originally just started reaching out trying
Speaker 1: to find people that were in the crypto and Mike
Speaker 1: likely had to claim. So there was a leaked list
Speaker 1: of creditors and it just had names, didn't have anything
Speaker 1: really had amounts and names, and so you know literally
Speaker 1: googling around like this guy's name is decently obscure and
Speaker 1: he's into crypto or he's a computer science person. So yeah,
Speaker 1: the early malc Cox you had sort of two profiles.
Speaker 1: If you're going to profile there would be kind of
Speaker 1: like crypto anarchists, like people that were very into like
Speaker 1: alternative cultures, sometimes maybe illicit activity, and then you had
Speaker 1: the other camp or just like people that were just
Speaker 1: like computer nerds. The mot coxing is coming to a close, right,
Speaker 1: So what are your expectations, and we had some crazy
Speaker 1: eye catching percentage of returns in the in the headline
Speaker 1: of the story, I think, so, what is your estimation
Speaker 1: of when when are you expecting it to sort of
Speaker 1: aiming to get paid back for the claims and then
Speaker 1: maybe just see I can give us the the number
Speaker 1: of the returns. Yeah, sure, sure, okay, So so early investors,
Speaker 1: you know, our early investors did the sort of put
Speaker 1: the trade on with us extremely well. And um, I
Speaker 1: would say, mal Cox, there's gonna be like two or
Speaker 1: three waves of distributions. One is like an early payout option,
Speaker 1: and the second is a final payout option. So if
Speaker 1: you did an early pay out option, you're capped a
Speaker 1: little bit on the return you'll get. You're giving up
Speaker 1: like a few percentage points to get your money early.
Speaker 1: That will be probably early, and then the final payments
Speaker 1: could be at the end of or maybe under. And
Speaker 1: the other thing you think about distributions are some of
Speaker 1: the distributions are going to go to I don't want
Speaker 1: to call him captive sellers, but like Big Corner of
Speaker 1: which is the biggest state going on in New Zealand,
Speaker 1: they had all their coins on mac Cox and there
Speaker 1: there a number of people like that that are big
Speaker 1: whales that likely won't sell, So I don't know the
Speaker 1: distribution is gonna be totally. I keep hearing this idea that, oh,
Speaker 1: people always call me and say, oh, when is it happening,
Speaker 1: Give me the breakdown of like how it's going to
Speaker 1: affect the price of bitcoin, And I'm always like, I
Speaker 1: really don't think it'll have as much effects people think,
Speaker 1: because so much of the coins anybody that wanted to
Speaker 1: sell sold over the years, not just ourselves but but Fortress.
Speaker 1: So the two big buyers have claims ourselves and Fortress
Speaker 1: over the years. So Thomas probably doesn't want to give
Speaker 1: the percentage himself, but like, at least I think in
Speaker 1: terms of the first sort of slate of claims that
Speaker 1: he bought, I mean, he is kind of slated to
Speaker 1: make like one tho seven on those and I guess
Speaker 1: that's because in the nature of distress investing, you're buying
Speaker 1: those claims at a discount to begin with, and it
Speaker 1: so happens after the winding path that that case has
Speaker 1: taken that at the end of the day, the users
Speaker 1: will end up getting some upside from all that bit
Speaker 1: Court appreciation over the years. Some of the issues or
Speaker 1: questions that people had with Montox. One of the biggest
Speaker 1: ones is will people get their money back UM or
Speaker 1: will they get their crypto back? Right? So, Justina, can
Speaker 1: you sort of walk us through and how that I
Speaker 1: guess applies now to with Celsius and Voyager and some
Speaker 1: of them you are, yeah. So, in most cases UM,
Speaker 1: the value of the user's claim is fixed in dollar
Speaker 1: terms at the moment of their petition. But it's kind
Speaker 1: of controversial to just directly apply this to crypto because crypto,
Speaker 1: as we all know, is a lot more volatile than
Speaker 1: most assets that the law typically applies to. And one
Speaker 1: interesting thing is, at least when I was speaking to
Speaker 1: some of the Celsius users UM, it might seem surprising,
Speaker 1: but many of them are still crypto believers, and in
Speaker 1: their ideal world, they actually want their coins back, and
Speaker 1: so this is really a huge unknown in these cases UM.
Speaker 1: And one lawyer has told me that if the users
Speaker 1: are able to make the claim that crypto is in
Speaker 1: fact more like securities or commodities, there's a chance that
Speaker 1: they could actually get their claims kind of valued at
Speaker 1: the time of UM liquidation. But of course, as we
Speaker 1: all know, that's sort of the big unknown, even beyond
Speaker 1: bankrupt see law when it comes to crypto. We'll be
Speaker 1: right back with more from Bloomberg reporter Justina Lee and
Speaker 1: bankruptcy investor Thomas Brazil. What's different between working on a
Speaker 1: crypto bankruptcy and another one? Uh? Gosh, is it more
Speaker 1: fun or no? It's more interesting. It's more interesting. That's
Speaker 1: it interesting because it is again a ton of unsettled
Speaker 1: case law how crypto is treated. We talked about petition date,
Speaker 1: value versus uplift. Who gets the uplift and value? You know,
Speaker 1: what's unregistered security? Are these securities? Which one? Are securities
Speaker 1: which one or not? You know, all kind of things
Speaker 1: like even areas of traditional bankruptcy law which is called
Speaker 1: their avoidance actions. One section is preferences, another's fraudulent conveyances
Speaker 1: or transfers. I'll do the quick idea of a prefer
Speaker 1: and says, if you've got a payment within ninety days
Speaker 1: of prepetition, just before the bankruptcy petition, uh, they can
Speaker 1: basically call that back. And the idea is like you
Speaker 1: got a hundred cents in the dollar and in the
Speaker 1: bankruptcy it's only fifty cents in the dollar recovery, so
Speaker 1: it's not fair to everybody. So we call that back,
Speaker 1: we give you a claim, and you get the fifty
Speaker 1: cents that everybody else got, and that increases predator recoveries.
Speaker 1: In a traditional bankruptcy, it's not boring, but it's quite
Speaker 1: straightforward the way you'd handle it. But in crypto even
Speaker 1: think of the idea like, well, when the transfer happened,
Speaker 1: you know, I'm I'm making it up, but ethereum was
Speaker 1: a sev now in set of thousand, so my preference
Speaker 1: is much higher dollar amount than what I even have
Speaker 1: today to pay back. So it's a very interesting question,
Speaker 1: like is that equitable, Like that's kind of what the
Speaker 1: code says. It says at the time of the transfer,
Speaker 1: so you should be going after like the hundred you know,
Speaker 1: ethereum times the price at the time of the transfer.
Speaker 1: So these are all interesting bankruptcy questions that need to
Speaker 1: be wrestled with, and I'm hopeful that the US Bankruptcy
Speaker 1: Code can also push a lot of case law in
Speaker 1: at least of the federal court system. I mean, the
Speaker 1: opinion is they're not gonna use for everything, but federal
Speaker 1: bankruptcy judges are extremely usually the top of their fields
Speaker 1: or lawyers in their in their regions, and so do
Speaker 1: you interesting to see how they wrestle some of these
Speaker 1: so something as simple as their preference and crypto has
Speaker 1: never been dealt with. How do you actually, you know,
Speaker 1: deal with the amounts and how do you deal with offsets?
Speaker 1: Because you do normally get offsets on those, So if
Speaker 1: you have money you're still owed versus money you took off,
Speaker 1: they can offset that claim. Well, in this instance, you
Speaker 1: can potentially do offsets, but it's indebtedness, but it's it's
Speaker 1: your customer, it's an account claim. And also like in
Speaker 1: terms of crypto, like these Sea Fine institutions are great example.
Speaker 1: These are kind of like unregulated banks, which would usually
Speaker 1: be like a sipahi just simple liquidation that would be
Speaker 1: and they have insurance and things, and so these are
Speaker 1: very interesting questions we haven't really grappled with, and so
Speaker 1: they're they're super interesting from a legal standpoint. If you're
Speaker 1: let's start like a legal nerd, you're like, wow, this
Speaker 1: is like, you know, super interesting, and um, have you
Speaker 1: have you come across and f T s yet? In
Speaker 1: in liquidations or bankruptcy because I think, you know, not
Speaker 1: one big fund is being a really good well yeah,
Speaker 1: three a C right, so they owned n f T s.
Speaker 1: I think that there was some news recently about some
Speaker 1: of the n f T s day and I wonder
Speaker 1: if the issues will be the same, like how to
Speaker 1: value of those that will be interesting. I mean, honestly,
Speaker 1: this is there's a lot of stuff that has been
Speaker 1: grappled with. There's always interesting stuff going on in the
Speaker 1: bankruptcy and stressed. Uh, this is no different. This is
Speaker 1: just on steroids like every single traditional bankruptcy thing you think,
Speaker 1: you think, oh well, actually there's a new wrinkle. And
Speaker 1: I don't know in three season. I mean, I just
Speaker 1: gotta call the other day about a very large three
Speaker 1: C claim. So I'm probably learning more about it soon.
Speaker 1: But it's it's funny to watch the domino's drop. There's
Speaker 1: so much liquidity that came out of the system so fast.
Speaker 1: I don't know what that means for like the price
Speaker 1: of anything, but it is kind of interesting to think about.
Speaker 1: There will be definitely more dominoes to fall in the
Speaker 1: crypto space and filings. Questions like how these firms will
Speaker 1: deal with it. I think in a lot of spaces
Speaker 1: that will be even some pre packs and things like that,
Speaker 1: prepack bankruptcies because they have a lot of secure lenders
Speaker 1: in there. They're basically underwater on their loans and they're
Speaker 1: not you know, they don't want to tell the street
Speaker 1: they're underwater, and you know they'll be some out of court,
Speaker 1: but they'll definitely have to be some more filings. It
Speaker 1: in a weird way. Every filing there's automatic stay and
Speaker 1: it's sort of like pulls supply offline. I mean, think
Speaker 1: about it like Selsie's Voyager. When they file, they can
Speaker 1: automatic day. So instead of the crypto basically like you know,
Speaker 1: flooding out into the market and lots of sales, is
Speaker 1: actually locks up the crypto for the time of case.
Speaker 1: I mean, not entirely. They can petition the court to
Speaker 1: sell certain cryptos, but it's kind of interesting. An impact
Speaker 1: on price too, Yeah, that's what I mean. The impact
Speaker 1: on price could be interesting. Thank you, just Tina and
Speaker 1: Thomas for joining me today. You can find more of
Speaker 1: just Tina Lee's reporting on the Bloomberg Terminal on Bloomberg
Speaker 1: dot com and on Twitter at j U S t
Speaker 1: I n A k n O p e. On the
Speaker 1: next episode of Bloomberg Crypto, there's an old joke about
Speaker 1: billionaires and politics, but this isn't that kind of podcast.
Speaker 1: This is a podcast about crypto though, so we're gonna
Speaker 1: be talking about all of the ways that crypto billions
Speaker 1: are pouring into US elections. This is Bloomberg Crypto, a
Speaker 1: daily podcast from Bloomberg and I Heart Radio. For more
Speaker 1: shows from I Heart Radio, visit the I Heart Radio app,
Speaker 1: Apple Podcasts, or wherever you get your podcast. Send us
Speaker 1: your comments, questions, or suggestions for the show to Crypto
Speaker 1: at Bloomberg dot net or find us on Twitter. We're
Speaker 1: at Crypto. The supervising producer of Bloomberg Crypto is Vicky
Speaker 1: very Galina. Our senior producer is Janet Babin. Our producer
Speaker 1: is Mohammed Farouk. Associate producer is Moses on Them Desta
Speaker 1: wonder At is our engineer. Original music by Leo Sidran.
Speaker 1: I'm Stacy Marie Shmall. We'll be back tomorrow.