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Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and

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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.

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Speaker 1: It's Wednesday, February twenty second. Over the course of this

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Speaker 1: crypto winter, we've seen companies falling like dominoes. Several have

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Speaker 1: filed for bankruptcy, with consequences that continue to reverberate across

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Speaker 1: markets even today. In July twenty twenty two, Celsius became

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Speaker 1: the first, but not the last, of the major crypto

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Speaker 1: companies to seek bankruptcy protection. Now, consumers and courts alike

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Speaker 1: are grappling with what these collapses all mean. Regulators have

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Speaker 1: sharpened both their rhetoric and their actions against crypto companies

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Speaker 1: and individuals in the market, particularly in the past few months.

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Speaker 1: How are these bankruptcies informing their thinking, what precedents are

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Speaker 1: they setting, and what are the potential consequences for crypto.

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Speaker 1: Joining me now to discuss the growing power and importance

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Speaker 1: of bankruptcy court judges is Bloomberg Reporto Steve Church. Steve,

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Speaker 1: Welcome to the podcast. Steve, what a pleasure to have

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Speaker 1: you on the show today. Welcome to the podcast. Great

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Speaker 1: to be here. You, like many of my colleagues at Bloomberg,

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Speaker 1: have found yourself caught in the crypto across his in

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Speaker 1: the past year and a bit. How is it that

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Speaker 1: you've been having to do so much reporting on what's

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Speaker 1: been happening in crypto? Oh, a simple explanation. The crash

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Speaker 1: has put several crypto companies into bankruptcy, and that means

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Speaker 1: I get a chance to sit in court and listen

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Speaker 1: to the confusing things that make crypto world so fascinating.

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Speaker 1: What are some of those fascinating, if confusing things, Oh,

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Speaker 1: A big question about how do you decide who's a

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Speaker 1: creditor and who's a customer. It's as if a bank

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Speaker 1: was allowed to go bankrupt. Banks are not allowed to

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Speaker 1: go bankrupt in the United States. But if a bank

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Speaker 1: did go bankrupt and you were a depositor, do you

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Speaker 1: own your own money? Technically you don't, So questions like

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Speaker 1: that It's becoming really more interesting in a way that

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Speaker 1: is going to cause headaches for a lot of customers

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Speaker 1: and a lot of crypto investors. I've barely asked you

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Speaker 1: any questions, and you're already blowing people's minds about whether

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Speaker 1: they own their own money, so I have great faith

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Speaker 1: about where this is going to go. So you've got

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Speaker 1: these big questions like what are some of the companies

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Speaker 1: that have been involved in having these things play out

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Speaker 1: in courts? Well, the biggest on the block right now

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Speaker 1: is of course FTX, the sand Bankman freed company that

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Speaker 1: collapsed it's fraud allegations. Another is a Celsius, another crypto

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Speaker 1: company that went bust, and it's further along an into

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Speaker 1: bankruptcy case than the others. So that's the one to

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Speaker 1: watch in terms of what judges are going to do

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Speaker 1: and how investors might be treated. Now, I have never

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Speaker 1: had the privilege of being in bankruptcy courts either on

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Speaker 1: either side of this. I've never found a bankruptcy. But

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Speaker 1: I've also never been at these hearings and at these

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Speaker 1: conversations what's happening in courts that's having such important precedents

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Speaker 1: for crypto. I think the main thing is how will

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Speaker 1: customers be treated? That's the most direct thing that's happening.

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Speaker 1: There's some other issues as well that a little more esoteric.

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Speaker 1: But right now, if you are a crypto customer of

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Speaker 1: say FTX or Celsius, and you had money on the platform.

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Speaker 1: You expect that you're going to get that money paid

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Speaker 1: back to you, But what happens or that money returned

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Speaker 1: to you because you say had an x number of

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Speaker 1: coins and you expect to get X number of coins back.

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Speaker 1: But in these cases Celsius and FTX especially, they pooled

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Speaker 1: all of your coins with everyone else's coins, and that

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Speaker 1: means that then they lent that money out, so those

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Speaker 1: coins are no longer on the system, that money is

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Speaker 1: no longer enough to cover what you deposited, which means

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Speaker 1: you're really not a customer anymore. You're not a depositor.

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Speaker 1: You're more like a creditor. And in traditional bankruptcies, creditors

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Speaker 1: don't get a hundred cents on the dollar, or they

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Speaker 1: very rarely do they get less than they are actually owed.

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Speaker 1: And that's what's driving a lot of the crypto investors

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Speaker 1: crazy because they thought their money was safe if they

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Speaker 1: read many of the disclosures and thought that their coins

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Speaker 1: they've deposited or their actual dollars that they deposited would

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Speaker 1: be segregated and kept separate, just like say a bank.

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Speaker 1: But as we're discovering, crypto firms are not banks. Well,

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Speaker 1: it's so funny that you say that, because that was

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Speaker 1: supposed to be the whole point of crypto is to

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Speaker 1: not be back, and now we're knowing what the downfall is.

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Speaker 1: There are some regulations that protect the little guy. In fact,

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Speaker 1: a lot of regulators you themselves as the first line

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Speaker 1: of defense for regular consumers, especially in the banking world.

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Speaker 1: They really want to protect the little guy more than

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Speaker 1: the big investors. And in this case, who reads all

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Speaker 1: of the disclosures. When something pops up on your computer

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Speaker 1: screen and it says click agree in order to continue,

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Speaker 1: most people click. They don't read the fine print. What

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Speaker 1: do you not read the seven hundred and fifty words

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Speaker 1: of legally is before you agree to things. I have

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Speaker 1: to admit I tried once many years ago and gave up.

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Speaker 1: And that's having real consequences because you know, I think

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Speaker 1: in the example of Celsius that you mentioned what the

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Speaker 1: terms of service said, and also with FDx is becoming

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Speaker 1: a real issue for the courts to consider. Yeah. In fact,

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Speaker 1: in Celsius, that was the key distinction for whether you

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Speaker 1: are a creditor or a customer, whether your money will

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Speaker 1: be directly return to you, or whether you have to

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Speaker 1: wait in line like everyone else and just accept a

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Speaker 1: smaller amount. And the judge looked at these terms of service,

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Speaker 1: and I think there were several hundred thousand people who

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Speaker 1: signed in terms of service in which the company Celsius said,

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Speaker 1: we own your money, right, we control it. You are

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Speaker 1: not segregated from anyone else. You are not protected. Those

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Speaker 1: folks are going to have some heartburn when they look

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Speaker 1: at how much they get back because they may not

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Speaker 1: get everything back. In fact, they're likely not to get

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Speaker 1: everything back that they put on the system. Right, And

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Speaker 1: if I remember your story correctly, it was something like

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Speaker 1: six hundred thousand people, which is quite a lot of

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Speaker 1: folks who are looking at you nowhere close to anything

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Speaker 1: like the amounts that they had deposited in the first place. Correct.

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Speaker 1: And this is why FTX is so much bigger and

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Speaker 1: so much more frustrating, because it's not several hundred thousand,

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Speaker 1: it's not six hundred thousand, it's millions. Millions of people

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Speaker 1: are in this similar boat. FTX is not as far

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Speaker 1: along in their case. So really, the decision on whether

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Speaker 1: all those funds were segregated and therefore maybe more protected,

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Speaker 1: has not been made yet. I don't think the FTX

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Speaker 1: lawyers who are running the show, and John Ray, the

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Speaker 1: new FTX CEO who was brought in to clean up

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Speaker 1: the mess. I don't think they've made a final decision,

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Speaker 1: or at least they haven't publicly announced the final decision

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Speaker 1: on how they're going to treat customer deposits. But here's

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Speaker 1: the economic reality. No matter what they decide, there is

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Speaker 1: not enough money for everybody to collect what they're owed.

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Speaker 1: And if I remember that correctly, you know that was

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Speaker 1: one of the points that a judge made in a

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Speaker 1: recent hearing on FTX that folks should not expect to

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Speaker 1: be able to be made whole in any capacity. Yes,

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Speaker 1: he said that. The lawyers for FTX have said that's

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Speaker 1: it's it's just the reality of the situation. The money

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Speaker 1: is not there that people wish, would wish that they

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Speaker 1: could another investigations going on to find it. But how much,

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Speaker 1: how many assets will be found and where it will

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Speaker 1: be found, is anybody's guests. No one expects. No one

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Speaker 1: expects one hundred percent recovery in FTX. Yeah, not even

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Speaker 1: the folks who were the most optimistic. I want to

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Speaker 1: go back to something that you said about how you

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Speaker 1: know crypto may have rejected the entire foundation of banks

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Speaker 1: and the traditional financial sector. But one big advantage to

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Speaker 1: customers and to consumers is rules in place that provide

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Speaker 1: some degree of consumer protection. Regulators woke up in twenty

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Speaker 1: twenty three. It seemed like on a mission they were like,

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Speaker 1: we may have missed some of the stuff in twenty

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Speaker 1: twenty one, twenty twenty two, but now we're coming for everyone.

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Speaker 1: To what extent do some of these conversations in bankruptcy courts,

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Speaker 1: some of these precedents that you're describing, some of these

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Speaker 1: issues that are being worked through ever inform policy, legislation

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Speaker 1: or is it more of a sentiment thing. I think

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Speaker 1: it's an indirect influence, and you put your finger on it.

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Speaker 1: Sentiment is a good word to use. What will happen

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Speaker 1: is there will be these outrageous findings in court that

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Speaker 1: leak into the public, and in ftx's case, millions of

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Speaker 1: people will be affected by this. That's going to create

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Speaker 1: pressure on regulators and on Congress in some indirect way.

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Speaker 1: The closest thing to a direct connection will be if

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Speaker 1: a judge makes a ruling that says, from now on,

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Speaker 1: if you're in bankruptcy and you're a crypto company, your

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Speaker 1: assets will be treated as an infill in blank, a security,

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Speaker 1: as money, as a commodity. If a judge makes that

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Speaker 1: kind of ruling, and it comes from a judge, say

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Speaker 1: in New York or Delaware, where the law has a

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Speaker 1: long precedent, and those judges have long reach of a

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Speaker 1: big reach across investors, you're going to see the professional

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Speaker 1: investor class really take hard look at how they're going

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Speaker 1: to invest in crypto companies in the future, because they

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Speaker 1: look down the line professional investors, the big hedge funds,

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Speaker 1: they look down the line and say, Okay, what if

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Speaker 1: the worst case happens and this company goes bankrupt, how

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Speaker 1: am I going to be treated? And that could inform

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Speaker 1: how they make their decisions, how they invest what kind

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Speaker 1: of crypto companies they invest in. How much experience do

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Speaker 1: these judges have with crypto prior to crypto prior to

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Speaker 1: the winter none. In fact, it's amazing to listen to

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Speaker 1: the judges talk about the learning curve they've gone through,

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Speaker 1: and it's been pretty impressive. The judges in New York

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Speaker 1: and in Delaware have spent an enormous amount of time

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Speaker 1: just learning the basics about how crypto works, and when

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Speaker 1: you hear them ask questions, you can tell they've done

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Speaker 1: their homework and they're grasping to understand. They're really trying

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Speaker 1: to get it right. It's impressive, but then again they're undergone.

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Speaker 1: Bankruptcy is famous for moving very quickly to try to

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Speaker 1: get money back, even if it seems slow by the

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Speaker 1: average person's review. Up next, more from Bloomberg Reports. Steve

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Speaker 1: Church on how a handful of judges are shaping the

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Speaker 1: framework of Crypto. We'll be right back. You know, one

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Speaker 1: of the things that I've noticed in talking to folks

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Speaker 1: about this is bankruptcy law. Nobody understands it who's not

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Speaker 1: either a report I like you who's reporting on this

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Speaker 1: twenty four seven, or a lawyer who's professionally paid to

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Speaker 1: understand it, or as you mentioned, these judges. Our colleague

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Speaker 1: Jeremy Hill, who I know you work with and who

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Speaker 1: has been on the show a couple of times, has

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Speaker 1: talked a lot about the fact that like, bankruptcy timelines

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Speaker 1: are different from what people might expect from your perspective.

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Speaker 1: When you're explaining that to people, like how fast can

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Speaker 1: this really move? It can move in a matter of months,

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Speaker 1: which is lightning speed in terms of contentious court cases.

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Speaker 1: If the SEC sues a crypto company to decide how

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Speaker 1: that company should treat customers, that can take years to

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Speaker 1: play out. But if you're in bankruptcy court and the

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Speaker 1: judge has to decide whether your account is segregated and

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Speaker 1: therefore you get back everything you put into it, or

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Speaker 1: whether it was pooled, and you really don't have control,

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Speaker 1: and so you only get back ten cents for every

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Speaker 1: dollar you put in. Those kinds of decisions create pressure,

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Speaker 1: and pressure causes the bankruptcy judges and the system itself

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Speaker 1: to work at a much faster rate, and so you

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Speaker 1: get to economic decisions, substantive economic decisions, much quicker in

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Speaker 1: bankruptcy court than you do in a traditional lawsuit case.

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Speaker 1: And from a consumer perspective, that's positive, right, because you know,

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Speaker 1: folks are spending less very expensive time and actually like

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Speaker 1: customer money potentially trying to sort these things out well.

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Speaker 1: Time and money exactly is what you say. If you're

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Speaker 1: waiting for a decision on how much you're going to

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Speaker 1: get back from FTX or from Celsius, and you have

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Speaker 1: lawyers argue about very obscure pieces of law. That's frustrating,

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Speaker 1: and it reduces what you're going to get back because

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Speaker 1: time costs money, right, so it's you know, the dollar

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Speaker 1: you expect to get back today is only worth eighty

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Speaker 1: way up to the Supreme Court. But in the meantime,

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Speaker 1: it in your pocket. After six months, nine months, sometimes

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Speaker 1: it takes longer than a year or so for you

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Speaker 1: as a consumer, still feel like it's taking a really

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Speaker 1: long time. Oh, of course, and the frustration is obvious

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Speaker 1: in each of these court hearings where you have many, many,

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Speaker 1: many investors on these zoom because many of the court

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Speaker 1: hearings a handle by zoom. They're on and they're talking

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Speaker 1: directly to the judge and they're asking questions. It's clear

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Speaker 1: Some of them are very do a very good job

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Speaker 1: of making their points, but others just wind up complaining. Yeah,

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Speaker 1: kind of vibe to that point, like what is the

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Speaker 1: wildest thing you've seen in one of these hearings. I

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Speaker 1: think there was one point in an FTX hearing early

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Speaker 1: on when the zoom was not quite under control of

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Speaker 1: the judge, and there were people popping up and asking questions,

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Speaker 1: the hearing done right. And I can imagine that can

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Speaker 1: be very frustrating for everyone involved. Yeah, you know, when

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Speaker 1: judges have to become like zoom Cole Moderatos, it truly

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Speaker 1: is twenty twenty three, and that's exactly what's been happening

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Speaker 1: in almost all these crypto hearings, not things they prepare

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Speaker 1: you for in law school. Well, Steve, thank you so

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Speaker 1: much for being on the show. I really appreciate you

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Speaker 1: taking the time. Great Thanks Stacy, it was great to

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Speaker 1: be here. That was Bloomberg Reports to Steve ch. You

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Speaker 1: can find more of his reporting on the Bloomberg Terminal

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Speaker 1: and on Bloomberg dot com, and be sure to check

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Speaker 1: out over twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto,

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

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Speaker 1: The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our

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Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Farouk

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Speaker 1: and Sharon Barrero. Our associate producers are Ty Butler and

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Speaker 1: Moses on um Desta wonder At is our engineer. Original

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Speaker 1: music by Leo Sidron. I'm Stacy Marie Schmel. We'll be

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Speaker 1: back tomorrow. The