WEBVTT - Who Owns Your Coins?

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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 Stacy Marie Ishmael, Managing editor of Crypto for

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<v Speaker 1>Bloomberg News. It's Tuesday, January. It was an unwelcome ruling

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<v Speaker 1>for about six hundred thousand Celsius account holders, who are

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<v Speaker 1>probably wishing they had read the fine print more closely

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<v Speaker 1>before investing, or frankly, put more stock in the crypto

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<v Speaker 1>mantra not your keys, not your coins. So what happened?

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<v Speaker 1>Well earlier this month, federal bankruptcy Judge Martin Glenn found

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<v Speaker 1>that when people deposited assets with a now bankrupt crypto

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<v Speaker 1>lenders Celsius, and in exchange received interest on those deposits,

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<v Speaker 1>that those assets became the property of Celsius. The effect

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<v Speaker 1>was to make the customers of that earned program, as

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<v Speaker 1>it was called, defined as what's known in finance terms

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<v Speaker 1>as unsecured creditors. What that means in practice is they're

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<v Speaker 1>unlikely to get all their money back because of the

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<v Speaker 1>ongoing bankruptcy. Many investors signed up for these accounts in

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<v Speaker 1>part because of the potentially higher returns that Celsius had

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<v Speaker 1>promised them on the deposits. In some cases, as much

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<v Speaker 1>as eighteen percent, even with current levels of interest rates.

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

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<v Speaker 1>for example. But unlike at a bank, those deposits which

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<v Speaker 1>were held in crypto were not in any way covered

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<v Speaker 1>by any sort of federal deposit insurance. And just to

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<v Speaker 1>give a little bit of context about how many people

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<v Speaker 1>are affected here, the value of those accounts back in

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<v Speaker 1>July was more than four billion dollars. But this ruling

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<v Speaker 1>won't only affect Celsius customers. For more on what else

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

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<v Speaker 1>Prior to this ruling, thousands of Celsius users may have

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<v Speaker 1>been clinging to the hope that one day the company

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<v Speaker 1>would simply raise the gates on the website, as it were,

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<v Speaker 1>and let them withdrawther crypto if it was there. We

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<v Speaker 1>know that there's a big hole in the balance sheet.

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

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<v Speaker 1>welcome back to the show. Thanks for having me. You,

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<v Speaker 1>of course, one of the folks who's been sort of dragged,

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<v Speaker 1>potentially kicking, potentially screaming into covering way more crypto than

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<v Speaker 1>you might have expected going into two. But one of

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<v Speaker 1>the things that has certainly taken up a lot of

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<v Speaker 1>your time and reporting is the ins and out of

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<v Speaker 1>these various rulings affecting some of these crypto companies. Why

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

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<v Speaker 1>Is it that there just weren't many bankruptcies before? Is

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

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

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<v Speaker 1>know it occupies a sort of strange place in the

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<v Speaker 1>legal landscape. Is bitcoin is security? Is ethere um a security?

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<v Speaker 1>If not? What does that mean for users of websites

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

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<v Speaker 1>The SEC hasn't said much about this, the CFTC, So

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<v Speaker 1>when crypto lenders started landing in bankruptcy last year, immediately

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<v Speaker 1>lawyers around the country being scratching their heads, saying, oh,

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<v Speaker 1>what are judges going to say about this? We're now

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<v Speaker 1>starting to get some of those rulings and those, as

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<v Speaker 1>you have report said, very highly paid crypto bankruptcy lawyers.

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<v Speaker 1>What are some of the most important cases that they've

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<v Speaker 1>been involved in? What are some of the judges talking

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<v Speaker 1>about I know Celsius is a big one that happened recently.

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<v Speaker 1>This is Celsius. Depositors put money into Celsius expecting that

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<v Speaker 1>all the money was still there and they're just earning

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<v Speaker 1>an interest on it. But now it seems as though

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<v Speaker 1>potentially in this bankruptcy hearing they could potentially not be that.

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<v Speaker 1>Celsius is certainly the biggest so far because FTX, for example,

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<v Speaker 1>just hasn't had enough time to play out. Celsius and

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<v Speaker 1>Voyager both went bankrupted around the same time. Both were

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<v Speaker 1>crypto lenders, so users deposited coins and then the companies

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<v Speaker 1>lent them out to generate yield, much like traditional banks

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<v Speaker 1>do UM but as we now know UM, these were

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<v Speaker 1>not regulated like banks. They didn't resemble banks in a

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<v Speaker 1>lot of ways. And so most recently we got a

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<v Speaker 1>ruling out of the Celsius case regarding whether or not

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<v Speaker 1>customer deposits that were put into interest bearing accounts, whether

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<v Speaker 1>those coins belong to Celsius or whether they belong to users.

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

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<v Speaker 1>if I'm remembering correctly, is if you because you didn't

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<v Speaker 1>as a person. But if you theoretically had to posited

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<v Speaker 1>crypto in a particular kind of Celsius account, that crypto

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<v Speaker 1>ceased to be your crypto. According to this judge, that's

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<v Speaker 1>a resolutely right. So there's a lot of discussion about

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<v Speaker 1>terms of service, a lot of exhibits submitted to the

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<v Speaker 1>court showing what the contract between the users and Celsius

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<v Speaker 1>looked like when someone signed up for these so called

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<v Speaker 1>earn accounts. What the judge found here was when you

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<v Speaker 1>clicked the box that said I accept, you were agreeing

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<v Speaker 1>to some lines in that contract that said, by depositing

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<v Speaker 1>coins with Celsius into this kind of account, I grant

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<v Speaker 1>right entitle to Celsius. So these coins are no longer

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<v Speaker 1>mine legally speaking, they belong to Celsius. So, after much

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<v Speaker 1>thinking and review and arguing, the judge said, yeah, that's

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<v Speaker 1>what the contract says, like, I'm really sorry to tell

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<v Speaker 1>you that this is not your bitcoin anymore. There is

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<v Speaker 1>a saying, of course, in the crypto industry, not your keys,

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

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<v Speaker 1>you know both. And so as a person, a theoretical

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<v Speaker 1>Jeremy who is now looking at this court ruling, like,

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<v Speaker 1>what does this mean for you in practice? So you

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<v Speaker 1>already are an an interesting spot because the entity with

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<v Speaker 1>which you deposited your crypto filed for bankruptcy. Now you're

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<v Speaker 1>having from this judge not necessarily even your crypto and

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<v Speaker 1>not actually your crypto at all. Does this mean this

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<v Speaker 1>person has an even lower chance of getting any of

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<v Speaker 1>their crypto back? Pretty much. So. Prior to this ruling,

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<v Speaker 1>thousands of Celsius users may have been clinging to the

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<v Speaker 1>hope that one day the company would simply raise the

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<v Speaker 1>gates on the website as it were, and let them

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<v Speaker 1>withdrawther crypto if it was there. We know that there's

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<v Speaker 1>a big hole in the balance sheet. A lot of

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

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<v Speaker 1>we know that all Celsius users that have interest sparing

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<v Speaker 1>accounts are going to be treated like unsecured creditors. So

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<v Speaker 1>they're going to get um the term is pro rata.

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<v Speaker 1>They're gonna get their proportion of whatever pie is created

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<v Speaker 1>as a result of the of this bankruptcy, rather than

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<v Speaker 1>just getting whatever coins they were owed. So in some

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<v Speaker 1>it's more equitable. Everybody's in the same bad spot. In

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<v Speaker 1>another sense, you're probably kind of sad if you had

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<v Speaker 1>some dogecoin or whatever, I don't know, Celsius or an

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<v Speaker 1>accepted dogecoin. If you had some dochecoin on the platform

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<v Speaker 1>and you would like to just get it back, there

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<v Speaker 1>might be enough for you to get it all back,

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<v Speaker 1>but you're just not allowed. Now it's not yours. How

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<v Speaker 1>do they have ranked unsecured creditors? So like, where would

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<v Speaker 1>a theoretical Jeremy be in the kind of here's the pie,

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<v Speaker 1>You're like a dred a thousand, ten thousand, Like where

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

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<v Speaker 1>in the same bucket, right, So it doesn't really matter

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<v Speaker 1>what kind of coins you had or the size of

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<v Speaker 1>your holdings, if you had good ones or bad ones. Um,

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<v Speaker 1>you're just gonna get the same percentage slice of the

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<v Speaker 1>assets that every other general unsecured creditor is and that

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<v Speaker 1>includes like vendors to Celsius, so not only users, but

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<v Speaker 1>the people who literally keep the lights on utilities, what

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<v Speaker 1>have you. You're all on the same boat. And is

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<v Speaker 1>it a percentage of the amount that was owed or

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<v Speaker 1>is it just the percentage of the amount that's left.

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<v Speaker 1>So they're going to decide at some point when to

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<v Speaker 1>like calcify the amount of the claims that might have

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<v Speaker 1>already happened. I actually don't know off the top of

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<v Speaker 1>my head, but that date will matter because it will

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<v Speaker 1>be you'll get a percentage of what you're owed as

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<v Speaker 1>of X date. Got it. So just because so you

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<v Speaker 1>were owld say, you know, two thousand dollars, you might

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<v Speaker 1>get back one or one hundred dollars maybe depending on

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<v Speaker 1>what the pool is. Sure, yeah, we don't know the

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<v Speaker 1>recovery levels quite yet. It could be a lot better

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<v Speaker 1>than that. I mean, the likelihood that everybody's going to

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<v Speaker 1>get all their stuff back is vanishing lee small. Something

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<v Speaker 1>amazing would have to happen. Well, what is the benefit

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<v Speaker 1>to Celsius of having these assets be classified this way?

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<v Speaker 1>This is pretty great for Celsius because among the assets

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<v Speaker 1>deposited and earn accounts was like three million dollars worth

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<v Speaker 1>of stable coins. Um those are easily turned into dollars

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<v Speaker 1>that the company can use to keep paying its bankruptcy

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<v Speaker 1>lawyers and still live in bankruptcy. So they've been asking

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<v Speaker 1>to sell these stable coins for a while because the

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<v Speaker 1>company's running out of money sometime in the early spring.

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

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<v Speaker 1>finding financing from a third party for this company is like,

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<v Speaker 1>not very likely. I don't I don't envy those bankers,

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<v Speaker 1>So this is this is great for them in the

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<v Speaker 1>sense that they cannot keep it lights on a little longer.

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<v Speaker 1>Got it up next. More from Bloomberg Reports or Jeremy

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<v Speaker 1>Hill on what the recent Celsius ruling could mean for Crypto.

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<v Speaker 1>We'll be right back now. One of the things that

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<v Speaker 1>you've talked about in the previous appearances on the show

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<v Speaker 1>is the fact that it's not this isn't a thing

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<v Speaker 1>that's going to get resolved tomorrow. What are some of

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<v Speaker 1>the timelines that folks should be prepared to encounter. Well,

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

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<v Speaker 1>but at some point Celsius is going to file what's

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<v Speaker 1>called a disclosure statement, and that disclosure statement is going

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<v Speaker 1>to lay out the plan for getting Celsius out of

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<v Speaker 1>bankruptcy and repaying creditors. The document is used to inform

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<v Speaker 1>creditors users about the shape of that plan, and everybody

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<v Speaker 1>gets to vote, um, how much sheer vote matters depends

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<v Speaker 1>on where this sort of value breaks in the company. Um,

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<v Speaker 1>but it's an important document and that's like, that's like

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<v Speaker 1>a key thing to look out for. And have any

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<v Speaker 1>of the other crypto companies that have entered into bankruptcy

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<v Speaker 1>in the past year and a half filed similar documents already?

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<v Speaker 1>Voyager has. Voyager has because they were going to sell

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<v Speaker 1>themselves to FTX that they had a plan again, so

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<v Speaker 1>they had their ducks in a row, and then something

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<v Speaker 1>really bad happened and uh, now they're trying to sell

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<v Speaker 1>themselves to Finance dot US. That process is proceeding. They're

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<v Speaker 1>facing some pushback, but if I recall correctly, that's been

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<v Speaker 1>rolled into a plan, so a disclosure statement exists with

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<v Speaker 1>estimated recoveries. Lager Digital has announced the crypto exchange operator

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<v Speaker 1>Binance will acquire its s. That's the deal worth just

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<v Speaker 1>over a billion dollars. Binance was one of several bidders

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<v Speaker 1>for Voyager, which is currently in bankruptcy. Voyager said the

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<v Speaker 1>move will start the process of allowing customer access to

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<v Speaker 1>their funds, and of course the pushback comes from a

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

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<v Speaker 1>sometimes which is like light regulatory objection, which is to say,

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<v Speaker 1>like the regulators haven't been like raw, but they've been

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<v Speaker 1>like m we have concerns. And so the U s

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<v Speaker 1>SEC had some concerns about the binance US proposal to

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<v Speaker 1>acquire Voyager, that's right, and other state securities regulators and

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<v Speaker 1>they have been you know, they vary in in their forcefulness,

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<v Speaker 1>and it seems like an overarching concern is like we

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<v Speaker 1>don't really know that much about finance, um as I

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<v Speaker 1>understand that finance is sort of famously opaque in some ways.

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<v Speaker 1>So these are objections that can very much be overcome.

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<v Speaker 1>It's in no way like an all out stop on

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<v Speaker 1>the process a judge after rule or they might be

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<v Speaker 1>settled before the sale hearing. And just because we're talking

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<v Speaker 1>about fd X and passing the a lot of attention

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<v Speaker 1>has been obviously on kind of the criminal case against

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<v Speaker 1>stand backmun Freed. He has pleaded not guilty. Multiple of

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<v Speaker 1>his former closest colleagues are appearing to be testifying against

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<v Speaker 1>Back and pun Freed, possibly for you know, leniency applied

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<v Speaker 1>to their own potential future prosecutions. But in terms of

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<v Speaker 1>the ft X bankruptcy what like where are the ass

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<v Speaker 1>in the process. I think the biggest thing right now

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<v Speaker 1>is the company's trying to get judges sign off on

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<v Speaker 1>procedures for selling some assets. So we know that f

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<v Speaker 1>t X does have plenty of good assets and the

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<v Speaker 1>proceeds of those sales will go towards repaying creditors. So

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

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<v Speaker 1>round of bid procedures, but that's a that's a good asset.

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<v Speaker 1>We understand that is going to be sold off. So

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<v Speaker 1>the thing is like bankruptcies take so long because there's

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<v Speaker 1>a lot of red tape and you have to get

0:13:13.160 --> 0:13:16.360
<v Speaker 1>judges sign off for things that seem really small. Just like,

0:13:16.520 --> 0:13:19.400
<v Speaker 1>here's how we plan to go about soliciting people that

0:13:19.520 --> 0:13:22.520
<v Speaker 1>may want to buy our assets. Is this okay? And

0:13:22.559 --> 0:13:24.760
<v Speaker 1>then everybody else gets to weigh in and say like, no,

0:13:25.000 --> 0:13:26.839
<v Speaker 1>you need to reach out to a broader pool, or

0:13:26.880 --> 0:13:29.640
<v Speaker 1>it's too faster, it's too slow. So we're in the

0:13:29.760 --> 0:13:32.599
<v Speaker 1>process right now, and you know, in terms of that

0:13:32.679 --> 0:13:35.560
<v Speaker 1>outreach the you're describing Block five, another one of these

0:13:35.600 --> 0:13:39.040
<v Speaker 1>crypto companies that run into distress UM put out its

0:13:39.040 --> 0:13:42.520
<v Speaker 1>own presentation and how to hearing. You know, in January

0:13:42.640 --> 0:13:45.080
<v Speaker 1>essentially saying we try to get more than a hundred

0:13:45.080 --> 0:13:50.080
<v Speaker 1>people to you know, buy us effectively, and didn't quite succeed.

0:13:51.360 --> 0:13:54.880
<v Speaker 1>The funny thing about these processes is that the bankers

0:13:54.880 --> 0:13:56.880
<v Speaker 1>that run the sales, they have to reach out to

0:13:56.960 --> 0:14:00.240
<v Speaker 1>just as many people as possible. Oftentimes we never into

0:14:00.360 --> 0:14:03.960
<v Speaker 1>learning who exactly was contacted. But it's really important for

0:14:04.000 --> 0:14:06.760
<v Speaker 1>the court that the bankers and lawyers show we tried

0:14:06.760 --> 0:14:09.240
<v Speaker 1>our best and cast the net as wide as possible,

0:14:09.280 --> 0:14:12.560
<v Speaker 1>even if we thought this company has absolutely no interest

0:14:12.640 --> 0:14:16.679
<v Speaker 1>in buying our assets, but it's worth a shot, right yeah.

0:14:16.840 --> 0:14:20.120
<v Speaker 1>I mean they've got to justify those fees somehow, certainly too.

0:14:21.200 --> 0:14:23.360
<v Speaker 1>Just as a kind of a final question, you know,

0:14:23.400 --> 0:14:28.360
<v Speaker 1>the market continues to be challenging as it were, and

0:14:28.520 --> 0:14:31.760
<v Speaker 1>you know we've seen just in January multiple exchanges saying

0:14:31.800 --> 0:14:35.400
<v Speaker 1>they're cutting twenty thirty in some cases of staff. We

0:14:35.440 --> 0:14:38.480
<v Speaker 1>have different types of banks withdrawing from the crypto universe

0:14:38.720 --> 0:14:42.480
<v Speaker 1>entirely other than like the kind of the obvious headline numbers,

0:14:42.520 --> 0:14:46.920
<v Speaker 1>Are there any interesting underlying considerations that may affect any

0:14:46.960 --> 0:14:49.880
<v Speaker 1>part of these bankruptcy proceedings related to just the states

0:14:49.880 --> 0:14:52.560
<v Speaker 1>of the markets, right, Now that's a good question. I mean,

0:14:52.560 --> 0:14:54.560
<v Speaker 1>if the price of crypto goes up, it's good for

0:14:54.560 --> 0:15:00.280
<v Speaker 1>crypto bankruptcies if you especially if judges find that the

0:15:00.320 --> 0:15:04.720
<v Speaker 1>crypto held by the bankrupt company belongs to the company itself,

0:15:04.760 --> 0:15:08.760
<v Speaker 1>as in the case of Celsius, then theoretically they can

0:15:08.760 --> 0:15:12.000
<v Speaker 1>sell that crypto and start repaying creditors, so that would

0:15:12.040 --> 0:15:14.880
<v Speaker 1>be a good thing. Interestingly, in the case of FTX,

0:15:15.040 --> 0:15:18.880
<v Speaker 1>some early indications seemed to say that the contract between

0:15:19.000 --> 0:15:21.960
<v Speaker 1>users in the company was different than Celsius. The users

0:15:22.000 --> 0:15:24.960
<v Speaker 1>retained title, so rather than being all general and secure

0:15:25.000 --> 0:15:27.200
<v Speaker 1>creditors that are like rooting for the price to go

0:15:27.320 --> 0:15:29.440
<v Speaker 1>up so that they'll get more money back. We may

0:15:29.480 --> 0:15:31.600
<v Speaker 1>see a situation where some people are made whole and

0:15:31.640 --> 0:15:33.600
<v Speaker 1>some people are not, and the price of the crypto

0:15:33.680 --> 0:15:38.240
<v Speaker 1>doesn't matter as much. Exciting times lost to do Absolutely well,

0:15:38.280 --> 0:15:39.800
<v Speaker 1>I'm sure we'll have you back to smoke about it more.

0:15:39.800 --> 0:15:43.360
<v Speaker 1>Thank you for joining. Thank you. That was Bloomberg reposto

0:15:43.440 --> 0:15:45.720
<v Speaker 1>Jeremy Hilt. You can find more of his reporting on

0:15:45.760 --> 0:15:48.480
<v Speaker 1>the Bloomberg terminal and on Bloomberg dot com, and check

0:15:48.480 --> 0:15:56.400
<v Speaker 1>out our twice weekly use less of Bloomberg Crypto This

0:15:56.440 --> 0:15:59.480
<v Speaker 1>is Bloomberg Crypto, a daily podcast from Bloomberg and I

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0:16:09.320 --> 0:16:12.360
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0:16:15.560 --> 0:16:19.280
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0:16:19.320 --> 0:16:23.120
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0:16:23.200 --> 0:16:26.600
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