WEBVTT - How Are Bankruptcy Courts Shaping Crypto Law?

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<v Speaker 1>This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and

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

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

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

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<v Speaker 1>filed for bankruptcy, with consequences that continue to reverberate across

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<v Speaker 1>markets even today. In July twenty twenty two, Celsius became

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<v Speaker 1>the first, but not the last, of the major crypto

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<v Speaker 1>companies to seek bankruptcy protection. Now, consumers and courts alike

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<v Speaker 1>are grappling with what these collapses all mean. Regulators have

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<v Speaker 1>sharpened both their rhetoric and their actions against crypto companies

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<v Speaker 1>and individuals in the market, particularly in the past few months.

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<v Speaker 1>How are these bankruptcies informing their thinking, what precedents are

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<v Speaker 1>they setting, and what are the potential consequences for crypto.

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<v Speaker 1>Joining me now to discuss the growing power and importance

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<v Speaker 1>of bankruptcy court judges is Bloomberg Reporto Steve Church. Steve,

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<v Speaker 1>Welcome to the podcast. Steve, what a pleasure to have

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<v Speaker 1>you on the show today. Welcome to the podcast. Great

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<v Speaker 1>to be here. You, like many of my colleagues at Bloomberg,

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<v Speaker 1>have found yourself caught in the crypto across his in

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<v Speaker 1>the past year and a bit. How is it that

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<v Speaker 1>you've been having to do so much reporting on what's

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<v Speaker 1>been happening in crypto? Oh, a simple explanation. The crash

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<v Speaker 1>has put several crypto companies into bankruptcy, and that means

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<v Speaker 1>I get a chance to sit in court and listen

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<v Speaker 1>to the confusing things that make crypto world so fascinating.

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<v Speaker 1>What are some of those fascinating, if confusing things, Oh,

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<v Speaker 1>A big question about how do you decide who's a

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<v Speaker 1>creditor and who's a customer. It's as if a bank

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<v Speaker 1>was allowed to go bankrupt. Banks are not allowed to

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<v Speaker 1>go bankrupt in the United States. But if a bank

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<v Speaker 1>did go bankrupt and you were a depositor, do you

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<v Speaker 1>own your own money? Technically you don't, So questions like

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<v Speaker 1>that It's becoming really more interesting in a way that

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<v Speaker 1>is going to cause headaches for a lot of customers

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<v Speaker 1>and a lot of crypto investors. I've barely asked you

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

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<v Speaker 1>they own their own money, so I have great faith

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<v Speaker 1>about where this is going to go. So you've got

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<v Speaker 1>these big questions like what are some of the companies

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<v Speaker 1>that have been involved in having these things play out

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<v Speaker 1>in courts? Well, the biggest on the block right now

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<v Speaker 1>is of course FTX, the sand Bankman freed company that

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

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<v Speaker 1>company that went bust, and it's further along an into

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<v Speaker 1>bankruptcy case than the others. So that's the one to

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<v Speaker 1>watch in terms of what judges are going to do

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<v Speaker 1>and how investors might be treated. Now, I have never

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<v Speaker 1>had the privilege of being in bankruptcy courts either on

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<v Speaker 1>either side of this. I've never found a bankruptcy. But

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<v Speaker 1>I've also never been at these hearings and at these

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<v Speaker 1>conversations what's happening in courts that's having such important precedents

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<v Speaker 1>for crypto. I think the main thing is how will

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

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

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<v Speaker 1>But right now, if you are a crypto customer of

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<v Speaker 1>say FTX or Celsius, and you had money on the platform.

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<v Speaker 1>You expect that you're going to get that money paid

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<v Speaker 1>back to you, But what happens or that money returned

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<v Speaker 1>to you because you say had an x number of

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<v Speaker 1>coins and you expect to get X number of coins back.

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<v Speaker 1>But in these cases Celsius and FTX especially, they pooled

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<v Speaker 1>all of your coins with everyone else's coins, and that

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<v Speaker 1>means that then they lent that money out, so those

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<v Speaker 1>coins are no longer on the system, that money is

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<v Speaker 1>no longer enough to cover what you deposited, which means

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<v Speaker 1>you're really not a customer anymore. You're not a depositor.

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

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<v Speaker 1>don't get a hundred cents on the dollar, or they

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<v Speaker 1>very rarely do they get less than they are actually owed.

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<v Speaker 1>And that's what's driving a lot of the crypto investors

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<v Speaker 1>crazy because they thought their money was safe if they

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<v Speaker 1>read many of the disclosures and thought that their coins

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<v Speaker 1>they've deposited or their actual dollars that they deposited would

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<v Speaker 1>be segregated and kept separate, just like say a bank.

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

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<v Speaker 1>it's so funny that you say that, because that was

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<v Speaker 1>supposed to be the whole point of crypto is to

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

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<v Speaker 1>There are some regulations that protect the little guy. In fact,

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<v Speaker 1>a lot of regulators you themselves as the first line

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<v Speaker 1>of defense for regular consumers, especially in the banking world.

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<v Speaker 1>They really want to protect the little guy more than

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<v Speaker 1>the big investors. And in this case, who reads all

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<v Speaker 1>of the disclosures. When something pops up on your computer

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<v Speaker 1>screen and it says click agree in order to continue,

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<v Speaker 1>most people click. They don't read the fine print. What

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<v Speaker 1>do you not read the seven hundred and fifty words

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<v Speaker 1>of legally is before you agree to things. I have

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<v Speaker 1>to admit I tried once many years ago and gave up.

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<v Speaker 1>And that's having real consequences because you know, I think

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<v Speaker 1>in the example of Celsius that you mentioned what the

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<v Speaker 1>terms of service said, and also with FDx is becoming

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<v Speaker 1>a real issue for the courts to consider. Yeah. In fact,

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<v Speaker 1>in Celsius, that was the key distinction for whether you

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<v Speaker 1>are a creditor or a customer, whether your money will

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<v Speaker 1>be directly return to you, or whether you have to

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<v Speaker 1>wait in line like everyone else and just accept a

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<v Speaker 1>smaller amount. And the judge looked at these terms of service,

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<v Speaker 1>and I think there were several hundred thousand people who

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<v Speaker 1>signed in terms of service in which the company Celsius said,

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<v Speaker 1>we own your money, right, we control it. You are

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<v Speaker 1>not segregated from anyone else. You are not protected. Those

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<v Speaker 1>folks are going to have some heartburn when they look

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<v Speaker 1>at how much they get back because they may not

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<v Speaker 1>get everything back. In fact, they're likely not to get

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<v Speaker 1>everything back that they put on the system. Right, And

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<v Speaker 1>if I remember your story correctly, it was something like

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<v Speaker 1>six hundred thousand people, which is quite a lot of

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<v Speaker 1>folks who are looking at you nowhere close to anything

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<v Speaker 1>like the amounts that they had deposited in the first place. Correct.

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<v Speaker 1>And this is why FTX is so much bigger and

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<v Speaker 1>so much more frustrating, because it's not several hundred thousand,

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<v Speaker 1>it's not six hundred thousand, it's millions. Millions of people

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<v Speaker 1>are in this similar boat. FTX is not as far

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<v Speaker 1>along in their case. So really, the decision on whether

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<v Speaker 1>all those funds were segregated and therefore maybe more protected,

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<v Speaker 1>has not been made yet. I don't think the FTX

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<v Speaker 1>lawyers who are running the show, and John Ray, the

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<v Speaker 1>new FTX CEO who was brought in to clean up

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

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<v Speaker 1>or at least they haven't publicly announced the final decision

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

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<v Speaker 1>the economic reality. No matter what they decide, there is

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<v Speaker 1>not enough money for everybody to collect what they're owed.

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<v Speaker 1>And if I remember that correctly, you know that was

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<v Speaker 1>one of the points that a judge made in a

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<v Speaker 1>recent hearing on FTX that folks should not expect to

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<v Speaker 1>be able to be made whole in any capacity. Yes,

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<v Speaker 1>he said that. The lawyers for FTX have said that's

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<v Speaker 1>it's it's just the reality of the situation. The money

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<v Speaker 1>is not there that people wish, would wish that they

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<v Speaker 1>could another investigations going on to find it. But how much,

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<v Speaker 1>how many assets will be found and where it will

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<v Speaker 1>be found, is anybody's guests. No one expects. No one

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<v Speaker 1>expects one hundred percent recovery in FTX. Yeah, not even

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<v Speaker 1>the folks who were the most optimistic. I want to

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<v Speaker 1>go back to something that you said about how you

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<v Speaker 1>know crypto may have rejected the entire foundation of banks

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<v Speaker 1>and the traditional financial sector. But one big advantage to

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<v Speaker 1>customers and to consumers is rules in place that provide

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<v Speaker 1>some degree of consumer protection. Regulators woke up in twenty

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<v Speaker 1>twenty three. It seemed like on a mission they were like,

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<v Speaker 1>we may have missed some of the stuff in twenty

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<v Speaker 1>twenty one, twenty twenty two, but now we're coming for everyone.

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<v Speaker 1>To what extent do some of these conversations in bankruptcy courts,

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<v Speaker 1>some of these precedents that you're describing, some of these

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<v Speaker 1>issues that are being worked through ever inform policy, legislation

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<v Speaker 1>or is it more of a sentiment thing. I think

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

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<v Speaker 1>Sentiment is a good word to use. What will happen

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<v Speaker 1>is there will be these outrageous findings in court that

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<v Speaker 1>leak into the public, and in ftx's case, millions of

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<v Speaker 1>people will be affected by this. That's going to create

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<v Speaker 1>pressure on regulators and on Congress in some indirect way.

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<v Speaker 1>The closest thing to a direct connection will be if

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<v Speaker 1>a judge makes a ruling that says, from now on,

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<v Speaker 1>if you're in bankruptcy and you're a crypto company, your

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<v Speaker 1>assets will be treated as an infill in blank, a security,

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<v Speaker 1>as money, as a commodity. If a judge makes that

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<v Speaker 1>kind of ruling, and it comes from a judge, say

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<v Speaker 1>in New York or Delaware, where the law has a

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<v Speaker 1>long precedent, and those judges have long reach of a

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<v Speaker 1>big reach across investors, you're going to see the professional

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<v Speaker 1>investor class really take hard look at how they're going

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<v Speaker 1>to invest in crypto companies in the future, because they

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<v Speaker 1>look down the line professional investors, the big hedge funds,

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<v Speaker 1>they look down the line and say, Okay, what if

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<v Speaker 1>the worst case happens and this company goes bankrupt, how

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<v Speaker 1>am I going to be treated? And that could inform

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<v Speaker 1>how they make their decisions, how they invest what kind

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<v Speaker 1>of crypto companies they invest in. How much experience do

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<v Speaker 1>these judges have with crypto prior to crypto prior to

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<v Speaker 1>the winter none. In fact, it's amazing to listen to

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<v Speaker 1>the judges talk about the learning curve they've gone through,

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<v Speaker 1>and it's been pretty impressive. The judges in New York

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<v Speaker 1>and in Delaware have spent an enormous amount of time

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<v Speaker 1>just learning the basics about how crypto works, and when

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<v Speaker 1>you hear them ask questions, you can tell they've done

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<v Speaker 1>their homework and they're grasping to understand. They're really trying

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

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<v Speaker 1>Bankruptcy is famous for moving very quickly to try to

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<v Speaker 1>get money back, even if it seems slow by the

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

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<v Speaker 1>Church on how a handful of judges are shaping the

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

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<v Speaker 1>of the things that I've noticed in talking to folks

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<v Speaker 1>about this is bankruptcy law. Nobody understands it who's not

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<v Speaker 1>either a report I like you who's reporting on this

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<v Speaker 1>twenty four seven, or a lawyer who's professionally paid to

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<v Speaker 1>understand it, or as you mentioned, these judges. Our colleague

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<v Speaker 1>Jeremy Hill, who I know you work with and who

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<v Speaker 1>has been on the show a couple of times, has

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<v Speaker 1>talked a lot about the fact that like, bankruptcy timelines

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<v Speaker 1>are different from what people might expect from your perspective.

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<v Speaker 1>When you're explaining that to people, like how fast can

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<v Speaker 1>this really move? It can move in a matter of months,

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<v Speaker 1>which is lightning speed in terms of contentious court cases.

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<v Speaker 1>If the SEC sues a crypto company to decide how

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<v Speaker 1>that company should treat customers, that can take years to

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<v Speaker 1>play out. But if you're in bankruptcy court and the

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<v Speaker 1>judge has to decide whether your account is segregated and

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<v Speaker 1>therefore you get back everything you put into it, or

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<v Speaker 1>whether it was pooled, and you really don't have control,

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<v Speaker 1>and so you only get back ten cents for every

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<v Speaker 1>dollar you put in. Those kinds of decisions create pressure,

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<v Speaker 1>and pressure causes the bankruptcy judges and the system itself

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<v Speaker 1>to work at a much faster rate, and so you

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<v Speaker 1>get to economic decisions, substantive economic decisions, much quicker in

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<v Speaker 1>bankruptcy court than you do in a traditional lawsuit case.

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

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<v Speaker 1>folks are spending less very expensive time and actually like

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<v Speaker 1>customer money potentially trying to sort these things out well.

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<v Speaker 1>Time and money exactly is what you say. If you're

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<v Speaker 1>waiting for a decision on how much you're going to

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<v Speaker 1>get back from FTX or from Celsius, and you have

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<v Speaker 1>to wait years while appeals go forward, and while the

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

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<v Speaker 1>and it reduces what you're going to get back because

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<v Speaker 1>time costs money, right, so it's you know, the dollar

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<v Speaker 1>you expect to get back today is only worth eighty

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<v Speaker 1>cents in a couple of years. The system knows that,

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<v Speaker 1>and so they push to get things out as quickly

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<v Speaker 1>as possible. One advantage in the bankruptcy courts is that

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<v Speaker 1>you can get money out the door and then everyone

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<v Speaker 1>can argue on appeal and spend years fighting all the

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<v Speaker 1>way up to the Supreme Court. But in the meantime,

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<v Speaker 1>you as a credit you've got your money, You've put

0:13:31.440 --> 0:13:34.040
<v Speaker 1>it in your pocket. After six months, nine months, sometimes

0:13:34.040 --> 0:13:36.160
<v Speaker 1>it takes longer than a year or so for you

0:13:36.240 --> 0:13:38.200
<v Speaker 1>to get your money, but it's much quicker than if

0:13:38.280 --> 0:13:40.680
<v Speaker 1>you were in a traditional court system, even though you

0:13:40.760 --> 0:13:42.600
<v Speaker 1>as a consumer, still feel like it's taking a really

0:13:42.600 --> 0:13:46.640
<v Speaker 1>long time. Oh, of course, and the frustration is obvious

0:13:46.800 --> 0:13:50.840
<v Speaker 1>in each of these court hearings where you have many, many,

0:13:50.880 --> 0:13:53.960
<v Speaker 1>many investors on these zoom because many of the court

0:13:54.000 --> 0:13:56.559
<v Speaker 1>hearings a handle by zoom. They're on and they're talking

0:13:56.559 --> 0:14:00.600
<v Speaker 1>directly to the judge and they're asking questions. It's clear

0:14:00.720 --> 0:14:03.120
<v Speaker 1>that they are invested in the process and they're frustrating.

0:14:03.160 --> 0:14:05.280
<v Speaker 1>Some of them are very do a very good job

0:14:05.320 --> 0:14:10.360
<v Speaker 1>of making their points, but others just wind up complaining. Yeah,

0:14:10.400 --> 0:14:12.120
<v Speaker 1>you know, this is a comments and all the question

0:14:12.240 --> 0:14:14.760
<v Speaker 1>kind of vibe to that point, like what is the

0:14:14.800 --> 0:14:17.320
<v Speaker 1>wildest thing you've seen in one of these hearings. I

0:14:17.400 --> 0:14:20.440
<v Speaker 1>think there was one point in an FTX hearing early

0:14:20.520 --> 0:14:23.760
<v Speaker 1>on when the zoom was not quite under control of

0:14:23.800 --> 0:14:27.520
<v Speaker 1>the judge, and there were people popping up and asking questions,

0:14:27.600 --> 0:14:30.640
<v Speaker 1>or their faces would come on the screen and they

0:14:30.640 --> 0:14:33.480
<v Speaker 1>would try to interject, and the judge kept whackamling and

0:14:33.600 --> 0:14:36.280
<v Speaker 1>putting them, shutting them off because they're trying to get

0:14:36.280 --> 0:14:39.320
<v Speaker 1>the hearing done right. And I can imagine that can

0:14:39.360 --> 0:14:42.600
<v Speaker 1>be very frustrating for everyone involved. Yeah, you know, when

0:14:42.680 --> 0:14:45.760
<v Speaker 1>judges have to become like zoom Cole Moderatos, it truly

0:14:45.840 --> 0:14:48.440
<v Speaker 1>is twenty twenty three, and that's exactly what's been happening

0:14:48.720 --> 0:14:51.080
<v Speaker 1>in almost all these crypto hearings, not things they prepare

0:14:51.080 --> 0:14:52.800
<v Speaker 1>you for in law school. Well, Steve, thank you so

0:14:52.920 --> 0:14:54.440
<v Speaker 1>much for being on the show. I really appreciate you

0:14:54.440 --> 0:14:56.800
<v Speaker 1>taking the time. Great Thanks Stacy, it was great to

0:14:56.800 --> 0:15:00.640
<v Speaker 1>be here. That was Bloomberg Reports to Steve ch. You

0:15:00.680 --> 0:15:02.720
<v Speaker 1>can find more of his reporting on the Bloomberg Terminal

0:15:02.760 --> 0:15:05.120
<v Speaker 1>and on Bloomberg dot com, and be sure to check

0:15:05.120 --> 0:15:14.000
<v Speaker 1>out over twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto,

0:15:14.200 --> 0:15:18.080
<v Speaker 1>a daily podcast from Bloomberg and iHeartRadio. For more shows

0:15:18.080 --> 0:15:22.240
<v Speaker 1>from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever

0:15:22.320 --> 0:15:25.840
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0:15:25.880 --> 0:15:28.880
<v Speaker 1>suggestions for the show to Crypto at Bloomberg dot net.

0:15:32.080 --> 0:15:35.760
<v Speaker 1>The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our

0:15:35.840 --> 0:15:39.680
<v Speaker 1>senior producer is Janet Babin. Our producers are Mohammed Farouk

0:15:39.720 --> 0:15:43.040
<v Speaker 1>and Sharon Barrero. Our associate producers are Ty Butler and

0:15:43.200 --> 0:15:47.480
<v Speaker 1>Moses on um Desta wonder At is our engineer. Original

0:15:47.560 --> 0:15:52.160
<v Speaker 1>music by Leo Sidron. I'm Stacy Marie Schmel. We'll be

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<v Speaker 1>back tomorrow. The