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Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,

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Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for

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Speaker 1: Bloomberg News. It's Tuesday, January. It was an unwelcome ruling

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Speaker 1: for about six hundred thousand Celsius account holders, who are

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Speaker 1: probably wishing they had read the fine print more closely

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Speaker 1: before investing, or frankly, put more stock in the crypto

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Speaker 1: mantra not your keys, not your coins. So what happened?

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Speaker 1: Well earlier this month, federal bankruptcy Judge Martin Glenn found

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Speaker 1: that when people deposited assets with a now bankrupt crypto

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Speaker 1: lenders Celsius, and in exchange received interest on those deposits,

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Speaker 1: that those assets became the property of Celsius. The effect

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Speaker 1: was to make the customers of that earned program, as

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Speaker 1: it was called, defined as what's known in finance terms

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Speaker 1: as unsecured creditors. What that means in practice is they're

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Speaker 1: unlikely to get all their money back because of the

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Speaker 1: ongoing bankruptcy. Many investors signed up for these accounts in

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Speaker 1: part because of the potentially higher returns that Celsius had

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Speaker 1: promised them on the deposits. In some cases, as much

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Speaker 1: as eighteen percent, even with current levels of interest rates.

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Speaker 1: That's way more than you'd make at a savings bank,

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Speaker 1: for example. But unlike at a bank, those deposits which

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Speaker 1: were held in crypto were not in any way covered

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Speaker 1: by any sort of federal deposit insurance. And just to

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Speaker 1: give a little bit of context about how many people

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Speaker 1: are affected here, the value of those accounts back in

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Speaker 1: July was more than four billion dollars. But this ruling

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Speaker 1: won't only affect Celsius customers. For more on what else

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Speaker 1: you should expect, we've got Bloomberg report to Jeremy Hill.

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Speaker 1: Prior to this ruling, thousands of Celsius users may have

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Speaker 1: been clinging to the hope that one day the company

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Speaker 1: would simply raise the gates on the website, as it were,

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Speaker 1: and let them withdrawther crypto if it was there. We

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Speaker 1: know that there's a big hole in the balance sheet.

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Speaker 1: A lot of the crypto just isn't there anymore. Jeremy,

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Speaker 1: welcome back to the show. Thanks for having me. You,

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Speaker 1: of course, one of the folks who's been sort of dragged,

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Speaker 1: potentially kicking, potentially screaming into covering way more crypto than

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Speaker 1: you might have expected going into two. But one of

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Speaker 1: the things that has certainly taken up a lot of

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Speaker 1: your time and reporting is the ins and out of

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Speaker 1: these various rulings affecting some of these crypto companies. Why

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Speaker 1: are these different rulings important? Like, what's what's going on? Um?

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Speaker 1: Is it that there just weren't many bankruptcies before? Is

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Speaker 1: because judges are doing unexpected things like what's the landscape here?

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Speaker 1: You're pretty much right there? I mean, crypto as we

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Speaker 1: know it occupies a sort of strange place in the

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Speaker 1: legal landscape. Is bitcoin is security? Is ethere um a security?

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Speaker 1: If not? What does that mean for users of websites

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Speaker 1: that get into trouble? These are questions that hadn't been answered.

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Speaker 1: The SEC hasn't said much about this, the CFTC, So

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Speaker 1: when crypto lenders started landing in bankruptcy last year, immediately

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Speaker 1: lawyers around the country being scratching their heads, saying, oh,

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Speaker 1: what are judges going to say about this? We're now

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Speaker 1: starting to get some of those rulings and those, as

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Speaker 1: you have report said, very highly paid crypto bankruptcy lawyers.

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Speaker 1: What are some of the most important cases that they've

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Speaker 1: been involved in? What are some of the judges talking

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Speaker 1: about I know Celsius is a big one that happened recently.

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Speaker 1: This is Celsius. Depositors put money into Celsius expecting that

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Speaker 1: all the money was still there and they're just earning

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Speaker 1: an interest on it. But now it seems as though

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Speaker 1: potentially in this bankruptcy hearing they could potentially not be that.

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Speaker 1: Celsius is certainly the biggest so far because FTX, for example,

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Speaker 1: just hasn't had enough time to play out. Celsius and

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Speaker 1: Voyager both went bankrupted around the same time. Both were

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Speaker 1: crypto lenders, so users deposited coins and then the companies

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Speaker 1: lent them out to generate yield, much like traditional banks

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Speaker 1: do UM but as we now know UM, these were

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Speaker 1: not regulated like banks. They didn't resemble banks in a

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Speaker 1: lot of ways. And so most recently we got a

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Speaker 1: ruling out of the Celsius case regarding whether or not

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Speaker 1: customer deposits that were put into interest bearing accounts, whether

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Speaker 1: those coins belong to Celsius or whether they belong to users.

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Speaker 1: That's very important for recoveries. So what the judge fouled,

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Speaker 1: if I'm remembering correctly, is if you because you didn't

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Speaker 1: as a person. But if you theoretically had to posited

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Speaker 1: crypto in a particular kind of Celsius account, that crypto

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Speaker 1: ceased to be your crypto. According to this judge, that's

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Speaker 1: a resolutely right. So there's a lot of discussion about

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Speaker 1: terms of service, a lot of exhibits submitted to the

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Speaker 1: court showing what the contract between the users and Celsius

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Speaker 1: looked like when someone signed up for these so called

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Speaker 1: earn accounts. What the judge found here was when you

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Speaker 1: clicked the box that said I accept, you were agreeing

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Speaker 1: to some lines in that contract that said, by depositing

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Speaker 1: coins with Celsius into this kind of account, I grant

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Speaker 1: right entitle to Celsius. So these coins are no longer

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Speaker 1: mine legally speaking, they belong to Celsius. So, after much

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Speaker 1: thinking and review and arguing, the judge said, yeah, that's

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Speaker 1: what the contract says, like, I'm really sorry to tell

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Speaker 1: you that this is not your bitcoin anymore. There is

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Speaker 1: a saying, of course, in the crypto industry, not your keys,

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Speaker 1: not your coins. If you're not in personal possession, then um,

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Speaker 1: you know both. And so as a person, a theoretical

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Speaker 1: Jeremy who is now looking at this court ruling, like,

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Speaker 1: what does this mean for you in practice? So you

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Speaker 1: already are an an interesting spot because the entity with

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Speaker 1: which you deposited your crypto filed for bankruptcy. Now you're

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Speaker 1: having from this judge not necessarily even your crypto and

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Speaker 1: not actually your crypto at all. Does this mean this

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Speaker 1: person has an even lower chance of getting any of

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Speaker 1: their crypto back? Pretty much. So. Prior to this ruling,

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Speaker 1: thousands of Celsius users may have been clinging to the

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Speaker 1: hope that one day the company would simply raise the

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Speaker 1: gates on the website as it were, and let them

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Speaker 1: withdrawther crypto if it was there. We know that there's

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Speaker 1: a big hole in the balance sheet. A lot of

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Speaker 1: the crypto just isn't there anymore. Now with this ruling,

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Speaker 1: we know that all Celsius users that have interest sparing

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Speaker 1: accounts are going to be treated like unsecured creditors. So

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Speaker 1: they're going to get um the term is pro rata.

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Speaker 1: They're gonna get their proportion of whatever pie is created

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Speaker 1: as a result of the of this bankruptcy, rather than

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Speaker 1: just getting whatever coins they were owed. So in some

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Speaker 1: it's more equitable. Everybody's in the same bad spot. In

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Speaker 1: another sense, you're probably kind of sad if you had

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Speaker 1: some dogecoin or whatever, I don't know, Celsius or an

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Speaker 1: accepted dogecoin. If you had some dochecoin on the platform

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Speaker 1: and you would like to just get it back, there

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Speaker 1: might be enough for you to get it all back,

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Speaker 1: but you're just not allowed. Now it's not yours. How

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Speaker 1: do they have ranked unsecured creditors? So like, where would

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Speaker 1: a theoretical Jeremy be in the kind of here's the pie,

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Speaker 1: You're like a dred a thousand, ten thousand, Like where

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Speaker 1: are you? So unsecured creditors generally aren't ranked. You're all

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Speaker 1: in the same bucket, right, So it doesn't really matter

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Speaker 1: what kind of coins you had or the size of

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Speaker 1: your holdings, if you had good ones or bad ones. Um,

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Speaker 1: you're just gonna get the same percentage slice of the

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Speaker 1: assets that every other general unsecured creditor is and that

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Speaker 1: includes like vendors to Celsius, so not only users, but

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Speaker 1: the people who literally keep the lights on utilities, what

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Speaker 1: have you. You're all on the same boat. And is

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Speaker 1: it a percentage of the amount that was owed or

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Speaker 1: is it just the percentage of the amount that's left.

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Speaker 1: So they're going to decide at some point when to

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Speaker 1: like calcify the amount of the claims that might have

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Speaker 1: already happened. I actually don't know off the top of

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Speaker 1: my head, but that date will matter because it will

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Speaker 1: be you'll get a percentage of what you're owed as

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Speaker 1: of X date. Got it. So just because so you

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Speaker 1: were owld say, you know, two thousand dollars, you might

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Speaker 1: get back one or one hundred dollars maybe depending on

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Speaker 1: what the pool is. Sure, yeah, we don't know the

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Speaker 1: recovery levels quite yet. It could be a lot better

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Speaker 1: than that. I mean, the likelihood that everybody's going to

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Speaker 1: get all their stuff back is vanishing lee small. Something

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Speaker 1: amazing would have to happen. Well, what is the benefit

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Speaker 1: to Celsius of having these assets be classified this way?

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Speaker 1: This is pretty great for Celsius because among the assets

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Speaker 1: deposited and earn accounts was like three million dollars worth

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Speaker 1: of stable coins. Um those are easily turned into dollars

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Speaker 1: that the company can use to keep paying its bankruptcy

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Speaker 1: lawyers and still live in bankruptcy. So they've been asking

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Speaker 1: to sell these stable coins for a while because the

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Speaker 1: company's running out of money sometime in the early spring.

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Speaker 1: It's projected that they'll be out of cash, and uh,

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Speaker 1: finding financing from a third party for this company is like,

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Speaker 1: not very likely. I don't I don't envy those bankers,

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Speaker 1: So this is this is great for them in the

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Speaker 1: sense that they cannot keep it lights on a little longer.

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Speaker 1: Got it up next. More from Bloomberg Reports or Jeremy

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Speaker 1: Hill on what the recent Celsius ruling could mean for Crypto.

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Speaker 1: We'll be right back now. One of the things that

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Speaker 1: you've talked about in the previous appearances on the show

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Speaker 1: is the fact that it's not this isn't a thing

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Speaker 1: that's going to get resolved tomorrow. What are some of

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Speaker 1: the timelines that folks should be prepared to encounter. Well,

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Speaker 1: I don't have exact dates off the top of my head,

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Speaker 1: but at some point Celsius is going to file what's

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Speaker 1: called a disclosure statement, and that disclosure statement is going

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Speaker 1: to lay out the plan for getting Celsius out of

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Speaker 1: bankruptcy and repaying creditors. The document is used to inform

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Speaker 1: creditors users about the shape of that plan, and everybody

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Speaker 1: gets to vote, um, how much sheer vote matters depends

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Speaker 1: on where this sort of value breaks in the company. Um,

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Speaker 1: but it's an important document and that's like, that's like

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Speaker 1: a key thing to look out for. And have any

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Speaker 1: of the other crypto companies that have entered into bankruptcy

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Speaker 1: in the past year and a half filed similar documents already?

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Speaker 1: Voyager has. Voyager has because they were going to sell

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Speaker 1: themselves to FTX that they had a plan again, so

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Speaker 1: they had their ducks in a row, and then something

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Speaker 1: really bad happened and uh, now they're trying to sell

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Speaker 1: themselves to Finance dot US. That process is proceeding. They're

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Speaker 1: facing some pushback, but if I recall correctly, that's been

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Speaker 1: rolled into a plan, so a disclosure statement exists with

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Speaker 1: estimated recoveries. Lager Digital has announced the crypto exchange operator

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Speaker 1: Binance will acquire its s. That's the deal worth just

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Speaker 1: over a billion dollars. Binance was one of several bidders

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Speaker 1: for Voyager, which is currently in bankruptcy. Voyager said the

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Speaker 1: move will start the process of allowing customer access to

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Speaker 1: their funds, and of course the pushback comes from a

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Speaker 1: combination of UM, there's a phrase that we've used here

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Speaker 1: sometimes which is like light regulatory objection, which is to say,

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Speaker 1: like the regulators haven't been like raw, but they've been

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Speaker 1: like m we have concerns. And so the U s

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Speaker 1: SEC had some concerns about the binance US proposal to

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Speaker 1: acquire Voyager, that's right, and other state securities regulators and

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Speaker 1: they have been you know, they vary in in their forcefulness,

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Speaker 1: and it seems like an overarching concern is like we

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Speaker 1: don't really know that much about finance, um as I

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Speaker 1: understand that finance is sort of famously opaque in some ways.

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Speaker 1: So these are objections that can very much be overcome.

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Speaker 1: It's in no way like an all out stop on

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Speaker 1: the process a judge after rule or they might be

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Speaker 1: settled before the sale hearing. And just because we're talking

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Speaker 1: about fd X and passing the a lot of attention

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Speaker 1: has been obviously on kind of the criminal case against

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Speaker 1: stand backmun Freed. He has pleaded not guilty. Multiple of

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Speaker 1: his former closest colleagues are appearing to be testifying against

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Speaker 1: Back and pun Freed, possibly for you know, leniency applied

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Speaker 1: to their own potential future prosecutions. But in terms of

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Speaker 1: the ft X bankruptcy what like where are the ass

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Speaker 1: in the process. I think the biggest thing right now

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Speaker 1: is the company's trying to get judges sign off on

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Speaker 1: procedures for selling some assets. So we know that f

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Speaker 1: t X does have plenty of good assets and the

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Speaker 1: proceeds of those sales will go towards repaying creditors. So

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Speaker 1: ledger X, I don't know if that's included in this

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Speaker 1: round of bid procedures, but that's a that's a good asset.

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Speaker 1: We understand that is going to be sold off. So

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Speaker 1: the thing is like bankruptcies take so long because there's

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Speaker 1: a lot of red tape and you have to get

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Speaker 1: judges sign off for things that seem really small. Just like,

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Speaker 1: here's how we plan to go about soliciting people that

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Speaker 1: may want to buy our assets. Is this okay? And

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Speaker 1: then everybody else gets to weigh in and say like, no,

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Speaker 1: you need to reach out to a broader pool, or

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Speaker 1: it's too faster, it's too slow. So we're in the

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Speaker 1: process right now, and you know, in terms of that

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Speaker 1: outreach the you're describing Block five, another one of these

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Speaker 1: crypto companies that run into distress UM put out its

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Speaker 1: own presentation and how to hearing. You know, in January

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Speaker 1: essentially saying we try to get more than a hundred

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Speaker 1: people to you know, buy us effectively, and didn't quite succeed.

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Speaker 1: The funny thing about these processes is that the bankers

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Speaker 1: that run the sales, they have to reach out to

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Speaker 1: just as many people as possible. Oftentimes we never into

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Speaker 1: learning who exactly was contacted. But it's really important for

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Speaker 1: the court that the bankers and lawyers show we tried

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Speaker 1: our best and cast the net as wide as possible,

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Speaker 1: even if we thought this company has absolutely no interest

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Speaker 1: in buying our assets, but it's worth a shot, right yeah.

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Speaker 1: I mean they've got to justify those fees somehow, certainly too.

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Speaker 1: Just as a kind of a final question, you know,

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Speaker 1: the market continues to be challenging as it were, and

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Speaker 1: you know we've seen just in January multiple exchanges saying

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Speaker 1: they're cutting twenty thirty in some cases of staff. We

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Speaker 1: have different types of banks withdrawing from the crypto universe

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Speaker 1: entirely other than like the kind of the obvious headline numbers,

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Speaker 1: Are there any interesting underlying considerations that may affect any

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Speaker 1: part of these bankruptcy proceedings related to just the states

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Speaker 1: of the markets, right, Now that's a good question. I mean,

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Speaker 1: if the price of crypto goes up, it's good for

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Speaker 1: crypto bankruptcies if you especially if judges find that the

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Speaker 1: crypto held by the bankrupt company belongs to the company itself,

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Speaker 1: as in the case of Celsius, then theoretically they can

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Speaker 1: sell that crypto and start repaying creditors, so that would

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Speaker 1: be a good thing. Interestingly, in the case of FTX,

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Speaker 1: some early indications seemed to say that the contract between

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Speaker 1: users in the company was different than Celsius. The users

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Speaker 1: retained title, so rather than being all general and secure

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Speaker 1: creditors that are like rooting for the price to go

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Speaker 1: up so that they'll get more money back. We may

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Speaker 1: see a situation where some people are made whole and

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Speaker 1: some people are not, and the price of the crypto

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Speaker 1: doesn't matter as much. Exciting times lost to do Absolutely well,

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Speaker 1: I'm sure we'll have you back to smoke about it more.

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Speaker 1: Thank you for joining. Thank you. That was Bloomberg reposto

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Speaker 1: Jeremy Hilt. You can find more of his reporting on

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Speaker 1: the Bloomberg terminal and on Bloomberg dot com, and check

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Speaker 1: out our twice weekly use less of Bloomberg Crypto This

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Speaker 1: suggestions for the show to Crypto at Bloomberg dot net.

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