American court hearing recordings and interviews - Season 6. Episode 10. May 8, 2023. In re BlockFi Inc. et al., chapter 11 bankruptcy case no. 2022-19361, audio of hearing held in the BlockFi bankruptcy proceedings pending in New Jersey, USA #crypto

Episode Date: May 9, 2023

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Good morning, everyone. This is Judge Kaplan, and I'll start this morning's hearing on Blockby, Inc. at Al. We have a limited number of attorneys in the courtroom, as well as counsel and parties appearing remotely. To the extent, parties who are appearing remotely wish to be heard are to use the raised hand function. let me turn to debtors council uh good morning morning your honor uh mike slave from kirklin knellis for the debtors all right i think we are ready to proceed this morning on the wallet withdrawal motion we're finally there yes um i have um some slides that i intend to use to guide the presentation by absolutely it wouldn't be oral argument these days without a PowerPoint.

Mr. Jacobson, we have those up. Okay, they're also available on the Kroll BlockFi website for folks that are participating in the hearing over Zoom and would like to follow along. For the benefit of all, my intention is to hear from the debtor first, let them prosecute their motion, hear from those who are supporting the debtor, and then to the objectors. And then, of course, I'm sure there's always a reply. Yes, thank you, Your Honor. And Ms. Kovsky, my opposing counsel, I just want to thank her. We were able to work out instead of agreed stipulated facts that are on the docket at docket number 842. Those facts, along with the declaration of the amended declaration of Amit Chila, which is on the docket at 822, plus the exhibits.

Those constitute the factual record for this particular hearing. by agreement. And we have agreed there won't be any witness cross-examination at this hearing. We're ready to proceed to argument. Make sense. Thank you. So thank you, Your Honor. And as you've noted, we are here at Log Last for the wallet withdrawal motion. And the particular issue being addressed today is whether post-platform pause actions were effective to give those clients rights against assets in the custodial omnibus wallet. We believe that they are not, and the relief that the debtors are requesting today is supported by the official committee of unsecured creditors, and also what we believe to be the aptly named ad hoc committee of actual wallet holders, which is represented by the Reed Smith firm.

And during our argument today, I refer to them as the Reed Smith ad hoc group. And, Your Honor, the motion follows a familiar pattern in the BlockFi bankruptcy case. Trying to advance the slides. Okay, next slide. The relief that we're seeking is pretty simple. BlockFar wants to give people their assets back, and we want to give them back their assets as quickly as possible. But the process for effectuating this pretty simple goal has become very complicated and challenging. And today we are going to debate the consequences of very small details about BlockFi's infrastructure,

the terms of service, and how they work together. Next slide. BlockFi filed this motion because there are specific tokens that are worth about $297 million that are sitting in the custodial omnibus wallets at BitGo and Fireblocks. And those tokens were deposited or moved to the custodial omnibus wallet, at the direction of specific clients for requests before the platform pause time stamp on November 10th at 8.15 p.m. Eastern time. Under BlockFi's terms of service, BlockFi did not have the right to use or re-hypothicate those assets because they were in those

particular custodial omnibus wallets, and BlockFi did not do so. The tokens in those particular omnibus wallets are the property of the clients that directed them into those particular wallets before the platform pause. And we want those assets to go back to those clients because they are not property of the estate. It is undisputed that the actual tokens that are in those custodial omnibus wallets were all deposit or moved there by BlockFi clients as a result of transactions before the platform pause timestamp. My opposing counsel, which I'm going to call the Troutman ad hoc group, it is their position that they have an equal right to the coins

that were moved to those custodial omnibus wallets at the direction of other clients before the platform pause. Their clients sought to remove assets from Blothfai's estate after the platform pause. if you could flip the slide four. Between the platform pause timestamp, Your Honor, on November 10th at 815 p.m. And the petition date, about 48,000 clients clicked buttons on the BlockFi user interface, 48,000 clients in an effort to transfer about $375 million of cryptocurrency from their BlockFi interest accounts,

which I'll call the BIA accounts, into the GIFT accounts, into the GIFT, custodial omnibus wallets. And the members of the Troutman ad hoc group are among the 48,000 clients that did that. It is not disputed that no cryptocurrency ever moved as a result of the buttons pushed after November 10th at 815 Eastern Time, period. Nothing moved. And even though the only tokens that are in the custodial omnibus wallets reflect other clients' activities, the Troutman ad hoc group thinks that they have rights to those assets too. And we respectfully disagree with their position and to articulate why I want to step back, way back, and talk specifically about the two products at issue. And Rob, if you could turn to slide five. So BlockFi offers several different

products, but the two that are at issue here, Your Honor, are the BlockFi wallet product and the BlockFi interest account. Cryptocurrency assets that are on the BlockFi platform have to be in one or the other. They cannot be in both. And just by the nature of the way the products work, it is not possible for assets to be moved from one of the accounts to the other at just the push of a button. Slide six, BlockFi maintains the omnibus wallet accounts at Bitco and Fireblocks. You've finally broken loose from work. Three friends, one tea time, and then the text. Honey, there's water in the basement. Not exactly how you pictured your Saturday.

That's when you call us, Cincinnati Insurance. We always answer the call because real protection means showing up, even when things are in the rough. Cincinnati Insurance. Let us make your bad day better. Find an agent at CINFIN.com. For the wallet product. And, Your Honor, I think you can think of the BitGo and Fireblocks accounts.

They're like safes that are held by Block 5. BlockFi has the private keys, and BlockFi has the ability to access these particular coins through the BitGo or the Fireblock software. And there are omnibus accounts by coin. So the Bitcoin that's placed in the BlockFi wallet product by customers, okay, is put into the omnibus wallet account. And the same with Ethereum put into the BlockFi custodial. wallet product by customers.

Cryptocurrency that's housed in the BlockFi wallet product, it does not move outside the custodial omnibus wallets until and less directed by the customer. And the terms of service are very explicit about this. The terms of service say that the title to the cryptocurrency in the BlockFi wallet shall at all times remain with you and shall not transfer to BlockFi. And that BlockFi shall not sell, transfer, load. hypothicate or otherwise alienate cryptocurrency held in the BlockFi wallet and less specifically instructed. So let me just clarify all cryptocurrency held by BlockFi that was deposited by

customers went through BitGo. Initially. Initially. And then placed in the various omnibus wallets. So it went into BitGo and then if a customer said, I want this. I want this. to be in the interest-bearing accounts, then it was moved to the re-hypublicatable wallets. If they did not, it stayed in the custodial balance. Now, there are two sets of those on it. One is at Bitgo and one is it fireblocks, but those are custodial wallets that have to, the coins have to sit in those accounts. They do not go to the B account.

They do not earn interest, and they cannot be used for BlockFICE revenue-generating activities. And that's actually the opposite of the coins that go into the BIA, or BlockFi interest account. And that's on slide 7. They are the opposite of the custodial accounts. The point of the BIA interest product is that by directing the deposit of cryptocurrency into the BIA account, you're giving title and control over the tokens to BlockFi for use in BlockFi's revenue-generating activities. And cryptocurrency that's placed into the Bia account, earns interest, so of course BlockFi has to do something with those coins. Otherwise,

it would have no way to generate the money to pay the interest. And the terms of service, again, are very explicit about this. They say that BlockFi has the right if you direct your coins into the be a product without further notice to you to pledge, re-pledge, hypothicate, re-hypothicate, sell, lend, otherwise transfer with all attendant rights of ownership for any period of time and without BlockFi retaining possession and control a like amount of cryptocurrency. Those are very clear in the BlockFi BIA terms of service. And my colleagues on the other side admit this in their reply brief that what you put, what do you direct assets into the BIA product, you are giving title to those assets

away from yourself and to BlockFi. And you acknowledge in the BIA terms, that with respect to assets used by BlockFi, pursuant to the BIA terms, you will not be able to exercise rights of ownership. So, Your Honor, as BlockFi told everyone it was going to do, BlockFi did, in fact, re-hypothicate and lend currency placed by customers into the B accounts over to third parties to earn yield. Now, BlockFi did keep a buffer on hand at any one time to try to have liquidity available to meet customer withdrawals. But the whole business model was to lend cryptocurrency that was deposited into the BIA accounts to third parties to earn yield. Blackfai was a crypto lending business, and it did exactly what it told customers it was going to do. Now, those loans, in large part, were freely callable, and they were callable far in advance of BlockFi's obligations to its clients. And the system that BlockFi had in place worked for years because BlockFi could call back low

to customers quicker than it would need to in order to satisfy withdrawal requests. And that's why BlockFi was, in fact, able to satisfy customer requests prior to November 9th of 2022 at all times. It was able to satisfy those faster that it was required to it in terms of service. But in our view, based on the nature of the BlockFi interest account, it does not make sense to assert that if Customer A pushed a button seeking to transfer, assets in the interest account to the wallet account to assert that it happened immediately and therefore there were coins in the omnibus custody audio accounts reflecting customer a's direction. That's not how the system worked. By definition, the movement of assets could not

happen immediately because the asset transfers were manual. They were manual for a number of reasons. One is that the company deliberately divorced the user interface from the external actual assets in order to reduce opportunities for security breaches. But more practically, there might not have been assets available for immediate movement from BIA to wallet, precisely because of the nature of the product. Customers had allowed the assets in BIA to be lent to third parties, rehypaticated, and large portions of them were. So Bafite might not even have possession of the assets to be able to move them from Bia to wallet. So if you move slide to slide eight, the reality is that the assets held for the B-O-Wall,

the BlockFi wallet product were in segregated wallets at BitGo and Fireblocks that BlockFi did not use to generate revenue. The assets in the interest accounts were in fact re-hypothicated for revenue-generated activities. They were not commingled. And for one to be moved from one to the other, you actually have to move them from one to the other. So now I want to move to the November situation and talk about exactly what happened. Let's turn to slide 9 round. So as I talked about previously, throughout BlockFi's history, it had been able to process customer withdrawal requests in the ordinary course.

Just an example, in June, when Celsius shut its doors, BlockFi was able to process all customer withdrawal requests. And Voyager, when it shut down its doors in July of, 2022, BlockFi kept right on trucking. As prices reduced and the crypto market struggled a little bit between June and November of 2022, some clients decided that crypto was too risky. They wanted to pull their assets out of BlockFi and it processed billions of dollars in customer withdrawals. But that said, as the market has shown in the summer, the cryptocurrency market is very sensitive to market feedback. A single news article can have a huge impact on customer behavior.

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You go to the next slide, Rob. Crypto Twitter, Your Honor, is nonstop, as I know you have experience. I'm sure people are listening right now. And what I'm saying, for some reason, I probably can't figure out, is probably moving the price of some cryptocurrency. But what happened in November of 2022 is pretty straightforward. Negative news caused a run on the bank at FTX. That's what happened.

Now, if the FTX's disclosures to the world had been accurate, if it had been a real company and maintained assets one-to-one, that wouldn't have mattered because customers would have been able to withdraw their cryptocurrency as FTX had represented they would have been able to. Unfortunately, like it was a massive fraud, and it failed. And BlockFi was collateral damage. And all of this played out over a week in November of 2022. Next slide.

On November 6th, the CEO of Binance, which is one of the largest players, tweeted that he was going to sell all of his position in FTT, when a major player with a large position in a cryptocurrency says it's going to liquidate its entire position. Obviously, the price moves materially. and Binance continued to tweet about FTX, and you can go to the next slide. Customers continued to react, and there were huge customer withdrawals, $6 billion in just a couple of days, and on November 8th, FTCS ceased customer withdrawals.

But the situation was still unclear. Blackfite didn't exactly know what was going to happen, because Binance announced the next day that it was going to acquire, F-TX and stopped the slide. Nobody knew what was going to happen, but the situation calmed down for at least a short amount of time. Then the situation flipped again. Next slide, the next day on November 9th, the CEO of Binance changed his mind and he tweeted out as a result of corporate due diligence as the result of latest news reports regarding mishandled customer funds and alleged U.S. agency investigations, we have decided that we will not pursue the potential

acquisition of FtX.com. Now, that caused a massive run on the bank at FTX, and they had to shut down their platform. BlockFi had to figure out what to do. It tried to get capital elsewhere. FTX had an obligation to provide capital. It refused to do so. FTX's Alameda had posted additional collateral, as Your Honor knows, from the adversary. that was pending in front of the court. BlockFi tried to access that, but was unable to immediately do so. And BlockFi began experiencing its own high levels of customer withdrawals, and then it had to decide what to do under its own terms of service.

And so the board thought hard about this, and BlockFi held out as long as it could. Go to the next line. It had two meetings of the board on November 10th of 2022. at 9.30 in the morning, they thought about whether or not they should stop customer withdrawals and freeze the platform. They decided to wait and see until what happened later in the day. Next slide. At 3.45 p.m. They had a second board meeting and held that they really didn't have any alternative. Because of the level of customer withdrawals and the liquidity issues that they were facing, it was in the company's best interest to pause platform activity.

So at 8.15 p.m., next slide, BlockFi implemented the platform pause. BlackFi drew a line in the sand, November 10th at 815 p.m. to protect and ensure equal treatment of similarly situated clients. BlockFi took the steps via the true-up and batching processes to honor all trading and withdrawal requests that had been initiated before that time stand, 8.15 p.m. on November 10th. including requests for transfer, requests for withdrawal, and requests for trades. If you requested before April, 815 on November 10th, BlockFi fulfilled that request. But BlockFi stopped all other processing or transaction requests. And so if you pushed a button on the user interface to request a withdrawal from the platform, a transfer to the wallet account, or a trade, after that time period, it was not fulfilled.

If a client tried to make a loan payments after the platform pause time stamp, that request was never recognized. And Your Honor authorized us via your scratch order, which is a docket 754, to send that money, and then the future loan payments that the clients might make back to the clients immediately, because those transactions were never processed and effectuated. no transactions initiated after the platform pause time stamp were completed. And BlockFi had the right to do this. In fact, this possibility was expressly contemplated by the terms of service as it had to be. BlackFi had to have put in place processes to protect clients in a downside scenario, and that's what it did.

So let's move to some of those. Slide 19 shows the general acknowledgement by all users of the platform that they have to agree, read, agreed, and understood the BlockFi terms of service, which were written to protect the company and clients. The next slide. This is a key term of service, Your Honor, and in fact, it's written in not just the general terms of service. It's part of each product, the wallet product, the BIA product, the BIA product for international client, the private client terms of service. Every client agrees. So there are since two sets of terms of terms of service.

of service. There's the general and then account specific? There are several sets of terms of service and basically they apply depending on what you're doing. The general terms apply at all times. The wallet terms apply when you're to wallet related transactions. The BIA term applies to Bia term related transactions and multiple sets of terms might apply depending on what specifically you are doing. It is more often the case than multiple sets of terms would apply. And in fact, this specific term was listed multiple places because it had to be applicable in many different circumstances. And people had to agree that blockfi might experience, among other things, extreme market conditions or other operational and

technical difficulties, which could result in the immediate halt of transfers and withdrawals of cryptocurrency, either temporarily or permanently. And this is a way. warning, and it appears in the terms of service for all products. And the reason it's there is because BlockFi must take action in some circumstances to protect customers. I mean, BlockFi was not in a position to satisfy all demands for withdrawal off the platform. It was not in a position to satisfy the demands for people to put names in the client property in the client's name in the wallet accounts because it didn't have control of specific, certain enough assets to do so. So the next slide shows one of the other key terms of service, which is in the wallet, the BIA, the international BIA, and others.

You know, BlockFi had the right to limit access, which can include temporarily or permanently removing your online assets, restricting your account, and or closing your accounts without prior notice to you unless prior notice is required by law. And there's also a set of terms of service. the next slide in the general terms of service, which generally give BlockFi the right at its sole discretion to suspend use at any time and without notice to you, and to cancel orders or transactions in its discretion. That's in the general terms of service applicable to every client and every transaction. And so BlockFi's platform pause was announced to clients via Twitter and via Reddit. which are the sources that are most likely to be used by BlockFi clients.

And it definitely was not a secret. In fact, it was publicly reported shortly thereafter. The next slide shows just some of the public reports. The Bloomberg reported it 15 minutes after it happened. Wall Street Journal reported an hour or two later. Even the leading report in Singapore, the leading paper in Singapore, reported it before anybody woke up the next morning in that. Singapore. And it's not disputed what BlockFi actually did as a result of the platform pause,

and that's shown in the next slide, slide 24. BlockFi shut down all substantive transactions as of the platform pause. Users could go onto the platform, they could view valances and they could click buttons, but no transactions were actually consummated. No substantive action requested after the platform pause was processed. Now, Your Honor, FTC's demise and BlockFi's platform pause all happened very fast, and BlockFi could not immediately turn off a number of the internal and external functions that were part of its system. And that is what caused some of the communications and some of the objectors to our motion

have cited to the court. the user interface was not able to be turned off immediately. It was extremely complicated to get that process complete. The user interface remained on and clients could push buttons to request a transfer. The user interface would change to request reflected transactions, even though they never happened. And users continued to receive automated emails as they had pre-pause. And all of this happened because of the technical issues involved in changing the user interface and the related internal functionality, which took a significant amount of time.

Next slide. So BlockFi right after November 10th at 815 started working on disabling the functionality of the platform. And nobody knew right at the beginning how hard it would be or how long it would take. Along the way, BlockFi did take actions to try to tell people that platform activity was paused. And so let's go to the next slide and start with this timeline. So November 10th at 8.15 p.m. is when BlockFi implemented the platform cause and communicated that to the world on the places most likely to be seen by BlockFi clients. Next slide. The BlockFi engineers immediately started working on the problem. in years of operations, no one had tried to disable functionality.

The system had worked well for years. And at first, they didn't know what would be required or how long it would take. Within about 10 hours, they knew it was going to be more complicated than they feared. So click next slide, Rob. The engineering team, what they did was they posted what's called an in-app message. Your Honor might have seen these sort of messages on your phone, right? You open up an app and it's the first thing. that pops up. And these are warnings. Starting at 1214 on November 11th, any user who accessed

BlockFi had to click on this pop-up message before they clicked on anything else on the platform. This is the first thing that popped up. And I want to focus on this message a bit. Next slide. It's a dismissible message. So it was reasonably straightforward to add it to the app. And it's the first thing that anybody saw. And they explicitly said that given the FTX situation, BlockFi was not able to operate business as usual and was limiting platform activity immediately as permitted by its terms. BlockFi did not know how long the pause would last. And after this time, next slide, to access your BlockFi accounts at any time after this was posted, you had to click a button that said, got it. Okay, got it. Affirmatively dismissing the message that platform activity was

suspended. And even after this was posted, as I mentioned earlier, tens of thousands of BlockFi clients still clicked, got it, and then went and hit transfer and tried to do transactions on their phone. Let me just stop you there, if I may. The notice, and this is referenced in the pleadings, references we are limiting platform activity including pausing client withdrawals it doesn't reference transfers those are separate activities requires and you may be going into it separate functions on the on the customer interface so if you're moving from the interest account to the to the custodial account okay the funds have to be withdrawn from the interest account account and then transferred to the custodial account.

So a withdrawal could include a transfer, a transfer could include a withdrawal. It depends specifically on what you are trying to do. So a number of the clients, actually the overwhelming majority of the people that are at issue here, they didn't just say, I want to withdraw from the BIA account and move it to the custodial account. They said I wanted to withdraw altogether. And to do that, it requires the activities to go from the BIA account through the wallet to the client's external wallet. So block by the position is you cannot initiate a transfer without actually including a withdrawal.

That's right. That's what happens. It physically moves from the BIA account to somewhere. And you can either transfer it to just transfer it to the interest account or you can withdraw altogether. from the platform. The vast majority of people, I think we have the numbers somewhere, we're trying to get off the platform entirely, which required going through the custodial interest accounts. So, where are we? Okay, next slide. A few minutes later, after this, Blackfied posted a message on its website, and it finalized the ability to send an email to the 650,000-plus clients. that were potentially affected, and it sent the same message out to email to every client,

whether they're clients that have assets in wallet, clients that have assets in the B-A account, or both. Now, disabling the user functionality was a challenge, and LockFight was still seeing clients click through the dismissible message and click more buttons trying to withdraw assets off the platform. This was taking, and the dismissing, disabling the functionality was taking longer than expected. So then on November 15th, BlockFi added another message to iPhones and iOS phones, notifying people that transfer was paused. This went up again after you click through the dismissible message. And then on November 17th, it said it did the same thing for the Android phones, because it was taking longer than BlockFi expected it to take. On November 18th, BlockFi was

finally able to disable the user functionality, and users were no longer able to click on the transfer button. But again, in the interim, between the Platform Pause timestamp and November 18th, 48,000 clients had click buttons saying transfer, next slide, and they had received automated emails saying transfers valued at $375 million had been completed where they had not been. And that's why we're here. The people that made those transfers after the platform pause are saying that they should be treated the same as the clients who physically had cryptocurrency in the custodial accounts as of the platform pause. And so now I want to go into a little more detail about the way the business worked before and after the pause because that shows why these transactions did not happen. and then to try to walk the court and people watching this hearing through this in a few slides.

The back end of BlockFi system is very complex. So go to slide 36. So the direct transactions between Blockfying clients come through the wallet custodial omnibus wallets. Okay, those are the ones on the left hand side of the slide. Deposits come into those. When clients choose to move assets into the re-hypothicatable wallets, to earn interest, cryptocurrency is in fact moved from the custodial wallet to the re-hypothicatable wallets. And BlockFi then sends that cryptocurrency to borrowers, as indicated at the right-hand side

of this slide. And again, this is the core of the business. We were a cryptocurrency lender, and we told the world and all of our clients that the business was to earn yield on loans to third parties. That was the business. Next slide. So when, when, when, Customers clicked transfer on their user interface before the platform pause because they wanted to move assets out of the BIA re-hypothicatable wallets, either to withdraw from BlockFi altogether or to trade them or to just move the coins to the custodial wallets, nothing immediately happened to any actual assets, nothing. And actually, it was impossible for anything to happen physically until and unless BlockFi employees, actually moved assets. And actually, it's not technically feasible to do that anyway, given the constraints and capacity of the blockchain itself. It can't be that you push a button and the assets immediately move. That's not how it works. Next slide. What happened automatically when

clients hit the buttons was that the user interface changed. If you had five Bitcoin in your BIA account and you hit transfer two of them to the external wallet, the user interface would immediately reflect three Bitcoin in the Bia account and two Bitcoin to an external wallet. And you as the client would get an automated email saying that the transaction had been completed, but it had not been. It was not until after the BlockFi batching and or true-up processes were complete, that the client transfer requests are or actually could be actually effectuated. And in the interim, in between these two things, why client always had the rights under its terms of service to pause withdrawals or transfers and or to cancel transactions.

Those are clear parts of the block five terms of service. So let's walk through this with an illustrative pre-pause transaction. Next slide. So assume that as shown here, client A hits the button on the BlockPy platform to move 10 Bitcoin from the BIA account to the wallet, hits transfer and confirm. Go ahead, Rob. Next slide. Client A's user interface immediately displays 10 less Bitcoin in their Bia account and 10 more

Bitcoin in their custodial wallets. And, next slide. client A would immediately receive a fully automated email saying that the transaction had been completed. Next slide. But nothing actually happened until later steps on the back end. And those steps began when the company's interface collected the transaction and began consolidating them for review by BlockFi's operations and finance teams. Next to this slide. So BlockFi had two processes that its employees in finance and operations performed, one called batching, one called Trua.

And no physical transactions occur, no cryptocurrency has moved until one or both of these processes on the back end occur. What BlockFi does on the back end depends on the nature of all clients' collective requests on the front end within a specific time period. If all the client is doing is trying to move assets out of the BIA account and into the custodial wallets without trading them or moving them off the platform, then that action did not occur until the next day following the trua, bless you. But if a client is trying to do something further than that, if a client is trying to move the assets from their BIA accounts, ultimately off the platform entirely to an external wallet. That could happen sooner, but only if the assets went through what BlockFi calls the

batching process in the interim. So I'm going to walk through those two processes separately. Go to slide 44 in the TrueUp process. The TrueUp process is critical because BlockFi had an obligation to match what was physically in the custodial wallets with what was owed to clients who had directed their assets to the custodial wallets. BlockFi had promised people it was not going to re-hypothicate these particular assets. These assets are in the account and they are yours, not ours. So each day after clients, one business day after the transfer requests, the treasury team looked at the assets in the accounts and compared those accounts to where clients wanted their assets to be. And if there was an insufficient amount in the custodial wallets, coins were physically moved from the BIA to

wallet. And if there were not sufficient assets in the BIA, and you needed to go further to clients to call back those assets, Block FI did that. That is the true-up process. So is it fair to say that the true-up process involved to look at the transaction as an aggregate for the day, not customer-specific, but collectively, to see if there's enough money in one to transfer what was transferred individually into the other. It's both. You look at individuals and the group as a whole, but a true-up was necessary only if the group as a whole required additional movement of assets from the BIA accounts to the wallet

accounts. And if you're if obviously if there's a significant amount of assets that are moving at any given day, you know, by definition it's going to be required because the purpose of the process is for the assets in the custodial accounts to match one to one at all times. Okay. So slide 45, assuming that clients have asked to move assets in the hypothetical that I mentioned earlier from BIA to the wallet, BlockFi actually has to add. get the assets from somewhere. So its Treasury team takes physical assets from the re-hypothicatable wallets and move them to the custodial wallets so you can match your obligations to clients.

Now, depending on the day, as I said, Glockfein may or may not physically possess the coins to be able to do that in the re-hypothicatable wallets. It might have lent those assets to a third party. That was its business. It lent many, many assets to third parties consistent with what he told clients. And Bafi may be able to move existing assets from those wallets over to the custodial wallets or might have to get those from the borrowers. In any event, in any event, the process of physically moving assets from BIA to the

re-hypothicatable wallets, it's not automatic, it's definitely not immediate. That's not how it works. And the BIA terms of service, Your Honor, are completely consistent with this process, but you have to read the terms of service altogether. Let's go to the next slide, slide 46. So this is the terms of service, Your Honor, and these are under the BIA terms of service. It's the same under the BIA, U.S. and non-U.S. terms.

Okay, this is under the category of withdrawals, like one, two, and three. Number one, you may make a request for a complete withdrawal of principle from your crypto interest account. the B account at any time. Any withdrawal of principle will be transferred instantly to your BlockFi wallet, and any withdrawal from the wallet is subject to the wallet terms. And then BlockFi number three, right below it, BlockFi and our third party partners, as I described before, may experience extreme market conditions that could result in the immediate halt of transfers

and withdrawals of cryptocurrency temporarily or permanently. So my colleagues on the other side are trying to make a meal out of these two words. These two words will be transferred instantly. But you have to read those words in the context of the full sentence, definitely in the context of the full paragraph, and in the context of all the terms of service. The first sentence says that you can make a request for a complete or partial withdrawal of principle from your BIA account at any time.

And the second says that the actual withdrawal of principle, once that withdrawal happens, we'll be transferred to your wallet immediately, and then further wallet transfers out of the system are subject to the wallet terms. But the actual withdrawal of principle from BIA does not occur immediately, and it could not. And that's because of what I described before about how BlockFi's business actually works. BlockFi has to go physically to get principal assets from the BIA and move them to wallet, and that does not happen instantly ever. And so the argument that's being advanced to the other side takes these two words transferred

instantly out of context, and it ignores the rest of the sentence, and it definitely ignores number three, via term C3, which couldn't be any clear, in identifying the situation that BlockFi found itself in on November 10th at 8.15 p.m. There were extreme market conditions. That's indisputable. And BlockFi decided to immediately halt all withdrawals and all transfers of cryptocurrency. And so our view is that my friend's argument on the other side is inconsistent not only with the Blay BlockFi's business work, but also with the terms of service. Now, the argument gets even more complicated, Your Honor, because there's a conflation between requests to move assets from BIA to wallet with requests to move assets from BIA to an external wallet through the custodial wallets. That makes things even more complicated, and that's what brings into play the so-called batching process.

Okay? And so let's go to the next slide 47. The batching process reflects what I mentioned earlier, Your Honor. BlockFi set up its system to try to be responsive to client's requests. When a client wanted to withdraw assets, BlockFi wanted to be responsive and wanted to be in a position to do that as quickly as possible. But certainly it was not instant. So let's walk through that process. So when a client wants to take assets off the block fire platform entirely, the process looks a lot like the true up process that I mentioned earlier with respect to just withdrawals from BIA and deposits into the custodial accounts.

Clients initiate transfer requests and the interface in the user interface, those are collected by the company and the financial operations group. And the user interface immediately reflects the book entries that assets. and the BIA are reduced in the amount requested, but it takes time to process the transactions. Next slide. Now, here, Your Honor, because assets are leaving the platform entirely, the fraud and security team takes the first crack at these particular requests, and they're done in groups, and that's why they call it batching. Batches of proposed transactions are sent to the fraud and security team, and they look at them, and that's the first line of defense, and oftentimes security issues are flagged, and those issues actually may require interaction with the

clients, but you actually might need additional information from the client before you're able to process the particular request. And so it definitely cannot be the case that when you ask for a withdrawal from your BIA account, that it happened instantly because it has to go through the fraud and security checks and may require further interaction with the client. But the depending on the nature of their individual batch, what is requested specifically and what is overall requested, the process can go slow, but it can go fast. Twice a day, the finance team would review the batches and it would try to process the fraud checks, which depended both on who was trying to withdraw and what they were trying to get. It might be different if you were asking

for a withdrawal of cryptocurrency or if you were asking for a withdrawal of cash through a or through an ACH. The debtor systems had in place an 18-hour fraud check for any crypto withdrawal. It was actually quicker if you wanted to get a cash withdrawal because of the back-end systems. So what happened was that valid requests were sent to the BitGo account. That was the smaller account that directly interacted with the clients. Those were where the crypto asset requests were sent once they were validated. And the cash requests were sent to Silvergate for wires or ACH. If Silvergate had enough cash, the cash would go out the door. If it did not, it had to get the cash, either by liquidating the crypto or getting cash somewhere

else. If Bitco had enough crypto in the form of the specific coin requested to meet the growth draw requests, the whole batch, then once the request passed the fraud check, it would batch out the crypto to clients. And again, that was only if the Bitco account had enough, it didn't have to itself go to the other account at Firewarks to get crypto to send out the door. So depending on the day, cryptocurrency withdrawal requests could either be consummated during the batching process if there was a limited number of requests, depending on what was in the Bitco account to begin with, or it would have to go through a separate mini true-up process where cryptocurrency was physically moved to effectuate the transaction. It just depended on the day.

Like, for example, my colleagues on the other side found one time that this had happened where there was a same Zay withdrawal request that actually was processed. And it was processed because this was in July of 2022, I believe. And it was processed because there was an intraday batching system that blocked the, was able to effectuate. The process was certainly not instant, and the process was done exactly consistently with the block fight terms. So if you go to slide 50, Rob, the bottom line is that no withdrawal request, whether it was a withdrawal from BIA to the custodial wallet or withdrawal from BIA to the external wallet through the custodial product, none of them were instance, every single one of them had to go through BlockFi's backend systems. And that was not,

that was true for every transaction before the program pause, period. Now let's talk about the attempted post-pause transactions. Let's go to slide 51. So my friends on the other side are arguing that because they clicked transfer and confirm on the user interface during the 8th day period between November 10th at 815 p.m. Eastern, and November 18th when we shut down the system, as did 48,000 people trying to move $375 million for cryptocurrency. Their argument is that they click the buttons as they could have done pre-pause. Next slide.

The user interface, as it had done pre-pause, display the transaction had been completed. Next slide. And as had occurred, pre-pause, they received an automated email saying the transaction had been completed. And, in fact, as had happened pre-pause, next slide, BlockFi's system had internally collected the transfer requests for review by the team. But BlockFi did not and could not conduct any of the back-end processes after the platform pause. Doing so would not have treated clients fairly and would certainly have not treated them equally, given that other clients had assets in the custodial omnibus accounts that were attributable to that.

And actually moving more cryptocurrency from BIA to the custodial wallets would be unfair to the remaining clients that were at BIA. The argument being made by my opponents is that clicking the button saying transfer creates an ownership interest in assets that were already in the custodial omnibus accounts because other clients, had directed those assets to be there. But that can't be right in our view. The assets that are in those custodial accounts that belong to those other clients. And I want to end by kind of just level setting on the current state of affairs.

And you can go to slide 58, Rob. So sitting here today, we have about 297 million when you round up of cryptocurrency that is sitting in the omnibus custodial wallet accounts at BitGo and Fireblocks, and that matches almost to the dollar, the wallet claims that are attributable to those clients who had assets in the product as of the platform pause.

And separately, we have about $1,2 billion in claims for clients who, as of the pause, had directed clients to the BIA product and permitted BlockFi through the terms that we went through to re-hypothicate and lend those assets out to a third party in order to earn yield. Those are assets that blockfi, had title to, not the individual clients. Now, when we read the initial objection, we actually

weren't clear, and we thought that what they were asking was for assets to actually be physically moved from the re-hypothatable wallets over to the custodial wallets to address the post-pause requests, and the supplemental objection, in my view, clarifies what they originally requested when I read them to be saying now. Next slide. Is that because, they click the transfer and confirm buttons between November 10th at 815 and November 18th, they've an equal claim to the assets that are in the custodial wallet accounts, even though no assets were actually moved to the custodial wallet accounts on account of their button clicking. We don't agree with their theory, but the effect would be, of course,

to just nor than double amount of the wallet claims against the same pool of assets sitting in the custodial wallet accounts. Next slide. That result would materially reduce the recovery to wallet holders, but more practically for purposes of the motion that we filed. It would make it impossible for us to do what we want to do, which is to give wallet customers whose assets block by held in trust without the right to re-hypotheco with those assets.

We want to give those people their money back. And so, next slide. What we're asking the court to do is, overrule the objections and allow the debtors to do what we've been trying to do since the motion was filed, there is a pool of cryptocurrency in the custodial wallet accounts that was directed there by specific customers and placed there by BlockFi employees on the premise that those specific assets belong to those specific customers. BlockFi promised to give those coins back to the clients, and that's what we want to do. And as your honor knows, you know, time is often the enemy,

of a creditor in bankruptcy, and we've been trying to get these assets out the door to these people for some time. Funds on hand at the company, they're sitting in account, obviously they're targets for all sorts of potential creditors, so I don't blame anybody for trying to get at those assets. They are sitting there, and we are taking the position that that is not property estate. We want that assets to go out the door. Largely, this is an intercreditor fight about who gets those particular assets, Your Honor. Our position is a position. is that it's pretty clear. It's the people who put those assets there in the first place on the premise that the debtors wouldn't have a right to move them. The creditors committee

is reserving their right to pursue preferences depending on when those assets were moved to the custodial accounts. They're suggesting there might be clawbacks from the wallet, and there's a suggestion in the other side that the wallet account isn't big enough. Maybe there should be more assets in the wallet account. But what that highlights here on, is the fundamental reality. Aligning the sand had to be drawn by the debtor's pre-petition, and it has to be drawn here by the court. And the publicly announced platform pause is clearly the most logical and rational route

to an expedient process that enables client recoveries, and it is the only one that's consistent with both the way BlockFi actually conducted its business and BlockFi's terms of service. So unless your honor has any questions, that all I have for now subject to rebuttal. No, not at this time. Thank you. Thank you, Your Honor. Here from the committee. Good morning, Your Honor. Kenneth Allette of Brown Rudnick for the official committee.

We agree with the relief that the debtors are seeking here, but we come at it from a little bit of a different perspective. Every single one of Blockbige customers was promised their money back and is entitled to their money back. The issue is it's just not there. And that's why we're here today, because BlockFi does not have the money to meet all of its promises to return money to its customers. And so the role of this bankruptcy is to resolve those competing entitlements to funds in the fairest and most equitable way consistent with the bankruptcy code. And so we view this less as a question of contractual interpretation as what actually happened and what was blocked by actually able to do. So it's undisputed that there are sufficient funds segregated for the pre-pause wallet holders.

If no additional funds come in to the wallet, those people can be paid in full. they can recover their property, and they don't have to further deal with this bankruptor. Subject to potential clawbacks. Correct, Your Honor. And as we note, it's not them being in the wallet that's the issue with potential clawbacks. It's it coming out of the Viet accounts. So from our perspective, like I said, the debtors have talked about the contractual notice issues, But we don't actually see that as relevant because I think that debtors have the better of that argument.

But even if they don't, what that means is the debtors breached their contracts. And they breached a lot of contracts, unfortunately. Every BIA account holder was entitled to withdrawal of their funds in full, and they're not going to be able to get that. And that's as a result, the question is, do you have an unsecured claim or do you have some of something else. And we analogized this in our response to a bank check. Even if BlockFi sent a message saying, we're going to pay you, they sent a check. But BlockFi didn't actually move any money on the back end. And that, in our view, is what's determinative. Because even if BlockFi was obligated as the paragraph on 46 debtors slide deck said even if Block

was obligated to immediately transfer funds it didn't that's a promise and it reached its promise but that is nothing more than an unsecured claim companies headed into bankruptcy all the time write checks trying to pay people that aren't honored and as we note in our papers when the funds actually transfer with the check is when the check is honored. And here, these transfer requests were never honored. So BlockFi may have breached its contracts, but the remedy is a breach of contract claim. The funds that were segregated pre-petition are not BlockFi's property. Those are the those were owned by the pre-pause wall

holders and so it cannot be the case that BlockFi's breach of its contractual obligations made it so that pre-pause wallet holders lost their entitlement to property that they had. BlockFi wasn't entitled to take that property three pause. If BlockFi had taken property from the wallets to use as it saw fit, you know there might be much more significant claims in this case but there's no indication that it did that. And we don't challenge anybody's for trying to get their money back. Like we said, everybody was owed their money back. At the time of the pause, the automatic stay had not come into effect and everybody was entitled to do their best to try and get paid. And we don't

challenge anybody for doing that. You know, tens of thousands of people did. Mr. Slade noted some aspects of what was happening, but, you know, the story with F-TX and Al-Meda research began even earlier on November 2nd when, as the debtors noted in their first-day declaration, certain balance sheets leaked of Al-MATA research, which was the debtor's counterparty there. Ultimately today, we're here because Block 5 just doesn't have the money that it needs to have to be able to pay everybody in full. It made a number of contractual promises and every day in a bankruptcy court, contractual promises are not honored. It's why you're in bankruptcy. It's not that anybody wasn't owed their money. The money just isn't there today. And so as of the pause date,

WACFI did announce it was halting withdrawals. I think that it's a fair reading. It's a fair of how the BIA accounts work, that if you're taking money out and putting into wallet or you're taking it off the platform entirely, you're getting paid on an unsecured claim. That sounds like a withdrawal to me, but in our view, you don't need to dance in the head of the pin of all these contractual arguments. You don't need to look at what notice was actually provided, because at the end of the day, even if BlockFi was not entitled to an actual platform pause it did but block five stopped honoring withdrawals stopped honoring transfers stopped honoring everything because it knew that at that

moment it didn't have the funds it needed to satisfy debts in the ordinary course and so that's why we're here today your honor that's why we've been here since November and unfortunately that means that certain via account holders are not going to get paid in full but unfortunately absent some fairly substantial recoveries, none of them are going to get paid in full. And what we have to do here is to do what's barest and equitable for all the account holders, both those who attempted to withdraw their funds after the platform pause date and those who didn't.

And so, Your Honor, we'd request that you find that the platform pause transfers did not give customers a right to wallet funds that had not been segregated for their benefit. All right, thank you, counsel. Anyone else on behalf of the debtor in support of the debtor's motion? Mr. Gwen, I see your hand raised. I think you need to, you're on mute. Can you hear me? No, we can.

Thank you, Your Honor. Good morning, Kurt Gwynn from Reed Smith on behalf of the ad hoc group of actual wallet holders who are identified by name and footnote two of our response in support of the motion to stock it, item number 826. Our clients had assets in the wallet accounts prior to the platform pause. Neither the debtors nor the Troutman Ad Hoc Group deny that our clients own their assets in the wallet account. The Troutman Ad Hoc Group, however, seeks to share in the assets of the actual wallet holders. As a matter of law, Your Honor, there's no basis for the Troutman Ad Hoc Group to request

or for the court to grant the Troutman Group and interest in assets that belong to someone else. Here, the actual wallet holders. The Troutman Group's assertion of a right to someone else's property is itself based on a fiction. There is no factual dispute that the Troutman Group's BIA assets remained in the BIA. That is all the court needs to know to determine that the Troutman Group has no interest in other clients' assets in the wild account. What does not matter, and I see this largely the way Committee Council does, Your Honor.

What does not matter is a notice, whether any notice was given or what it in fact said. What also does not matter here are the terms of conditions with respect to the Troutman Group or the terms of service. why are those the notice and the terms and conditions of service irrelevant as applicable to the Troutman Group? Because at bottom, at the end of the day, none of their assets were transferred to the Wilde accounts. So even assuming that the Troutman Group is right about the notice or the terms of service were both, and I'm not saying they are. But even if they were right about both of those things, the bottom line is their assets were never moved to the Wilde account. So as committee council said, at most, the Troutman Group has a breach the contract claim against the debtor because their assets were not transferred to the wallet account.

But what the Troutman Group does not have is the right to share in the assets of clients that were transferred to the wallet account and are indisputably property of clients like the ad hoc group of actual wild homeowners. As the Supreme Court recognized in 1962 in the Paroleman case, quote, the Bankruptcy Act does not authorize a trustee to distribute other people's property among the bankrupt's creditors, close quote. The same is true under the Bankruptcy Code. So for those reasons, Your Honor, the ad hoc group of actual wildholders respectfully requested the court grant the motion, which was filed on December 19th of 2022. and permit the debtors to do what the bankruptcy code already permits to return the actual wallet holders property to those actual wallet holders. And that's all I have, Your Honor, unless you have questions for me. No, thank you, Mr. Gwynne.

Thank you, Your Honor. Is there anyone else in support of the motion? All right, then let me turn to Ms. Kovsky. Good morning, Ms. Kovsky. Good morning, Your Honor. Good morning, Your Honor. Debkovsky, Troutman-Papper for the Ad Hoc Committee of Wallet Account Holders. I don't have a fancy PowerPoint presentation like the debtors, and unlike the estate, I don't

have nine lawyers present here. My clients don't have a virtually unlimited war chest. They've just got me. The members of the Ad Hoc Committee are just ordinary customers of BlockFi. They're not wealthy. They're not well-financed. They're just trying to get fair treatment by the debtors to whom they entrusted their digital assets. As Mr. Slate alluded to at bottom, this is really a dispute over the allocation of non-estate assets. The question before the court is, at what point did a BlockFi customer who clicked the button to transfer out of BIA, who instantly stopped accruing interest on those assets

in the BlockFi system, who received an automated email set up by BlockFi confirming that in fact the transfer had occurred, at what point did they legally leave Bia and acquire the right to look instead to whatever digital assets are sitting in the commingled omnibus custodial wallet reserves? And I think it's important to note here that the debtors really have no skin in the game. The official committee definitely has no skin in the game. This is about assets that are not property of the estate. If the debtor's motion is granted, no digital assets return to the estate. If the ad hoc committee's objection is sustained and the ad hoc members valid transfers are recognized, there's no increase in claims against the estate. Let's walk through the math.

The debtors have said there's about three, and I'm going to use round numbers because I can do math in my head that way. There's about $300 million worth of digital assets in the custodial wallet reserves, there's about $300 million of, about $300 million reflected in the pre-November 10, 815 p.m. wallet accounts, about $375 million reflected in the post-November 10, 815 p.m. Wallet accounts. So if the debtor's motion is granted, there's about $375 million in claims against the estate. If the ad hoc committee's objection is sustained, there would be some kind of allocation of wallet assets. And then there would be a $375 million deficiency that could be asserted as claims against the estate.

So from the perspective of the estates, this is a complete wash. It's really especially perplexing to the ad hoc committee that the official committee has spent so much time and energy opposing the ad hoc committee on this matter when it has zero impact whatsoever on the official committee's actual constituents. The official committee doesn't have a roving commission to do what it perceives as equity. It has a mandate to represent the interests of unsecured creditors, and importantly, those interests are completely unaffected here. It was also kind of surprising and disappointing that the committee chose to argue preference issues in its reply briefs since the parties had decided and agreed that those issues, if they come up, would be deferred for another day and that the only issue before the court today is whether the transfers and that the transfers and that, out of BIA and into wallet actually happened. And with respect to that issue, as Mr. Slade indicated, there's really no dispute as to the key facts. The transfer button remained

live in the user interface well after November 10th at 8.15 p.m. The debtors did not shut it down. Blackfied did not pause those transfers in the user interface, did not pause the cessation of interest, did not pause, all of the things that the customer could do and all of the immediate impacts that those actions had, all that BlockFi did was make the back-end decision to stop truing up the wallet reserves. So when the customer clicked transfer, their via account balance was immediately debited and their wallet account balance was immediately credited. Interest immediately stopped accruing in the debtor's storm system, which is described in Mr. Chila's declaration. An automated email confirming the transfer was sent by the debtor system, and then the debtors

failed to add any digital assets to the wallet reserves on account of those actions. But here's the important part. When a customer transferred out of the BIA program and into the wallet program, his right to tap the existing assets in the custodial wallet reserves wasn't dependent on the debtors first putting more assets into the reserves on account of that transfer. And that is crystal clear from all of the facts that Mr. Slade just ran us through. And first of all, the debtors chose to design their system so that all that a customer had to do to exit via and stop earning interest was click the transfer button. They didn't have to design it that way. They could have built

in a delay. They could have tied the cessation of interest, the consideration for the grant of title to those digital assets to some other event. The debtors could have had the automated email say transfer pending. They didn't do those things. They chose to make it instantaneous. BlockFi chose to agree with its customers in terms of service that BlockFi drafted, that the transfer of principal out of BIA would happen instantly. In fact, customer's ability to make those transfers out of BIA instantly was part of what the the official committee described in one of its briefs as BlockFi's best-in-class customer protections. But notwithstanding that the app reflects instantaneous movement, the terms of service provided that it would not necessarily be instantaneous.

Isn't that correct? No, that's not correct, Your Honor. The terms of service say that it absolutely, well, let's take look at it. I mean, portions of it say that there can be up to a seven-day date. delay in certain situations? Well, Your Honor, actually, let me clarify that, because you asked Mr. Slate a question, and I think his answer may have been a little bit confusing. I think you said, can you have a transfer, or I think you said you can't initiate a transfer

without a withdrawal. Is that correct? And I believe my colleague on the other side said, yes, that's correct. But actually, that's exactly wrong. If you look at paragraph 50 of the stipulated facts that were filed on the docket, it says that following the launch of BlockFi's wallet product, customers could no longer withdraw eligible digital assets directly from BEA to an external wallet. Instead, as set forth in the BlockFi USBA Terms of Service and BlockFi non-USBia terms of service, digital assets had to first be transferred from Bias to customer wallet accounts. Now that first step, the transfer from BIA to a customer wallet account, that's instant.

That's discussed right there in the BIA terms of service. Then if you go to the wallet terms of service, if you want to actually withdraw off the platform altogether, there could be up to a seven-day delay. That's in a separate set of terms of service. And that's once you're already in wallet, then you can request your transfer off the platform. And that can be, it depends on how quickly the debtors were able to process it. It could be same day. It could be a couple of days.

It could be up to seven days. So you're saying withdrawals are not necessarily instantaneous. Correct. Absolutely. Yes. A withdrawal off of the platform by the terms of service, and everybody agrees that was not, that was not instantaneous. Not even, it was not necessarily, it was not instantaneous. But the inter-account transfer from BIA to wallet, the terms of service are,

very clear. It happened instantly. And the debtors would like the court to believe that instantly in that context actually means, well, after we perform all of our back-end true-up processes or batching processes, then we'll instantly transfer you out of Bia and into wallet. That completely negates any possible sensible understanding of the word instantly. That word instantly doesn't belong there if, in fact, the transfer out of Bia and into wallet was something that could take. a day, two days, even three days, if it was a holiday weekend, and the trip process wasn't run until the next Monday. No, I didn't question too much your adversaries.

I don't want to be fair to you, but I do have a question. Sure. Overall, let me say I accept your views of what instantaneous should mean and the difference and the distinction between transfer and withdrawal. The black five general terms, at least what's been presented to this, me as part of the record, provides that Block 5 reserves the right to refuse service, terminate relationships, and cancel orders or transactions in its discretion. If at the end of the day, it retained the ability to cancel what may have been an instantaneous transaction, what

difference does it make? Couldn't they, when they initiated the pause, and even after the fact, go back and say we are canceling in order to level the playing field. It may give rise to claims. Maybe they're doing so improperly, which would create a general unsecured claim. It's a breach of contract if they cancel without a basis, but they reserve the right to cancel. So how does that comport with what you're saying as far as your entitlement? Well, Your Honor, first of all, they didn't cancel the transfers. that didn't happen. All they did was fail to put enough assets into the reserves to cover

everybody's transfers in full. That's not a cancellation of the transfer. It is a breach of contract, but it's not a cancellation of the transfer. It just means that people are going to have to take a haircut. Well, they're saying they're not honoring any activity that took place post-poss. So if we accept that the customer's initiation through the app was a transaction and their refusal to honor it in light of their pause, that's not a cancelation? Well, Your Honor, it's hard to see how it is because they didn't reverse. I mean, they came to this court to ask to be able to cancel those transfers, to ask to be able to reverse them. Clearly, they haven't done it yet. If my clients go into their apps and they pull up what assets do I have, it shows right there in wallet, in the wallet account,

that they have their assets in the wallet program. So is my granting approval, authorization, the last step necessary for them to cancel, consistent with the terms of the general terms of agreement? I don't know that, I don't actually know whether it is or not, but clearly the debtors felt that they needed the court's permission to do it since they asked for it. And in addition, although this wasn't briefed or argued, I would suggest that the debtors should not be able as a contractual matter to exercise their discretion in an entirely arbitrary and inequitable way, which would be the case if they decided to choose winners and losers

between similarly situated customers, that the customer who transferred, all they did was click the button to say transfer at 8.14 p.m. to make that customer, the winner who gets 100% recovery out of the wallet reserves, and the person who transferred two minutes later at 8.16 p.m. gets nothing. But there are going to be winners and losers, unfortunately, when there's not enough funds. Your Honor, there are going to be winners in Luzers,

losers because there are not enough funds because the debtors do not have enough assets to pay everyone in full, but that doesn't mean treating similarly situated customers differently. The debtors did not halt the transfers from Bia to wallet until days after November 10th. They did not revert. They didn't change anything about the system. They deliberately set up their system so that the architecture essentially pushed people out of BIA the minute they click transfer. The whole consideration, and this was discussed a lot in the Celsius case, the consideration for customers grant of right and title to their digital assets to BlockFi. The whole thing that gave BlockFi the right to re-hypothecate was the earning of rewards,

the earning of interest. And BlockFi designed its system, so you hit transfer, interest ceases immediately. You are now no longer in that interest earning. relationship. So I sort of think about it like sitting in a swivel chair. So if you're swiveled this way and you're looking at BIA, your account's pointing at BIA, you've got risk, you've granted title to blockify, and in return you're getting interest, you're getting rewards. You click transfer immediately, you swivel this way. You no longer get interest. You no longer get those benefits. But instead, you have the right to tap the assets over here that are in the reserve.

But what if you swivel and you're transferring more than you have? And the app is letting you do so. The user interface doesn't stop you. You've transferred more coins than what you have. There's some error. We know there are bank errors. We know there are lots of errors in using apps. But it allowed you to do so.

Your position on behalf of the Ad Hoc Committee is that, wait, it's still a valid transfer and we have actually what I think you're saying is you have a title interest in those coins in what a legal interest in what's in that account but it could be a mistake it doesn't the general terms of agreement allow for an audit essentially a look at that transaction before it becomes unreversible? Not necessarily, Your Honor. Well, first, there's been no suggestion that there were any errors

or that even the errors of that type could occur. But there really wasn't the necessity to check and make sure that the amount that you had in BIA was the actual amount that you transferred to wallet. That doesn't seem to have been part of either the batching process or the twit process. There were fraud checks. But it goes to whether the transaction itself could ever be reversible, cancelable, or terminable by BlockFi.

And you're saying they can't once the swivel took place, once the customer used the user interface and completed it on the app. I think that's right, Your Honor. Once the customer said, I no longer want to be in this risky relationship with BlockFi. I no longer want to be in this unregistered security. I want to do what the terms of service say I can do and push the button and be out instantly. Now, that doesn't mean that I'm going to recover in full because, you know what, the debtors could screw up. The debtors might not have reserved enough in that customer wallet reserve.

And in fact, that happened multiple times, even just in the 90 days leading up to November 10th, on at least five different occasions, even after running their true-up process where they were trying to have a one-to-one match plus a one-to-five percent buffer, that are still fell short. One day, by almost $4 million. So, yeah, if I can swivel this way, it doesn't mean I'm necessarily going to get paid in full. And if I transfer out immediately off of the platform, that may lead even greater of a deficiency. But all that's necessary to transfer off the platform is there have to be enough assets there for me to take. Not that there had to have been assets that were transferred in specifically for me. The true-up process, the process of moving assets from

BIA to the customer wallet reserves was completely decoupled from the legal transfers from BIA to wallet, and in many cases, from wallet to an external account. And that's exactly what Mr. Slade was describing. These were decoupled and independent processes. And there was a true, there was a true-up process afterwards. The debtors tried to make sure that there was enough asset, that there were enough assets in the custody reserves. Often they failed. But what would have happened on a day that there was a $4 million shortfall in the custody reserve wallets? And let's say that was the day that Blockwell fell for bankruptcy and everything was frozen. Everybody, you know, let's say that we showed $300 million of wallet accounts that the debtors agreed. Yes,

that's the right amount. Those are the transfers that we validated. We ran through what processes, but oops, this was the day we had the $4 million shortfall. What happens then? I would submit that the right answer is there's an allocation of the assets in the wallet reserves among all of the customers that said, I want out of BIA, just like the terms of service said I could. All they had to do was click that transfer button to say, I'm out. They stopped accruing interest. If the debtors had really intended, for customers to remain in BIA until there was an actual transfer of assets from BIA into the wallet reserve on account of their specific request, then why didn't they continue

to recruit interest until that happened? Sometimes that true-up process was as much as three days later. They only did the true-up on business days. So if there was a holiday weekend, that's three days of interest, that BlockFi was shorting customers. Now, I'm not assuming that BlackFi was cheating its customers. I'm assuming that BlackFi built its architecture to reflect the legal reality, which is that once you click that button, you're no longer in BIA. Doesn't mean you're going to recover in full. The wallet reserve may not be fully funded. That happens. It happened multiple times before the pause. It certainly

happened by the petition date. But that doesn't mean that customers who exited BIA don't have the right to swivel this way and look to that undifferentiated mass of assets that, by the way, do not get allocated to any particular customer. And in fact, some of them didn't even end up there, if you look at Mr. Chilis' declaration, didn't even end up there as a result of customers transferring from BIA into wallet. Because the BitGo custodial wallets were also used as the on-ramp for all assets onto the platform. Some of those were just deposits that were coming in from assets. outside. So you have this large, undifferentiated mass of unallocated assets in a reserve.

They're commingled, not with the, they're not commingled with the rehypothecatable wallets. They want to be clear, but they're commingled with each other. You can't point to any asset in there and say that belongs to a particular customer. All you can say is I've exited Bia, I've swiveled over here, I'm looking at the wallet reserve, I have a right entitled to look there. Sorry, that was a very long answer to your Honor's question. No, that's fine. Okay, so there were a few things that I just wanted to make sure that I covered,

just to clarify a few things that were discussed in Mr. Slate's presentation. I think we may have covered some of these. That's fine. Oh, I do want to point out that also in response to the committee's argument that this is really like BlockFi saying the check is in the mail, I think that's really an opposite to this type of platform and this type of architecture, because this is really much more like going into your banking app and then transferring money from a CD or a money market account to your checking account. And yes, the bank may at some point have to move things around on the back end, but you don't have to wait. to be able to take cash out of the ATM. You can do that immediately. And I think that's probably a closer analogy

than the check is in the mail. This is digital finance. I also want to point out that customers, and we covered this in our brief, but just to call it to the court's attention, customers who transferred out of via and into wallet could immediately trade the digital assets that they had transferred even before any true-up process had occurred.

And in fact, if you look at the trading terms of service, says that those transfers, or I'm sorry, that those trades can be settled by book entry. So the debtors were expressly recognizing that there could be trades in wallet that were finalized and settled by book entry without digital assets actually moving. Customers who transferred out of Bia and into wallet could immediately get a transfer out of the wallet reserves and into an external wallet before any trua process was performed. and yes, there had to actually be enough assets in the custodial wallets to make that happen because you can't transfer what's not there.

That's obvious that everyone agrees with that. But it was often the case that there would be assets there because there were always assets in the custodial reserves by definition, and Block V would just true the balances up later if necessary. And Mr. Slate's presentation seemed to suggest that the true-up always meant pulling assets from BIA and sending them over to the wallet reserves or maybe even having to go and call loans and obtain assets elsewhere and send them over to the wallet reserves. But if you look at Mr. Chila's declaration and the stipulated facts, in fact, sometimes the reserves were overfunded. And so assets got released back to the rehypothatable wallets.

So it kind of seems like the debtor's position is almost that, well, if there happened to be enough assets in the wallet reserve to cover a customer, then okay fine the transfer out of bea is valid but if there's if there doesn't happen to be enough there then you have to wait until the next true up process runs perhaps it's not entirely clear but it definitely doesn't make a lot of sense and it especially doesn't make a lot of sense because as i've mentioned there were all of those occasions where even after running the true up process there was still a shortfall and having a shortfall doesn't mean oh some of those customers didn't really exit BIA. It doesn't mean that some of them that exited Bia

now somehow revert back to Bia. It just means there's a deficiency. It's kind of like being temporarily undersecured. And if everybody had tried to withdraw on the same day, there would have had to be some kind of a solution, probably an across-the-board haircut, like the one that was imposed in Celsius until the recent settlement.

And it was discussed in our papers. And finally, a lot has been said about fairness and equity in support of the debtors position, and I think we do need to address that. The AdHoc Committee respectfully submits that it is not fair for the debtors to be able to ignore the plain language of the terms of service that say that exiting via happens instantly. It is not fair for the debtors now to try to pick winners and losers among their similarly situated customers, especially with respect to assets, that everybody agrees aren't even property of the estates. It is not fair for the customer who clicked transfer at 8.14 p.m. to recover 100% out of the

wallet reserves, and the customer who clicked transfer at 8.16 p.m. to get nothing. If the debtors messed up and didn't fully reserve for every customer who transferred out of BIA, well, it's not the the first time that it happened. But it's also not the, it's really just one of a long list of bad things that the debtors have done to their customers. But the answer is not to give everything to one customer and nothing to another.

That would be the opposite of fair and equitable. And if Your Honor has any further questions, I'm happy to try to answer them. Nope, I appreciate your time. Thank you, Counselor. Counsel, if you wish to respond? Yes, Your Honor. Just a few points.

First, I just want to commend Ms. Kossi. She's doing an excellent job advocating for her clients, and she does not need an army. She's a one-woman army, and I think she did an excellent job presenting her client's position. Just so we're clear, at the end of the day, the debtor's hope is that we can pay everybody 100 cents on the dollar. We have to pursue all this litigation against FTX and Alameda who defrauded the debtors in order to see whether there's going to be. be enough assets to pay everybody in full. But, you know, as we're sitting here today, there are not. It's definitely not a wash for the estates. I mean, the reason that we're taking a position on this is pretty clear is that we need to know who has an interest in these funds in order to

propose and confirm a plan. And like without taking a position on that issue, I'm not really sure what our plan would say. And the fact that the creditors committee has joined in our position in a case where we agree on nearly nothing is for. fairly remarkable. And actually shows why this position is really pretty clear, because if there were a real argument for these pool of assets to be accessible to unsecured general generally, one would be believed that the Unsecured Creditors Committee would be making that very argument. These are just not the data's, these are not the state's assets. These are specific customers' assets, and assets are there because, as Ms. Kovsky said, people made initial deposits into the

wallet product and just left them there because they did not want them to go to BIA. Those assets are those customers' assets. And some asked clients withdrew assets from their BIA accounts and had them deposited into the wallet accounts. The assets there today belong to those customers. It wasn't a mess up when BlockFi decided to pause the platform entirely. BlockFi had to do that. otherwise it would be a severe disadvantage to all clients.

It did it precisely because the terms provided for it and the terms provided for it, and they required it. I don't agree with the position that we're being inconsistent with the terms and conditions for precisely the reasons that I described. There's two reasons. If you look at the ones you relied on, first, withdrawal via terms of conditions one. I would just return to the argument that we had. It is true that a withdrawal of principle from the BIA account gets immediately moved to the wallet account. But the withdrawal of principle from the B account does not happen in the click of the button

ever. But even if it did, as Your Honor pointed out, two terms down in the same terms of service that she relies on, it's very clear that we could immediately halt transfers and withdrawals, of cryptocurrency, temporarily or permanently, which is exactly what the company did. That's exactly what BlockFi did. We implemented a pause of all transactions, BIA transfers, withdrawals, trades, everything stopped at the program pause. A point on interest, just so we're clear, her clients will get interest through the petition

dates because they were in the BIA products. As Mr. Chila pointed out in his amended declaration, some of the schedules are correct for that period of time. Some of the schedules are incorrect for that period of time, and we're going to have to amend them. But that was always true. Ms. Kovsky mentions that you can look at your interest calculation when you open up the app. But when you did that, this is discussed in the agreed set of facts at paragraph 54 footnote 15. there was always a pop-up in the app that says this is an estimate of your interest. And the reason is because at BlockFi, your interest was always calculated at the end of the month.

And it was very complicated because the display had your dollar calculation of interest, but it really wasn't calculated until the end of the month's crypto price. So it was always an estimate. But isn't Ms. Kopp's arguing that the fact that interest, whenever that calculation is done, would cease on the dollars that were transferred as of the moment of the transfer on the app. Does that reflect that there was an actual transfer of that the funds or the coins in that account as of that moment? In other words, if Blockby is not recognizing the entitlement to interest outside of this extraordinary

situation that happened with the pause, why isn't that reflective of Well, when funds are actually transferred? It's not precisely because the interest calculation was always, it was automated, that it was redone at the end of the month manually, and it was often changed based on some of the items that I just discussed with the court. So it is correct that just like all the other things about the automated, people got into automated email saying that this transaction had happened. And at the end of the day, sometimes it did not.

and BlockFi had the rights under terms of service to calculate to cancel transactions at any time. And that kind of gets me to my more general point, which is their argument is essentially that whatever the user interface says is the truth and is binding on BlockFi and all customers at all times. But that can't be right for a lot of reasons. One of them, Your Honor, pointed out, what if there's a hack in the system? And there's some, what if somebody hacked in the BlockFi system and says, Mr. All right? has a billion dollars in Ethereum today. I mean, that could happen. That doesn't mean it's correct.

Companies make adjustments to their books all the time to make sure that their books reflect reality. In fact, that's the whole concept of closing the books. At the end of the month or at the end of the quarter, you go back and try to determine whether or not your books reflect reality. And if they don't, then you make adjustments. Their argument also, again, ignores the terms of service. for precisely the reason that your Honor focused on,

BlockFi always has the option under its terms of service to cancel any transaction. BlockFi reserves the right to refuse service, terminate relationships, and cancel orders or transactions in its discretion. That's exactly what we did. And we're asking Your Honor for permission to match the user interface for what actually BlockFi did in reality. If you ever has any questions, that's all here. No, thank you. Katskowski, did you have anything else to add?

And I'll miss Rolet. I'll let you respond. Actually, I did have one other point that I was going to make. I apologize. They're arguing about title. I wanted to directly, your honor asked about that. So they agree that when clients directed the placement of assets at BlockFi, title transferred to BlockFi.

BlockFi owns those assets. So the client can ask to return the assets. Okay, that BlockFi has title to, but even if we refuse, that doesn't change title to the assets. It just gives people a claim against BlockFi. So the customer cannot legally direct the return of assets over which we have title just by themselves without BlockFi's cooperation. That might give them a claim. It doesn't say anything about who owns the assets. That's all.

Well, wait, and actually I'll go to Mr. Arlette next, so Ms. Kopsky can respond to any other issues. But would you want to comment on the argument made that when there's been a transfer of cryptocurrency into the wallet, even before the batch or the truer process, it could be traded? Okay. So this is also addressed in Mr. Chila's declaration. So there are book entries reflecting trade. when those transactions happened. But they don't happen until after the true-up process. And BlockFi retains the right to cancel transactions for precisely that reason. That the user interface will immediately reflect the trade. The trade may not actually be possible.

Blockify processes it on the back end. If it doesn't happen, the trade is canceled. So I don't think that helps Ms. Kovsky's arguments at all. It isn't really germane to specifically what happened here, but I don't think it's advances from cause very much. What is, and this probably reflects my meager understanding of cryptocurrency and the process, but from what you just said, how does that relate to how changes are reflected on the blockchain when there's been a transfer of currency?

if there were trading by a wallet holder, doesn't that also have to get reflected on the blockchain at some point? And what's the gap in between? So this would be my meager understanding of cryptocurrency as well, but I don't think there's anything that's reflected on the blockchain until at least the back end happens. Certainly, I don't believe there are changes to the blockchain when the buttons are pushed. That doesn't happen. Thank you.

Thank you. Mr. Allett? For the record, Kenneth Allett of Brown-Rudnik for the official committee. I just wanted to respond to a few of the points Ms. Kofsky made. The first was the question of what is the committee's skin in the game? And Ms. Kovsky pointed to that, you know, in certain interpretations, this is essentially a wash. It's an inter-creditor issue. And that's precisely the point, Your Honor.

This bankruptcy case, it's 650,000 individuals, a lot of their life savings. There's significant intercreditor issues here. And this is not a case where there's a bottomless well of money to pay lawyers. Every dollar that we spend on attorney's fees or anything else comes out of these people's life savings. Every day that we delay, it's another day that these people don't get what's left of their life savings. back. And the only way that a case like this can move forward and reach an end is that everybody's treated fairly. This is not a case where we can afford sharp elbows of individual creditor groups trying to advantage themselves over others because at the end of the day, the case will

devolve and nobody wins. And so that's why the committee has a position here. The only, in the committee's view, and the committee considered this very carefully, the only way to get this case resolved as quickly and efficiently as possible is for everybody to get what they're legally entitled to. And for this, this is not a case where there's an operating debtor to save, where maybe it's worth tolerating a few sharp elbows and some people getting more than they're entitled to, to save thousands of jobs or the like. This is a case where we've got to return people's life savings as in as much as intact as possible we share mr. Slade's hope that we can get a hundred percent but that's not going to be today it's not going to be tomorrow and

it's almost certainly not going to be when a plan is confirmed and we've got to get as close to what we've got as possible and that means that the committee needs things to go as they should everybody has to get what they're entitled to And that's why we can't support an effort to invade property that's not the estate's property. And, you know, it would generate deficiency claims. And so it's a wash of the estate. But it's a loss because then we're going to have to fight over it. And many of those 650,000 people are going to come in, delay the process, and quite rightly feel aggrieved.

And that's to the loss of everyone. Next, Ms. Kovsky quoted a few lines from our initial pleading where we referenced Block V's supposed best in class practices. Just to be clear, we're referencing what Blockby held itself out to be. That is not the committee taking position. And then two final key point. The debtor's practical ability to reverse one of these transactions, regardless of what the contract, contract says, the debtors could go back. And if, as Mr. Slade said, suddenly there's a transaction that says, I'm due a billion

dollars of Ethereum, they had the practical ability, even if title instantly transferred to me, to go back into their systems and say, wait a minute, that's not right, undo that. And that goes to what we said in paragraph 11 of our reply and support of this, that where title transfers depends on who has things like practical, who has greater control over the funds. And the debtors have the ability, subject to now that they're in bankruptcy or honors approval, to say these transactions didn't occur. And that means the title didn't transfer. And last, Ms. Kovsky pointed to moving money at a bank and wire transfers.

and as we all unfortunately learned in the recent turmoil with Silicon Valley Bank, the fact that your bank has confirmed a transfer, the fact that you have a federal reference ID for your wire transfer, the fact that your bank is not yet in FDIC receivership, does not necessarily mean that transfer is going to go through. And with that, Your Honor, we just request that your Honor, that the post-paws transfers did not give legal title to the transfer of targets.

All right. Thank you. Mr. Gwynn, last comment. Group of actual wallet holders. Just a few points. One, we are not similarly situated. Our creditors' assets were moved into the wallet account prior to the pause time. So we're not similarly situated.

It doesn't matter whether the terms and conditions say something's going to be transferred immediately or instantaneously, because at the end of the day, the assets were not transferred. It's no different than if a debtor promised to make a refund and to give someone back their property. So we're going to give you back your purchase price. We'll give you a refund. But then they don't give that person the refund, and they file bankruptcy. That doesn't give the person the right to go to other people who actually got their money back, got their property back, and say, well, you know, we're entitled to share your refund. I mean, there's no basis for saying that the creditors are similarly situated when you were in the wallet before the pause period versus if you're not.

Secondly, you can't decouple transferring a client to the wallet and then their assets going over later because the property that is in the wallet account belongs to those clients whose assets were transferred to that account. You can't just move someone over to share in other people's property. The debtor has no right to do that. And the Perelman case, Your Honor, again, is binding on that that the Bankruptcy Code, the Bankruptcy Act does not give the debtor the right to use other people's property to pay its creditors. And that's exactly what the Troutman Group is asking, Your Honor, to do. So once again, Your Honor, we would just request the grant relief requested. It's been almost five months since the debtor filed the motion. and the clients who are in the wallet account have always been entitled to get their property back,

and there's nothing in the code that prohibits that, but, Your Honor, we request to you expressly authorized the debtor to give the property back to the actual wallet holders. Thank you, Your Honor. Thank you, Mr. Gwynn. Now, Ms. Kovsky. Thank you, Your Honor, Debkovsky, Trotman Pepper, for the AdHop Committee of Wallet account holders. I think one way to think about this, maybe cut through some of the noise, is to think about pushing the transfer button as being notice to the debtors. That that was the notice that customers provided, that, hey, I don't want to be in BIA anymore. I'm no longer giving you right entitled to my digital assets.

I'm out of this program. And that was the act that terminated the grant of title. Does that mean that the customers could physically get back their assets to which they now had title? No, of course not. They needed BlockFi's cooperation. But that doesn't mean that the assets that BlockFi was holding did not revert back to being under the ownership of the customers who had put them there in the first place. especially when we're talking about assets that were all commingled and fungible and dealt with on omnibus net bases. With respect to my colleague on the other side who spoke about the trading terms of service,

which Your Honor had questions about, I would just direct, Your Honor, to go back and look at the terms of service themselves. They say really clearly that trades are settled by book entry. It does not say that settlement is. dependent on some other act happening. Yes, there could be a true-up layer. Yes, there was some risk involved, but the settlement itself happened by book entry. With respect to the committee's arguments, this is actually not an inter-creditor issue at all. It's an inter-non-creditor issue. These are not constituents of the committee. And as I think Mr. Alley, I recognized, there's no impact on the general unsecured creditors or the estates.

Whichever way the pot of assets that are there in the reserves are divided up between non-creditors of the estate has no impact on the amount of assets available to the estate or available to general unsecured creditors. And if lawyers' fees are really the issue, well, that was the committee's decision to jump into a fight that doesn't affect their constituents. And respectfully, there have been no sharp elbows here. The ad hoc committee members are the ordinary customers, just like all of the rest of them, who many have put their life savings on the platform, and all they want is to be treated fairly in an accordance with the terms of service to which they agreed.

All they want is what they're entitled to. Ms. Rolette says we can't allow non-creditors to invade non-estate property. It is completely baffling that the committee has, any position in this matter whatsoever. It simply doesn't affect their constituents. With respect to the Reed Smith ad hoc committee's arguments, we are similarly situated to the customers that moved out of BIA prior to the November 10th tweet. November 10th at 815 p.m. wasn't a bright line in terms of anything that the debtors actually did with respect to those transfers. The inner account transfers were not paused. There's no difference between the customer who

pushed the button at 8.14 p.m. versus the customer who pushed the button at 816 p.m. Both of them told the debtors, we want out of Bia. We are no longer giving you right entitled to our assets. Title reverts back to us. Now, what do we recover from? We're looking around. And the debtors, sometime later, not at the moment that the 814 button was pushed. That wasn't the moment that assets all of us had magically transferred over to the wallet reserve. Sometime later, maybe the next day, maybe even later than that, it's not clear. The debtors made the decision. Yeah, we're going to put assets into the reserve for some customers, but not others.

We're not going to chew up the reserves fully to cover all of the notices that we got, that people were exiting via and taking title back to their digital assets. And again, I go back to the question. What would have happened if the debtors had filed on the day when they had an almost $4 million shortfall? Some customers recover in full and some customers take a bigger deficiency. Maybe some customers wouldn't get anything at all out of the wallet reserve. There's no way to be able to point to an undifferentiated mass of an omnibus wallet and say, this Bitcoin belongs to that customer, that eighth belongs to this customer.

that's not how it works. And we're in basically exactly the same situation. You have a reserve that has insufficient assets to cover everybody who exited BIA, and some solution has to be found. But it's not property of the estate. It doesn't impact claims against the estate. It doesn't impact general unsecured creditors. And further, I think Mr. Slater alluded to a problem with actually being able to effectuate transfers out of wallet, my understanding is that if the ad hoc committee's position prevails, and there has to be some kind of a pro rata or other allocation of assets that are available in the wallet reserves right now, BlockFi has the ability to reset the amounts in customers' accounts and allow them to withdraw, I think, in fairly short order. So the ad hoc committee

is not standing in the way of customers getting back what is rightfully theirs. The ad hoc committee is fighting for recognition that some of that is rightfully theirs as well. Thank you. All right. Thank you, counsel. Mr. Sponder or Ms. Bielski, U.S. Trustee, taking any position in this? Got to get the legs moving. Thank you, Your Honor.

Good afternoon. Jeff Sponder from the office of the United States Trustee. The United States Trustee is not taking a position on this motion. Thank you. All right. I want to thank all counsel, extremely well briefed, well argued, and I appreciate the civility, the professionalism, and reaching the court on the stipulated facts in lieu of dragging this out with testimony, which would just be repetitive of what you have in there as well. It is, the court recognizes the impact on customers who've waited months to have acted. to funds that they desperately need. And it's been too long coming to this, although I think all parties recognize that there had to be due diligence in trying to identify the issues and resolve certain questions of fact.

In order to try to move this process along for the benefit of customers, all customers, I am going to to issue a ruling. I have the Third Circuit conference. I'm going to try to carve out time this Thursday. I'm going to ask you all to note 1030. That seems to be a break in the Third Circuit program. I'll run up to my hotel room and try to read into the record a decision. It will be an abbreviated ruling, obviously. It can be supplemented. by proposed findings of fact and law, or at that point not proposed, findings of fact and conclusions of law as needed to the extent the parties require. So, but I will issue a ruling to move this process along as quickly as possible. This Thursday at 1030 will set up a, like Chambers, will set up a webcast.

simply there will be no oral argument it'll simply be to allow me to read a ruling into the record all right thank you again yep you're your honor just address the court on some ancillary issues sure thank you thank you your honor richard canno it's hens and boone counsel for the debtors your honor um harking back to a while back when we talked about some seizures orders or seizures that were delivered to the debt of pre-bankruptcy out of the state of washington And in furtherance of what we advise, Your Honor, on January 9th, I believe, we did transfer the wallet assets to the government in connection with that seizure order. We still are negotiating with the government how to return what I would say is a very material amount of posted collateral in BIA that the government seeks to obtain. clearly there's a large amount that's owed to the debtor on the loan for the posted collateral.

We're trying to work off those set-off numbers and the process of doing so. The government's position is that the stipulation and agreement between the debtor and the government should be determined by the district court in Washington, which issued the seizure order. We're speaking with the committee about the process to have that effectuated, whether we actually go there or whether something has to happen in front of your honor, to get that done. We're not there yet. We just received the proposed stipulation from the DOJ the other day.

It was a long time coming, as you can imagine. Sure. I broached this issue with you in January. Scroll forward to another seizure warrant and order. This one issued out of Texas, a much smaller amount. Right now, we're going to turn over from wallet about $47,000, not the $700,000 plus we previously turned over. and the posted collateral set-off amounts we're talking about in the $500,000 range, not the multimillion dollar range we're talking about a state of Washington.

Again, we're not there with the DOJ on this seizure order and warrant, but the mechanics will likely be the same. And we're discussing with the committee, again, to try to appease the government and also satisfy the state's interests in this collateral and these loans. And I just wanted to bring to your attention the fact that we are going to comply with the seizure warrant and the orders so that we have not held in contempt by transferring the wallet assets to the government wallet. Now, these transfers are coming out of the BIA account?

Well, no. So some of these are sealed so I can't get into the details, but some of these customers had wallet, some of the had BIA, and some of it had posted collateral, which is money given to back their loans, which then BlockFi holds in separate. own wallet accounts, that unrelated to be an unrelated to wallet, right? So all of that comes into the mix, but what we've only transferred and going to transfer is the money that's associated with these client identification numbers in wallet, because it's our view, and the government obviously has listened to our view that whatever's in wallets, not property of these states,

and why aren't you complying with the order? That's what I wanted to clarify. Yeah. Okay. Thank you, Your Honor. Thank you. Mr. Rollett? Yes, Your Honor, Ms. Kenneth Ollett, Brown-Brodnick for the committee. The committee's view is that any – we don't have an objection to wallet funds being returned. The committee's view is that any return of funds on a BIA account or loan account has to come from order of this court. And to the extent that that needs to be brought to your Honor's attention, we intend to do so quickly to ensure that this court gets a chance to review those issues. Fair enough. Another battle down the road. All right. Thank you all again. We're adjourned. Thank you, Your Honor. Record.