Unchained - How Crypto Bankruptcy Claims Buyers Will Profit From the Collapse of FTX - Ep. 444

Episode Date: January 17, 2023

From 3AC to FTX (and possibly more to come), it’s boom times for those trading crypto bankruptcy claims. Thomas Braziel, founder and CEO of 507 Capital, gives a crash course on bankruptcy law, offering the latest updates on the FTX, Celsius, and Three Arrows Capital cases. Plus, insight on how 2023 could finally be the year Mt. Gox creditors get (some) closure. Show highlights: how Tom got into crypto with the Mt. Gox bankruptcy and whether "crypto distressed" is an emerging asset class how buying bankruptcy claims is also a way to buy crypto assets at a discount how to determine how much value creditors are owed in a crypto bankruptcy what the marketplaces for buying and selling claims are like whether it's possible to tokenize bankruptcy claims whether crypto tokens should be treated as property what is likely to happen when Mt. Gox creditors are returned their BTC the importance of Celsius' separation of custodial assets vs. assets in interest-bearing accounts the likelihood of Celsius being acquired why the fact that FTX recovered $5 billion in assets is "amazing" why so many stakeholders disputed the ownership of the $450 million in Robinhood shares why there's so much difference in the prices of FTX, Voyager, BlockFi and Celsius claims whether the customer list of FTX should be kept private what type of creditors are Gemini Earn customers Thank you to our sponsors! Crypto.com DeFi Saver Links Guests: Thomas: Twitter 507 Capital Previous appearances on Unchained: Will FTX Customers Ever Recover Their Assets? Two Insolvency Experts Weigh In Will Celsius Survive the Bankruptcy Process? Episode Links:  Celsius Reuters: U.S. judge says Celsius Network owns most customer crypto deposits Celsius bankruptcy judge orders return of some crypto assets to customers Bloomberg: Bankrupt Crypto Lender Celsius Receives Multiple Bids for Retail and Mining Assets FTX Unchained:  DOJ Seizes $450M in Robinhood Shares from FTX Bankrupt FTX Recovers Over $5B Worth of Assets: Report CoinDesk:  FTX Creditor Claims Going for 13 Cents on the Dollar on Bankruptcy Marketplace Xclaim After Bankruptcy, FTX User Claims Pay Cents on the Dollar Fortune: Sam Bankman-Fried's lawyers just filed a claim to keep his $450 million in Robinhood shares Reuters: U.S. Trustee files objection to FTX's planned asset sales Thomas Braziel’s prediction on the FTX claims Connor Grogan’s take on the $5 billion in assets  DCG/Gemini: Unchained: Gemini Ends Its Earn Program and Calls for Barry Silbert’s Ouster 3AC Kyle Davies’ comments Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first Main Street media reporter to cover cryptocurrency full-time. This is the January 17th, 2023 episode of Unchained. Did you know Unchained Premium now includes full transcripts for all shows and exclusive interviews with crypto builders, go to UnchainCripto.com.com to subscribe. Buy, earn, and spend crypto on the Crypto.com app. New users can enjoy zero credit card fees on crypto purchases in the first seven days.

Download the Crypto.com app and get $25 with the code Laura. Link in the description. DefiSaver is an all-in-one management app for top lending protocols on Ethereum, such as Ave, Maker, Liquity, and Compound. They're best known for the internet. their one transaction rebalancing options and automated liquidation protection features, and you can check them out on Ethereum, Arbitrum, and Optimism Today. Today's guest is Thomas Brazil, founder and managing partner of 507 Capital.

Welcome, Tom. Hi, Laura. Good to see you. Thanks for having me. 2022 was the year of crypto bankruptcies, and this is an area that you are very familiar with, as you have been purchasing claims from crypto bankruptcies for a very long time, starting with Mount Gawks. Tell us how that initial purchase of Mount Gawks claims came about. Oh, boy. Well, again, thanks for having me on. And, you know, I got kind of sucked into crypto probably in a way a lot of

people did. I wasn't like ideologically looking for, you know, stateless money or, you know, It wasn't into anarchy. So I just, I ran across Mount Cox and I saw that there was this situation going on, and I figured it would be interesting to try to buy a claim. I thought, wouldn't it be cool to buy a claim in a Japanese cryptocurrency bankruptcy claim? It's like the highest, like form of, you know, bankruptcy trade claim buying. So I sort of started buying claims. And then I was like, I guess I should know what crypto is, you know, what Bitcoin is.

And then it sort of went down the rabbit hole. And, you know, it was always like, ah, okay. This is pretty cool. I mean, and so I stayed close to it. You know, crypto distressed as an asset class is, if you think crypto is an emerging asset class, crypto distress is a real emerging asset class. And so I've sort of always done it as a little bit of a side hustle and, you know, work predominantly for a large family office sourcing regular distress deals, whether it's

bankruptcy trade claims, dip loans, alt loans, and just special situations, sort of opportunities. And so it's been sort of a passion project. So yeah, we started with Mount Cox, and we've been involved in almost every crypto insolvency sense, needing Mount Cox, Bitcoinica, Cryptopia. And then if you push over to the states, you can look at things like Quadriga, which is great cred,

these are trimmers of like the C5 meltdowns that we saw, where, you know, a small amount of individuals with no checks and balances, we're sort of running these CFI institutions. I guess not due to someone to Mount Cox, but this is like the new wave, you know, like C5 meltdown 2.0, and those were the first tremors. And you also had other things. Like you had some ICOs go sideways with like fraud stuff. You had like gigawatt and a thing called bulfactam wasn't fraud. So I don't want to say that.

But you had some other projects that went sideways and needed to restructure. So there was smattering of things. But now we're in full swing. So I'm curious, like when you talk about all these different ones, what was the amount that you had purchased before? or we'll just leave 2020 to a side. But up until that year, kind of how much was everything that you'd purchased or what was the value of it? Oh, gosh.

So in Mount Cox, we really only purchased like a few million dollars for a client. But at the time when we were buying, I originally started buying an old hedge fund I used to run. And then in 2018, I stopped doing that and liquidated my fund and started working just, you know, on this project.

And then trying to, you know, basically be up on the sponsor and landed a job kind of working for this. in my office. Originally, the exact amount at cost is probably like $2 million invested. And it sounds like a little bit. But at the time in 18, we were buying claims at $3, four, $500 of base value when they should have been worth about 10 times what we were paying for them. And that was some crypto is like $10,000. So we're sort of like buying crypto at like $1,000 or something like that and look through value. So that was kind of the iteration of the trade. And then of course,

one, it's a little more complicated than that because we're buying below the cash value in the estate on Mount Cox and then go over to Bitcoinica. Those stock is still going on. Mount Cox should pay out this year, probably this fall is what we're hearing. They backed up the date in terms of like election for how you want your distribution, whether you want the early distribution of late distribution, which you want all in fiat or crypto, basically because they were, you know, there's 14,000 creditors, which now seems like a little bit. But at the time, that was a lot. And it still is. And in Japanese insolvency is, is no. for being slow. So it's taking a little longer. So that was pretty much the trade. We did that.

So we sort of hoovered up small claims. It worked out great or has worked out great for my family, the family office that did it with us. We've done some other things along the way. And when you talk about how the Mount Cox one, because it's Japanese, is especially slow, how long would a typical bankruptcy take to play out? So typical American bankruptcy is, you know, I can give like the paired answer. It's like 16, 18 months for large chapter 11s, that number has come down over the years because there's been sort of the rise of what we're called 363 sales or sort of auction process as opposed to doing a plan. But if you look at Japanese, the Japanese are known for extremely long.

And there are certain jurisdictions like Swiss liquidations. And financial services liquidations are also known for being particularly long things that have SIPA's attached and stuff. So there are, you know, Lehman took an enormous amount of time. It kind of's all over the map. I would say for the current ones going on, if that's really the question. 16 to 18 months for the normal course stuff that needs to be done. But some of these companies have a lot of pre-petition activity that needs to be investigated, potentially litigated.

And those causes of action, as they're called lovingly in the bankruptcy code, will be pursued for many, many, many years. The cash and crypto could be returned in, like, stages. Like, stage one is cash and crypto returned, and, like, the books and records all settled. And then, like, stage two is, like, causes of action pursued. potentially preferences. We talk about those things. But that gives you some ballpark, hopefully. Okay. And just so I understand, like, the theory then for you is you're buying these claims at some fraction of the actual value that they'll pay out in the future. But is another part of

the strategy that in the future, you know, on a long time scale, as long as they're good assets, the crypto will also have increased in value? Yeah, yeah, sure. So with Mount Gax, it was always like Bitcoin at a discount and also Bitcoin 3. So I should say our initial investor did that $2 million, but we had some follow-in investors that bought, frankly, a lot more and at higher prices. And their view is always like we're just buying Bitcoin into discount, help us source this, help us manage it, help us do all the paperwork.

And that was the trade that they were basically doing buying Bitcoin in discount. I would say with when you look at the dockets that are currently out there, these are just like your traditional special situation investing. It's just applied to crypto. You know, Voyager looks a lot like a merger, like a bankruptcy merger, which guys will play those. And they, you know, whatever. People will invest in those in the special situation space. And you have the 3A stub attached as well because that'll be the residual value and potentially a cause of action against FTX, which is looking more valuable today.

And then if you move over to Celsius, it looks like a liquidation play where there's there is some fiat, there's some steak beef and things like that that'll, as steak as Eath goes up, clearly that's going to increase. the value of the recovery as well. And then, um, and FDX. And there's real, real venture portfolio with things like three ACs and FDX. And those do look a lot like crypto recovery. Because think about it. I mean, you know, if the recoveries, let's just take FDX. Like if the recoveries were 20 cents, you know, if crypto sort of comes back out and have a bull run, you know, what are that venture portfolio worth? It's worth a whole heck of a lot more. So it's really would affect your recoveries, even though it's not necessarily like tied to the price of the coin or tied to the price of Ethereum. Okay. And wait, but meaning like even if

you get paid out in dollars since it's because this is something that I don't understand. It's like, yeah, can you explain that? Because like for some of these, you'll get paid back in the crypto, but for others you won't. You'll get paid back in some dollar value. But I don't know what it's pegged to. Is it pegged to the dollar value at the time of the filing? Yeah, yeah, yeah, yeah, okay. So this whole like dollarization issue, which is like, you know, the bankruptcy code

hasn't kept up with the crypto markets, as you would expect. out of the U.S. Bankruptcy Code, there's a thing where you dollarize claims at the time of the petition. This is true almost every bankruptcy code. In fact, I was actually looking at the BBI Insultancy Code, and I was noticing that they have dollarization in there as well, basically meaning that you basically calculate some claims as claim as if it's liquidated on the time of the petition, which generally you might be referring to like a derivatives contract that like liquidates or, I don't know, a contract that you have with the debtor of like an employment contract. like liquidated on the day of the petition. But in this instance, since you have crypto, you've got to

basically take that crypto and almost like you went on the coin market cap and just converted it all into dollars on that date. That's your coin value. So that's going to happen in all the cases. I mean, there's very strong likelihood. That's what happened in the cases. I would say where you get into real arguments and where there could be points of contention is in Mount Cox, it was who gets the uplift and value post-petition if you blow through your dollar value. Right. So in Mount Cox, Bitcoin was at $483 at $4803 at the time of the petition. By the time the case is now paying out, Bitcoin's at $16,000, $17,000, come on, $18,000. And the question is like, who get that uplift and value? The Japanese court basically gave it to the creditors. And I would say in Celsius,

Boyager and FDX, and I guess maybe even three ACs as well, because it appears there are some people that were investing via Ethereum and things, or maybe doing loans in Ethereum and Bitcoin. There will be questions around, do you get the dollarized value? at the time of the petition or do you actually get some of that do you get is it actually not dollarized and that's going to be a big question like so for instance you're in celsius if you had celsius tokens do you get that dollarized value at the time of the petition or do you get now this crappy well i should say crappy because what if someone buys voyager maybe you get uh that voyager token reinstated or something like that and the same thing with ftt if i had ftt in my account do i get that

dollarize the time of the petition and that's my claim value? Or do I now have this, let's call a crappy token that has no value? And I'm inextricably like have this crappy token. I don't think that's fair, but it's possible there will be some dollarization issues where, you know, people need to be worried about. But those are sort of really strong. There's a really edge cases and probably don't affect the majority of creditors in either one of these cases. Okay. So it sounds like though, in the vast majority of cases, you do not actually get back the crypto that you had in your account? You could get distributions in crypto. There's nothing in the bankruptcy code that precludes it. Oh, it's just, so when you're talking about

the dollarization, it's literally just benchmarking what your value is, but you could still be paid. Oh, got it. Right. These are two separate questions. One is how do you estimate your claim and then how do you receive that claim value? You could still receive it in crypto. There's nothing in the bankruptcy code that precludes it. So just to back up for a second, the bankruptcy code is lovingly as my mom would say is written in the negative, meaning that they doesn't say that you can't do it, then you probably can, as long as there's an equitable basis for it. And so in the instance of most of these these doc, it's most of the creditors want to see crypto return to them. And so there's nothing going to preclude the court from doing it. And I think they will in any case they can. I mean,

they ever heard talking about it. And the Voyager hearing yesterday where they were talking about approving the disclosure statement, the big topic was, you know, talking about disclosure statement. and people were saying like, well, Your Honor, this is like a chance for people to get their crypto back. Like if we were actually needed to liquidate, I'm not sure that we'd have a mechanism for sending all this crypto out to claimants. So that would be quite an aggressive thing for the state to do, be expensive versus letting basically finance do it for states where they're not regulated is the wrong word, but where they don't have licenses to have customers, they're basically going to be distributing the crypto out. Okay, got it. So then it's more a case-by-case basis. It's not where there's like anything in particular that will let people know in advance what will happen.

So how do claims get sold and who generally buys? Oh, geez. So there's a whole like marketplace for these things. There are a few marketplaces that are great and nothing wrong with them. And there's a whole brokerage community. Of course, the brokerage guys, I don't think love the marketplaces because it feels like, oh, I don't want people to, you know, like opacity is how I make money. But in the inbox.

buyers are generally hedge funds, opportunistic investors, sometimes high net worth individuals, sometimes family offices. I would say crypto is somewhat unique because you have a lot of crypto people that have crypto money and they think like, oh, I'm already infected in this case. I already have a $20 million claim. Why don't I buy some more claims because I know what they're going for and I like the recoveries and I've done all the work. So you have a lot of new interest potentially of people wanting to buy. It's not for the faint-hearted. You kind of need to know what you're doing. But it's not impossible, basically to source claims and, you know, get lawyers to help you draft documents and then review preference exposure. And then think through

all the issues. Like we're talking about dollarization, how to value your venture portfolio, how to value the mining portfolio. If there is mining portfolio and your docket, you're involved in. So it's not that hard to do. And then how are the prices typically determined? Oh, boy. It's just, you know, willing seller, willing buyer. I think the reason that it's still sort of like hand-to-hand combat where there's people interacting as opposed to just through a computer screen and no one's thought of tokenizing it, although I've had people over the years all you reach out like, hey, we should tokenize malcox claims. Hey, we should tokenize FTX claim. And I'm like, it's actually a cool idea. If you had an estate sanction it, that would be even cooler because then maybe the estate could make like a fee every time it went across. So like you knew that if you were selling it also, you your fellow creditors were like gaining. So I think that'd be a really cool idea if someone wants to do it, call me. I think for all intents of purposes, a lot of the claims are not homogenous. You know, people that have tried to do like full marketplaces, I think what they've realized is like, oh, wow, the claims are not so homogeneous. Like it depends, like, where the person's located,

like what their preference exposure is, what the underlying claim is. And also like the marketplace, while it sounds big now, because FDX is a $10 billion claim pool and Voyager and Celsius have multi-billion dollar claims pools. Generally, the claims pool and take an airline bankruptcy, guess how big the trade claim pool is like a few hundred million dollars and it might have $10 billion of financial debt. The claims pool is usually really small compared to the cases, but with these, they're huge. The claims pool is the entire dock. Okay. And then once you buy a claim, what exactly do you get? A mess. Yeah.

But like are you the official contact person for the bankruptcy estate after that? Yeah, basically. Yeah, you buy the claim, you file your transfer in the court. Sometimes there's transferability issues and need to work through. Again, like if you're doing this, you want to have like able counsel helping you. But it's not rocket science. And you can file your transfers, you know, and you're, if you need power of attorney, if you need beneficial ownership, you know, certain jurisdiction like if you're in the BVI, maybe.

And then, you know, you're the corner of contact. You basically step on the shoes of that creditor. That can be good and bad, right? Because if you have a preference, you know, I mean, yes, okay, you technically don't buy the preference, but they could offset your claims because you are stepping in the shoes of that claimant. Wait, you keep using this word. preference, but what does it mean? So preference, anybody that's a creditor at this point is Googled it like 5,000 times and doesn't want to hear any more about it. So I apologize you're a creditor. But for the

general public, preference is just this idea that if you've received a preferential payment or treatment from from a debtor pre-petition, pre-petition meaning before the date they filed their bankruptcy petition. So in American jurisprudence or bankruptcy law, they look back 90 days. in BVII, they look back, I think 90 days or six months. Generally, the idea is you have three creditors. Like I give you, like, just a law school example. They have three creditors. One of them, you don't have to be friendly with them, but you just like him.

The other two you don't like. So you only have $10,000 left and you have three creditors that each owe $10,000. You pay him the $10,000. You file for bankruptcy, and the other two creditors get Pupkis. And the idea is like, well, hey, that's unfair. We should really unwind that transaction, pull the $10 back. And then they split it three ways. So it's equal treatment.

It's a court of equity. Bankruptcy courts come out of English common law courts of equity. And so that's the idea of a preference. Now, there are defenses to preferences, and we can talk about all that stuff. But yeah, you want to talk about differences and preferences? Sure. Why don't we? We'll cover that briefly.

Okay. All right. So in all these cases, the big ones are ordinary course of business defense, meaning it was a depend. These were demand deposits and you could pick them out. any time you wanted. The other one is ordinary business terms, which are added under the 2005 updates of the bankruptcy code under what's called Babsi is the update bankruptcy code. You also have what are called 546E Safe Harbor, which is basically safe harbor that allows you to when you have,

oh man, I feel bad saying this because I'm not like, you know, a high end lawyer, but I'm going to do it in a non-highen lawyer way. If you have financial transactions going through financial intermediaries on account of a securities a commodity contract, you're supposed to have a safe harbor. This was added by financial industry lobbyists to basically stop cascading bank runs in the financial industry.

And so the question would be, are these crypto firms financial intermediaries under the definition of the 54060 safe harbor? And if that's true, all the transfers you made to yourself out of your account could probably be fit within the safe harbor. And so it'll be an interesting question to see. And I've tried to contact a few crypto firms or crypto, thank you,

a few crypto policy groups about, you know, basically pushing for safe harbor because I think it's important for the industry. I've gotten, hadn't got a ton of support back from them. I think partially because they don't really understand the issue and it's just too, like, arcane. I'm just like, what? I pretty succeed. I didn't meet one lawyer who thought it was interesting.

And then she was like, send me a summary on like what you think we should do. And like I'll do it. I was like, summary on what you should do. I just explained it. You should get involved in these cases. They're like, maybe we can have a law firm do it for free for us. I was like, I don't think a law firm's going to take this up for free for you. Like these things have gone up to the Supreme Court.

Okay. Well, let's now just talk about Mount Cox because we have so many bankruptcies to cover in this episode. And we are, especially with the FTX, we're really going to get into it. But let's talk about Mount Cox because obviously this has been in the news on and off. since 2014, which is kind of crazy. And I just was curious to hear a take because I imagine, since this was the first major crypto bankruptcy case, that probably like kind of presented the new issues having a

crypto bankruptcy would present for bankruptcies in general. So what were those issues? Dollarization was a big one. The dollarization leads to this question of who gets the uplift and value of, in this case Bitcoin post petition. And then, but then also like, you know, for some of these, especially in FTCS, I imagine, you know, some of these are shit coins. And so the value will probably go down.

So then also how does that even? Okay. We're back to dollarization. We haven't lived 2014, 2024, almost. So 10 years, talking about dollarization. You know, because the codes aren't really set to deal with different currencies. I mean, they are foreign currencies they can handle. And that's why they dollarize it to whatever currency is that local currency.

Like in Japanese insolvency code, it puts it into Japanese yen. What the great thing about that is, the creditors have been walloped recently because the Japanese isn't falling against the dollar and probably against the euro as well. Dollarization again, but now it's cutting the other way for these shit coins, utility tokens. Do they get dollarized where you get that petition date value? Or is it just totally a zero and you have no hope? I think it gets dollarized as well. I think that with some of these issues, they're equitable.

So there's like the legal, so I should say that in everything we talk about, there's like a code provisions, like especially with all these American bankruptcies. But then you also can look to like what the equitable solutions are. And, you know, under 105, the bankruptcy court can basically do anything that it deemed equitable, that isn't in direct conflict like with a provision of the code. again, if it's not expressly prohibited, it's allowed. If it's adding equity to a situation. And I'm just curious for your take.

Do you think dollarization is a good idea or has been a good idea? I think it is. I think it is because even if you get dollarized, do you think, oh, that could screw me? You would have other equitable arguments to why you should get the uplift and value if you're getting screwed by dollarization. and you'd probably have equitable arguments to even if you're dollarized, I think it is the right solution. I think if you didn't dollarize it and left it in all these other currencies, it would be very

complicated for administering the cases. Maybe one day we'll Bitcoin eyes, you know, that'll be like the, you know, but right now, I think it's just a stick to the dollar. Well, one thing that you said to me when I interviewed you from my premium offering was that the Mount Gok's case never actually answered the question of whether people should receive back their crypto. You said that they kind of punted on this question of whether Bitcoin is property. So it was just so curious, how did they get away with not answering it? And why do you think they- It's Japan. I think it's a, look, I'm not like a Japanese legal scholar. So anyone that works in the

field, I apologize because I'm sure they're going to be like, oh, this guy's horrible. but my take from having expensive legal counsel there and going a few times for court hearings and being involved in the case for many years is it's kind of everything is kind of a backdoor deal. It's like you go over to the creditors meeting, any sort of argument that was going on, it's already resolved and it gets like presented by the trustee. You know, when you go to Japanese court, I was telling you this on, I think on the other pod, it's like the trustee sits in the middle of the courtroom and the three judges that are overseeing him sit on the side. And he stands in there and he talks on a microphone for like 45 minutes,

almost like filibustering the whole thing. So now can ask any questions because it's only an hour. And literally, like the judges sit on the side and nod as he talks. And it's just a very cultural thing, I think, where there's just not a lot of disagreement. There is disagreement, but it's always behind closed doors. And it's always like when it comes to being public, it's all very smooth. And there's like, you would never notice any. They didn't punt.

They punt it on like, they just basically said like, hey, it's property. We're not sure who should get the uplift and value. We think you should claimants. And so unless someone that kind of like strongly objects, we're going to kind of give it to you. That's, it sounds silly, but that's basically what they said. They never really answered the question on like whether they basically said it's more equitable to kind of give it to you. We're not sure. Yes, it's dollarized, but it's property. So maybe you should get your property back. they just never really got to the question. So, but then were there any, were there any kind of like precedents that were set in Mount

Cox that, you know, could be applied in like FTC or 3AC or Salthus or anything? No, so it's, no, there weren't really. And that's interesting. And there were some precedences out of the UK and out of New Zealand, which should affect some common law thing. So if you think a BVI where 3ACs is going on, or maybe the Bahamas or Antigua, if I'm saying it right, so the other day the judge said it wrong and it messed me up. And those are English common law, and they should actually look to potentially other Commonwealth countries to see how they've interpreted it.

And there was some decent case law out of New Zealand, I think, that went up to the Supreme Court. They basically said crypto is property. and even though they were pretty good for crypto acid orders, they basically said like, and it's held, you know, in, you know, there's a custodial relationship because you thought there was. You know what I mean? So like even though they're all the prongs of a like a custodial relationship

might not have been there, we're still going to give that to you. That's what they basically said in Cryptopia when it won't Supreme Court. So that's good case law, but it's, of course, it's not, you know, it's positive at all for U.S. bankruptcy court. Oh, okay. So in a way, it's like maybe we need a big crypto bankruptcy in the U.S. to kind of set some of the precedent. So, yeah, right. So here. So Voyager is quite a clean case. They had FtX as a buyer going in or kind of going in. And now they have CZ. If that gets done, a lot of not a lot of case law will come out of Voyager. But Celsius, kind of being like the redhead of stepchild will probably end up like in my life say that will probably. end up making more case law around dollarization and what are you going to do with

the sell token, you know, there'll be a lot more fighting about that. Preferences, you know, will preferences be pursued? Are there defenses to preferences? What are they in the crypto context? So there'll be a lot of case law of that. And FDX will be the same. There'll be a ton of case law because it's so messy that there'll be just more fighting. Okay.

Yeah. So we're going to get into all of those cases. But first, why don't you just give us kind of the TLDR on. what's happening with Mount Cox this year, because this year, I think, is a momentous year for the Mount Cox creditors finally nine years later. Yeah. So I'm, I think it's, I think it's about time. It's great to see that the cases sort of approved coming to an end, I guess. Creditors were supposed to submit their election for early payout or late payout, and whether they want to get paid in crypto or Bitcoin. And if they wanted to get paid in Bitcoin, and if they wanted to get paid in

Bitcoin, which I think, well, they didn't actually choose which payment, you know, part of you wanted to use or whatever. But that got moved from January to January 10th to March 10th. Since it's March, it looks like now the distribution instead of this summer will be this fall, which is great for creditors. I think people are somewhat worried about all that Bitcoin coming online, quote unquote, but I would say that one of the largest creditors is two firms, one or three firms. One is the Bitcornica state, which is going on in New Zealand. That'll take a few years to work out. So that is a, that's about 64,000 accepted Bitcoin claim. So it should be about, I don't know, rough math. I call it something like 10,000 of the 140,000 Bitcoin that will be going there.

So that's going on. That's not coming online. You also have, let's go down the list. Then you have like this guy, Josh Jones or something called Bitcoin Builder. He's going to receive, he's actually the largest creditor, but it's really Bitcoin Builder, it's just in his name. That won't be coming offline, but it'll take him probably a few months, if not a year, to administer that. So that Bitcoin won't be coming online just yet. Then you can go down the rung, it's probably Fortress, who owns probably another 10, maybe 15% of the docket. That could be coming online, but I think they'll be pretty smart about it and they probably have hedged some of it. And then, you know, maybe us and I don't know, let's think there's one or two other large creditors. I think what

it will do is it'll be a lot of Bitcoin on the market with guys that have a pretty low cost basis and will probably want to repothecate it into the like Bitcoin lending market. And so the prices for lending out your Bitcoin, or I should say the interest rate you can make for lending out and Bitcoin might be very depressed. And I think Bitcoin cash, which a lot of people were going to get could get really walloped. Because remember, these were like pretty early Bitcoiners like 2014. So I don't know, they can't read into their minds, but probably some of them are really serious, like, maxis. So.

Right. Yeah, that would make sense. Okay, so in a moment, we're going to talk about all the major crypto bankruptcies of 2022 and then some, but first, a quick word from the sponsors who make this show possible. It won't take long to tell you neutral's ingredients. Vodka, soda, natural flavors. So, what should we talk about? No sugar added?

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So let's start with the first big bankruptcy of last year, Celsius. There were a pair of consequential decisions that I believe maybe, you tell me, could have an impact on other bankruptcies. They concerned the assets held by the so-called custody customers who did not have interest-bearing accounts versus the earned customers who did have the interest-bearing accounts. So it was the vast majority of them on Celsius. So can you explain what those decisions were

and then why they were significant? And also let me know whether or not you think those will affect these other cases? Yeah, so it's very interesting. So I think Voyager did fall first, no. But anyway, but... Oh, I thought it was Celsius, but maybe I'm wrong. But anyway...

No, no, maybe you're right. I don't even remember now. It felt so concurrent that it doesn't really matter. But on this whole, like, custody-earned question, I think it really will affect long term, like where a lot of the C5 players and the onramps on the crypto, how they go about writing their terms of service and what their customers will demand to be able to get. Right. But just explain what those decisions were. Yeah. So the decision was basically so far, the decision has been we're going to return only the earn that's pure earn. Excuse me, custody that's pure custody, meaning that it came into a custody account. It never went into an earn account.

and we're also going to return people that have custody accounts of under $7,500. That's basically the minimum threshold for bringing a preference. And let me talk about why the whole custody account type might be a preference and why the judge has not ruled on returning all of the custody account on claimant's money. Basically, leading up to the bankruptcy, there were a number of state AG's attorney generals that were pushing back on the earned account saying it was security and it was unregistered and they were being offering to non-accredited investors. And so you got to get out of our state with this product.

And so what SELCES did is they basically transitioned everybody over to, they created a thing called a custody account. And this did not allow them to re-aphyocate, and it was supposed to be literally a custodian for you, which is a very different product than a security's offering, where they're going to re-apopogate, and you basically have an earned claim in your general of a secure creditor. That was created, believe it or not,

89 days before the bankruptcy filing. I remember we spoke about preferences earlier, which are 90 days before the bankruptcy. Now, some people claim that Mishinsky or the debtor, the debtor's professionals, purposely filed on the 89th day, just to make sure that if they could, that would be an extra $280 million or whatever the account claimants

within there. That whole account type would be considered a preference. And so other than the pure capital that went in there and now can come out, anything that went from earned to custody within that 90 days, that's a preference. I think it's going to, like we were saying earlier, like Voyager's going to make less case law because it's too clean, probably black by similar, you know, other than fighting over the Robin Hood shares. And it's significant because it kind of shows that preferences matter. You know, custody matters. You have to follow all the prongs to set up a custody account, you know, and just, looking at your phone and seeing that you have some assets in here doesn't create, you know,

a custodial account, custodial relationship. And so I think it's quite significant. And I think it'll probably affect all the big guys if you think of, you know, from Coinbase down, how they go about offering different products. And even the way the regulators will think about like what they demand if they bring regulatory enforcement to make sure they insulate their citizens of that state or that country. But what do you make of that $7,500 threshold? Like, you think that because it's like I don't understand why they didn't just say if you have money there then you will get it back like why do you think they suddenly were just like oh below this cutoff you can get the money back but above well the reason they gave under 7500 is because that's the minimum

threshold in in order to bring a preference when I say they gave back people with 7500 I mean people with accounts with 7500 or less in them so if like com Brazil has $6,000 the preference threshold, the minimum to bring a preference under the bankruptcy code is $7,500. So in a way, they're just keeping that possibility open for them. But I guess what I'm asking is, like, why not just say you had that money in there? It was in this custody account. Like, why not just say, even if you have more than $7,500 worth of it, that you can just claim it as your own? Why not?

Well, I think that from an equitable basis, you know, it's, it's, it's, It's, who knows, it's likely that it probably still gets returned. But judges have a tendency to only rule on what they absolutely have to. You know, they sort of like try to narrow things down to what they feel very confident is right. And then anything that's not, they're like, hmm, maybe I can punt on this decision. And then maybe later in the case, I don't even have to rule on it because someone buys the business. And so that's always a really nice, you know, to have. Like even today with the hearing in FDX, like even on Voyager's disclosure statement yesterday,

people were bringing up all kind of issues for confirmation. The judge said, that's a really great objection. The problem is I'm not ruling on confirmation today. I'm ruling on whether the adequacy of the disclosure statement. And I know what you're saying, and I hope you bring that up when we have a confirmation hearing. But right now, I don't have to listen to any of that. You know, like I don't have to take any of that in. And so I think that's what he's trying to do.

He's saying this is very narrow. 75 below, that's obviously not a preference because it can't be. Anything that was a pure custody, meaning it came from your outside wallet into a custody and never touched earned. That clearly was never a preference because it was never the debtor's property. But the stuff that went from earned to custody within the 90 days, I'm not sure yet. And I'm going to hold it until we figure it out later. Okay. The judge also ruled that the money in the earn accounts would be Celsius.

is and talk about that and like what do you think the significance of these decisions will be for these other bankruptcies? I think it's significant. I mean, if you look at the, if you look at the terms of service, even though they moved around and shapeshifted a lot over time, they were very clear that when you read it, it's, you know, when you buy into this, you're basically giving your money to Celsius to re-apoplicate and that you have this earned account and it's a general and secured claim. I mean, it's basically what it says. I think that's, again, Voyager probably would have had a similar determination, but they didn't have to go there because, or hopefully you don't go there because hopefully finance can get over the Sipheus review and can close on the transaction. Right, which is a review about like the national security interest of selling Voyager to finance.

But anyway. Yeah. So Sipheus review, I'm not an expert on Sipheus, but it is, yes, it's a DOJ's way or I don't know who actually reviews it. It's like Department of Justice for like the actual. like what branch of the government. But someone reviews it in the government and yes, as like, you know, someone that, you know, is foreign. I think particularly Chinese is allowed to own this asset.

I mean, I guess I guess finance has its own issues historically of like whether, you know, having wallet issues with the, with, with shady depositors and things like that. But it seems a bit far stretch to be blocking it on Scythias. Yeah, I agree. But I would say for FDX, is it that helpful? Probably not because the terms of service for FDX, say English common law. The problem the FDX runs apart and we are runs into and we could talk about this is even though they say English common law and even though they say title never changes

hands between the customer and the company. Exchange, yeah. Yeah, the exchange. You know, it's a giant fraud. You run into real issues around... Alleged. Was that? Alleged.

Allegedly... I wouldn't say a giant fraud. That's the wrong way to put it. It was allegedly a lot of, you know, shenanigans going on to where you have to start questioning the very contracts that are being used to support it. I mean, in Celsius, people really came hard at Machinsky. And now, I think in hindsight, people are going like, okay, we can talk about things he did that weren't right or aggressive stuff or promising things on AMAs or being promotional. but, you know, we've got bigger fish to fry. And I think in his terms of service, people were like, oh, throw all the terms of service out

because he wasn't following other terms of service. You know, there's thing in contract law that you sort of like, just because one provision is broken doesn't mean the whole contract is thrown out. You're supposed to try to follow the contract. So we'll see what happens in FDX. But the Celsius ruling, it's not too informative. it's sort of like what you kind of thought was going to happen all along. I know people didn't want to hear it, but it was clearly plainly obvious by the terms of service.

Okay. Yeah, I saw numerous people saying that they felt the decision was right, even though it's not something pleasant for Celsius customers. So Celsius is still looking for potential buyers in Bloomberg recently reported that there were 30 of them. How likely is it that you think such a deal would go through? You know, look, it's possible. I mean, if someone, just basically pays very little and is able to acquire the customers on the cheap, then why not? And do you think that would be good or bad for creditors? I think it would be good for creditors.

One, it would probably take the preference risk off the table because any buyer would say, like, hey, you can't be going after preferences after my customers. And I think also it would speed things up, you know, have a buyer. They're going to process. They're going to open accounts. Anybody that wants to close their accounts is 90 days to close it, very similar to kind of like the finance buyout of the Voyager. it would probably grease the wheels of getting something done.

I think the administration of distributing all the crypto left to bankruptcy professionals, I'm not saying they can't do it. I'm just saying when you see the bill, you're going to be like, whoa. So I think the cost on the estate of administering, distributing all the Bitcoin could be expensive. And then I think it also leaves the door open for preferences. But I think it's the real risk with Celsius. I don't think it's something to think that, oh, there's 30 bidders. I mean, sure, 30 people signed an NDA.

how many people are really serious and bid. I mean, you saw the back and forth on Voyager, and Voyager was pretty clean. So you think the odds are, what, less than 50%? You know, I think that the debtor and the UCC, the Unsecretary Creditors Committee is known as the UCC, the UCC and the debtor are going to have a tough time deciding whether the bidders are qualified and have feasibility issues around buying them.

So let's say a company who's kind of like a ragtime, tag team gets $25 million or $100 million together and tries to buy Celsius. Can they really run the operations? What if they slip in the chapter, like right after buying it? There's a lot of risk. So you're going to need someone with, sure, they might only pay $50 or $100 or maybe something like $100 million for the customers just to buy them. And then basically you'd reinstate whatever crypto balance is left in the estate. So like a one for one for the crypto and then we're going to add $100 million.

but there's real feasibility issues. Feasibility meaning like, who's to stop a bank run on that buyer unless they're a big boy who can shoulder a lot of withdrawals if they take over the company. Okay. All right. So now let's turn to the big cahuna of the crypto bankruptcies. We started to talk about it, FTX. The day we're recording, FTX announced that it had recovered more than $5 million in different assets.

And that didn't include another $425 million held by the securities community. Commission of the Bahamas. So Thomas, when I mentioned that, I saw you shaking your head. So what do you make of this news and what do you think it means for customers? Amazing. Amazing news. You know, the thing about these cases, you can't, you know, twist and turns like this do happen. It's nice to see a pleasant one for the creditors. There was a lot of fervor from distress firms trying to buy claims in this case. So it's interesting to see great news on the back of it. Did any of these guys know about this great news? I doubt it. I had one. one creditor who was going on and on about how they had to have known because they were trying

hard by his claim. And I'm just like, I'm telling you, I just don't see it. I mean, it's possible, but I don't think that anybody that would have leaked out. The estate professionals don't do that kind of stuff. They're really kind of in their own world. And they don't make sure they talk with the stress firms, but they would never cross a line like that. And so anyway, getting on to it.

Yeah, it's great news. I think the issue is going to be, is it. great news or is it good news? And so when you peel back like what's in that portfolio of stuff that they say is highly liquid, like how highly liquid is it? Are they, I guess just more disclosure. I mean, it's a big statement to be making. And there's really no benefit to an estate professional over-promising and under-delivering.

Generally, it's the other way around. They under-promise and over-deliver. So they look great. You know, just like John Ray in the beginning of the FTX case, he was sort of, oh, my God, this is the worst case ever, worst case ever. And then it's like, oh, we actually, we found a billion dollars. You know, so it's like they have a tendency to do that sort of under promise and over deliver. Yeah.

Well, I did see that Connor Grogan, the Coinbase Director of Product Strategy and Business Operations, tweeted that he tracked all the FTX assets. And he felt that they're relatively illiquid. He saw things like Locked Saul for, you know, Solana, as well as FTT, which, you know, doesn't and how much value. Maps, Oxy, like some of these no-name, Samcoins. And so he actually said that he felt it was irresponsible for them to advertise this $5 billion number as something that they could actually recoup. So what's your take on that? My take would be, that's a very thoughtful take by him. But an estate professional, I don't think would come out with something like that unless they really had something and thought through it. They're not, they're not idiots. Yes,

okay, they're learning crypto a lot of them, but these are highly educated, well, you know, all top, top firms. I mean, I'm not sure who actually said it in court of someone at Sullivan and Cromwell, I'm pretty sure. You know, you're talking about some of the best bankruptcy attorneys in the country. I don't know if it was Dieterick or somebody else, but I don't think they would say it unless they really had it. And if it's not on chain, that probably makes me think it's in currency, you know, like dollars and dollars and euros should be fantastic. Okay. we'll have to keep our fingers crossed us. Yeah, we really don't know.

There was like no, there was like, it was literally like this, it was like a paragraph of disclosure. And they're like, and we're not going to tell you anymore. It's like, oh, come on.

It's like the biggest news ever. And there's like no real breaking apart. But it is curious to me, like where do you find that much money in how is it not like tracked on chain, you know? I think that is very curious. All right.

Let's also talk about the Robin Hood shares. These were very hotly contested. And now it's resolved. But let's actually just talk about that initial fight. Not resolved about all. But anyway. Oh, okay. Well, yeah, clearly my understanding is less than yours.

So initially, BlockFi tried to link claim to them because they were saying that the entity, which is one owned by Sam Pinkman Fried, that had purchased them, had pledged that stock as collateral for a $600 million loan that BlockFi had provided to Alameda. Sam Bingham Fried himself tried to lay claim to them, saying that he needed that money for his legal fees. The FTX's state was also vying for them. So why were these shares so contested? And what do you make of this fight?

Like, what was the significance? Okay, yeah. So Sam Bank McFrey, his point was he had an equity interest in that after the loan to BlockFi. BlockFi was saying this had been pledged as a loan. And we're collapsing on loans. We'd like the collateral. And FDX, of course, was saying, well, hold on a second. The guy that pledged that loan never had the authority to pledge it.

And it's null and void because he wasn't authorized to pledge it. He basically had our shit. Sorry, he had our property and he was pledging it when he shouldn't have been. So those are the three separate arguments. None of it's been resolved because the government showed up and was like, we're just going to hold these, which on one level sounds great. I guess if you're FDX because Blackfire was making a power move for them. You know, the U.S. government's probably going to want to pound the flesh.

I mean, they're talking about holding them as part of a civil or criminal forfeiture. And what that means is that those assets will be, if he signed the plea agreement, they'll be, first of all, as the criminal trial is going on, they're going to sit on those assets. So it could be literally, I don't know, a few years while he's going through his criminal trial, and they're holding onto the assets. And only then, only after that will he potentially, essentially sign a civil forfeiture, which only then will each estate have to make a claim on the civil forfeiture. So it could be years before those shares have gotten back. So it's kind of interesting

to think about in terms of for Robin Hood. I mean, it's kind of a big risk now because, who knows, maybe Robin Hood ends up going to zero in five years, or who knows, maybe it's four X's and instead of $400 million and $1,600 million. And then Sam has the, he wants the residual, they want their loan. And then the estate wants their property back. So it'll be interesting how the spoils or split. And the other thing is, I'm not sure exactly, but when you do these civil forfeitures, there's no like adjudicated process, not a court process. You literally interact with the DOJ for splitting up those goods, you know, laying claim on that forfeited property. And, and so the DOJ, literally some person in an office somewhere could just be like, okay, you get 400, you get 400,

and you get 400, which is kind of crazy to think about because it really won't be appealable in any way, you know, or there won't be like motion practice with stuff that you would normally see in restructuring. So it's kind of kind of a curveball, but none of that's been decided. And it'll be years because his criminal trials going on and they'll sit on that property. Just like with Mount Cox, Alexander Vinnick, they're sitting on the BTCE property while he's been extradited. And if he's tried, only then, they've been sitting on the BTC servers for eight years, however long Mount Cox than going on. Oh, okay. Yeah. And just to fill people in, that's the exchange where allegedly a lot of the

stolen Bitcoins from Mount Cox were laundered through. And he, so BTCE was shut down and then he was arrested and I can't remember what happened. They, they caught him on vacation in Greece. Yeah. Yeah. So, okay, but I can't remember. I know that I think the French authorities caught him. I can't remember if he got extradited here. I don't think he did. Did he? He did. He got extradited recently. You did. Yeah. Oh, okay. Okay. So like, come on, like missing Malkax Bitcoin, maybe. Who knows? Okay. Yeah. Well, oh, right. That would be amazing for people like you, the creditors, right? Yeah, for all the creditors. I mean, I doubt they'll actually find any. And I heard recently there was a new story about them doing a like a prisoner swap. Like, Vinnick was going to be prisoner swap with somebody else. And I'm just like, oh, great. This is me horrible for creditors.

But there are, I assume, like, you know, who are the blockchain specials out there? Or blockchain analytic guys? Like, there are wallets that people track, like, Mount Cox, like, sort of like associated wallets with the hack that just sit there. Right. Okay. But so just to follow up on the Robin Hood shares thing, because I guess I didn't fully understand about the U.S. government's using that money.

So essentially, like, in a way, they're kind of holding it as what, some kind of leverage to use in their case against Sam? I do not. Yep. Basically. Sure ball. Okay. Okay.

Okay. Yeah. Seriously hotly contested Robin Hood shares. But out of curiosity, like, why do you think it was that asset in particular? Is that just one of the few assets that's actually valuable in the FTCS case? Or like, why was it those in particular? I think because technically they're outside of the estate, you know, because the shares were pledged to Block 5, but they weren't owned by Block 5.

So not owned by that estate. And then the FDX estate says, hey, that's stolen property, but they haven't actually brought that lawsuit yet, right? So it's technically outside of the estate still. So the government's like, well, hang on a second. We can maybe get what's outside of the property. Okay, maybe that house and like maybe those shares. Like they can't, they can't like reach the automatic stay of the bankruptcy courts and just like start grabbing property out of the estate. these were, this is like big estate property that's, that's basically not in any estate. So it was just what was available.

Got it. Okay. So yeah, now, now I get it. This is just, I mean, it's super interesting how this all works. But that makes a lot of sense. But because, yeah, obviously they want to honor the bankruptcy. And yet they, you know, need to also pursue justice however they're going to do it. So I wanted to ask you about, one of the marketplaces where the FTCs claims were trading because, you know, you mentioned these before about these marketplaces, but CoinDIS reported on one of the sites called X claim. FTCS claims were going for 13 cents on the dollar. And that's actually up from, I guess, initially after the bankruptcy, it was just a few cents on the dollar. But I was curious, like, you know, why you thought it was that amount because the same article said that the Voyager Digital claims were trading at 41 cents.

Block Fies were trading at 28.5 cents and Celsius is at 18. So why is it that the FTCX ones are so low, you know, like what, how are people kind of determining what they think the value of these are? Okay. So I'll get in trouble with my friends if I don't mention. There are two real websites. The two best ones are claimsmarket.com, claims for like, you know, I guess it's slash market.com. And then X claim, not with an S. those are the websites if you want to go and like try your hand and doing the stuff and they are there you know legitimate claims of there you just have to kind of like check the schedules make sure it matches the scheduled them out look at the preference exposure uh get comfortable with the counterparty that they have ID and stuff like that yeah why are they so much lower I guess because if you if you look at Celsius and Voyager it's very clear what the outcomes are going to be uh Celsius or say let's do it all let's do all three Voyager you're buying for 40 you're basically going to get 50 to 55 in crypto and you're going to get the 3 AC claims as a kicker and maybe a cause of action against FDX. So that's the play, right? You buy it for 40, you make you make 50. And that short

order, like a few months, hopefully, the deal closes. And you're just facing this on like what assets they have to repay the, okay, got it. Like the balance sheet, we know what the balance sheet looks like. We know what the claims pool looks like. We know the numerator and the denominator looks like. So, you know, it's like simple arithmetic on that. Then you start going further down to Celsius. We know what the arithmetic looks like, but they're burning a lot of cash and we don't know what mining's worth. And there's some equity guys kicking up a big stink saying that like, hey, we're ahead of all the customer account claimants on the mining business and on the GK8 assets. So there's a little more friction, right, between like, numerine denominator we know, but like we don't know like where we're going to converge and like get our recovery.

So there's a bigger delta between like what. you what you can pay versus what you could potentially have the opportunity of getting potentially. And then you really don't know what the cause of actions are against insiders. It's a little unclear. And then going further down, I mean, FDX, other than like today's big announcement, people were scratching their head. What does the denumerator look like? What does the denominator look like? I have no clue. Is it 10 billion of claims? Is it 12 billion of claims? Is it 15 billion of claims? And also on the numerator like, well, who's owning what? But what is in the liquid portfolio?

What about the venture stuff? Isn't that a lot of Solana projects? Like, isn't Falana dead now? Like, I'm not saying it is. I'm just saying, these are the questions that get asked within the stress firms. And they start saying, okay, we need an even bigger discount. And then there's wallets moving around. You hear about stuff on Twitter, like wallets moving around.

And so, again, now, not only the new, we don't know what's going to happen, but the numerator denominator are very fuzzy. And so you need bigger differences between what you pay and what you have opportunity of making. Oh, okay. It's like simply straight up the fact that the like the accounting for FTCS was so messy. That's really what it boils on to. Okay. Yeah. Yes. The funny spreadsheet with weird. Yeah. Poorly labeled internal Fiat account and whatever. So yeah. Okay. But I would say that, you said 13 cents. Yeah. I mean the the market on FTC has been bouncing around like crazy. So it started really, it actually, pre-petitioned, there were some, a few claims trading, I would say claims, but it counts trading hands.

People trying to do all kind of stuff. Trade Tron, trade the NFTs, get off back way through, you know, Bahamas. And then once it filed, people were like, oh my gosh, is this a zero? Like, this could be a zero. And so claims are trading at like three, five cents and then sort of moving out between five and five, six, seven. And then all of a sudden there were quotes in like the teens. And I would say that's probably where the market is, even after today's news, maybe a little higher. But it's tough for larger distress firms to buy smaller claims. So if you're a small account claim, if you really are trying to sell it, you have to be realistic about they have to do diligence in your claim. They have to do diligence on you, like a KYCML background.

So it's harder for smaller claims to get that full price. You get quoted in papers and stuff like that sometimes. So people shouldn't get, it's just a function of like the friction of doing transactions. I mean, if you're a $500,000 claimant, someone's buying it for 10 cents. That's a $50,000 purchase. Like you got to buy a lot of claims to make a business out of that. Okay. Right.

Okay, that makes sense. Yeah, it sounds like a slightly bureaucratic thing. So one thing that I found interesting was you tweeted, wild prediction. Timelines are years zero to two building records, years two to seven litigation and sell-off investments, years 7 to 15, selling off venture portfolio, you know, arrow, arrow, recoveries 60 to 100% plus over 15 years. So, so curious, like, how are you coming up, or like when you use these percentages of 60 to 100, is that like 60 to 100% of the actual crypto or 60% of the dollar value? Dollar, dollar, dollar is. Yeah. And then when you say like 15 years,

I don't know. It sort of seems like a super long time to get back 100% of your money. So yeah, but talk a little bit about your projection there. Well, if you buy it for 5 to 10 and you make 10x over 10 years or 12 years and you get back your cost basis in the first couple of years, you're not going to be upset. Oh, wait, wait. But you said 100% not 10x. 100% is like 1.

You just get back what you put in. Oh, no. I'm in if you were to buy them at 10. Yes. If you're an creditor and today's news is fantastic. fantastic news today. But I'm not saying that that's not a fantastic news and that was a total curveball. Why do I think that?

I mean, I think that there's a lot of cash, a lot of crypto investments, a lot of causes of action, a lot of assets outside the estate, which the state can trace out using like constructive trust lawsuits and things like that. And I think that all come back. And I also think that there are a lot of people around this estate that probably made money that need to be looked into. And also, like, if you think of the bank run on SPF and I should say on an FDX, like $5 billion left the estate in the last 30 days, that's a lot of potential preferences. And I'm not talking about little, you know, $1 million claimants.

I'm talking real big institutional players that pull serious money off these platforms. And I'm not saying they should pay it all back, but clearly that will help recoveries to the more like retail client. So that's just a prediction also based on my experience with some of the, when I was a kid, like learning about bankruptcy. There were these dot-com bankruptcies and they had these big venture portfolios. And they were very interesting because all the firms that invested in these, these ended up being like 100% repay and then some cases because the venture portfolios in years like, you know, 8, 9, 10, 11, 12, 13, 14, end up being great. So the two biggest ones, skipping on the one that I wanted to mention, but the other one is called Com Disco. So these are big bankruptcies in the dot-com bubble that led to fantastic recoveries, actually, for creditors. But at the time, people were like, the dot-com bubble burst.

Who wants any of these crappy dot-com companies? And yes, okay, a lot of them were zeros. There were some real winners in there, and it ended up really helping recoveries. And so I think you could get a very similar story in both probably, I guess the big ones with venture portfolios or three ACs and FDX. All right. So we're going to talk about 3A in a moment, but before we do that, I just want to ask about this other issue with the FTC's bankruptcy case, which is whether or not the names and contact information of the customer should be kept private. So at the moment that we're recording, the judge's rule that they can be kept private for three more months. Potentially, they're, you know, they might extend that. And I should just say, like, we're recording on Wednesday, January 11th. Apparently, one of the experts who looked at the list said that it's a valuable asset. And I was curious to know, like, is it unusual to keep the customer list private? And if so, why do you think they've chosen to keep it private so far? Let's talk about that.

And let me give you the case history on it. So let's walk through them. CRED, which was a precursor to these cases, the customer list, I think, was kept private. Then Flash 4 or come forward, Celsius was kept private. Excuse me, Voyager was kept private. Celsius was not. And now FDX is trying to do it.

And the same guy that ruled in cred, which in cred, in cred, it was unopposed because it wasn't such a big case. It was unopposed to keep the creditor list or customer list private. The issue you have is you have customers and creditors. We keep even doing it ourselves, like customer list, creditors, which one is it? So in American jurisprudence and in bankruptcy, there's supposed to be this idea of transparency and access to information, not just for parties of interest, but like all the creditors and all the parties of interest to see everything that's going on. You want to sell an asset? Great. Motion to court, explain why you want it.

Everybody have an opportunity to see it, respond to it, support it, object to it, you know, find red flags in it, you name it. And that's just the way the system works. And under 107 of the bankruptcy code, you're only a few areas that you can look to to have cause to redact things. The debtor hasn't even come close to meeting that burden in today's hearing. And so I think the judge wanted to give it to them. but there were too many people objecting to what they wanted to do.

And so he basically said, like, look, I love you. Yeah, I want to give you this. But you haven't really done your job. So I'm going to give you three months instead of six months of like an interim basis redaction. And you come back here with good 507 arguments. So how we can redact this. And basically the big things you can do for redaction are it's valuable to the estate. And you were basically hurting the value of the business by giving away this customer.

list or this creditor list. That's one argument. It's basically, you know, business competitiveness reason. The other one is like imminent harm to the party that you're giving their information out to. And the standards are there. I was getting on Twitter, some guy was going back and forth with. He seemed like a very nice guy, but he has like a very strong view that like no one's information should be public. I have, I guess, a little bit of a different view. I feel like there should be some disclosure around creditor names and amounts so that people can make relationships. that you might not know, like, oh, that's the guy that he used to have doing this for him. And, like, you know, he's not technically an insider, but, like, I'll bet that that came from here.

You know what I mean? Like, and if there isn't a lot of disclosure, people don't see those connections. So I think it's really great to have disclosure. That's the benefit. Of course, the downside is people are saying things on Twitter and people get all hot and like, oh, I'm getting doxed. Someone's going to come and, like, hold me up a gunpoint and steal my crypto. So I see both sides of this.

And I think Judge Glenn and Celsius wrote a really good opinion on this. But if you want to just talk about the facts in FDX, it looks very much like the judge is going to give him the relief they saw it. He just wants a better, you know, better papers and evidentiary hearing so that he doesn't look like a jerk for granting it, even though there were, you know, serious objections today to what the better wanted. Wow. Wow. You think, okay. Yeah, I don't know. I mean, I agree with you that I see it both ways. because of the nature of this case, I do feel the more information, you know, kind of probably the better for people because since, you know, where, you know, did certain people get their money from? Like, that's an important question to figure out. So the point that you made. Yeah, I would agree with that. And, you know, FTCX has a lot of individual traders and stuff. And they might have things in their personal name. So then it's redacted. But really, it's a business account. But at the time, they could only open it in a personal account. So what do you do with that? And that was even brought up today in court. I don't even think they know this. But like early claimants, I mean, could only open accounts in personal names.

Oh, wow. Okay. Yeah. Yeah. It's, it's so tricky. Yeah, I don't feel there's like any one good answer, but I find it interesting that the judge, yeah. Like, I guess what I'm hearing is more that the judge has a predetermined decision, but is engaging with the issues.

And that's what I find, um, maybe not. so compelling. But anyway, I wish the judge, I mean, for me, I get it like judges, federal bankruptcy judges are generally extremely smart and they are specialists in what they do. They are bankruptcy attorneys who have been, you know, applied. And I think I can't remember who actually appoints them, but they're appointed for like 14-year terms. So these are generally incredibly smart people that are very thoughtful. And they really care about the law. But I think on this issue, maybe some people think that the bankruptcy code is like too far behind where people are on privacy issues. I mean, my problem is, is like, as a bankruptcy nerd, like, some of the arguments are just so poorly, like, just articulated. Like, they don't even try to follow the code. They're just like, Your Honor, we want the relief. Like, because I said so and because this is a court of equity. 105, Your Honor. 105's in Section of Banking Code. It's like, kind of like throwing up the Hail Mary. Like, because I said so and because this is a court of equity. One of five, Your Honor. And one of five is in section of the Banking Code. It's like kind of throwing up the Hail Mary. like when the judge he doesn't liking you in your arguments you're just like 105 your honor like

this is like just saying like this is a court of equity and you can do whatever you know you think is equitable basically that's not expressly prohibited and that that's what 105 says of the bankruptcy code and I just felt like the debtor didn't even try to put on an evidentiary hearing for why they met the standard of 107 and it was just like guys like you're not even going to try like you're not even going to And honestly, in Celsius, I think the reason they got that opinion from Judge Glenn that they did was because, I think it was Kirkland. Kirkland did a really bad job articulating if there was really imminent harm because they basically switched. First, they said it was business competitive reasons in their first paper. Then when the judge was like, I don't like this argument.

This doesn't make any sense to me. Like, you got to explain this more to me. Instead of explaining it further to him, they just switched the next tier. they can see you the hearing, they just switched and said imminent harm. And the judge was like, but I don't get it. Like one guy like two years ago was held up a gunpoint. Like he's not even accredited in this case. What are you talking about? Yes, isn't the whole point is they don't have their keys. So how would someone hold you up a gunpoint for your keys? Like, you don't have your keys. You have a claim. Like that's the whole point of like why you're in this mess. You had a

C-Fi account somewhere. So I think the judge will still granted, though, because he was, you know, judges do this. They sort of like kind of let you know where their head is by the questions they ask and things like that and just their demeanor. He basically said, like, come back with more evidence. I'll probably give you 107. I mean, he didn't say that, but he basically said that. Okay. Okay. All right. So let's talk about the 3AC liquidation for a moment. Co-founder Kyle Davies recently tweeted, we and other creditors of 3AC are frustrated with the current bankruptcy process. Ongoing costs are high.

assets are not being thoughtfully handled, intercredit or disputes are delaying the process, and the estate value is not being maximized. Do you think there are merits to his claims? Oh, that's a heavily loaded question. I don't know enough about what Russell, who's the one of the liquidators from CNAO for 3DACs is doing. I think it's another guy in Chris Farmer, maybe. Anyway, I'm sure they're doing an okay job, but there's nothing wrong with creditors expressing their opinions. If you were in a U.S. bankruptcy court, talk about transparency, this would all be through motion papers. But it sounds like from those tweets that there's a lot of backroom discussion about what someone's doing, what someone's not doing, why they aren't doing this,

why they aren't doing that. Generally, I mean, that does go on in U.S. bankruptcies as well, but there's a lot of motion practice. So you will see the papers on the docket. You'll see, like, this ad hoc committee doesn't like what the debtor is doing or what the UCC is doing or the UCC is like what the debtor is doing. But you don't really see that in 3C's because we have no disclosure. It's all going on down to the BVI. The liquid air is basically doing whatever he wants. And you don't have a ton of disclosure about what he's doing. And they're probably frustrated at that process as well. Because I understand that they're looking into, you know, like all these cases, they're going to be looking at pre-petition activity. So, you know, the posture of some of these state professionals is not always going to be so kind to pre-petition actors.

And that can be frustrating. I don't know that much about it other than sounds like they're frustrated. All right. We're going to keep talking about 3C in a bit, but I actually also now just want to bring up Genesis because at this moment in time, it seems likely that Genesis will have to file for Chapter 11 bankruptcy. And as I mentioned earlier, we're recording on Wednesday, January 11th. And I'm saying this right now because in case Genesis files before this episode comes out

next Tuesday. Now you know why we are not discussing that bankruptcy filing. You know, assuming that they file, it'll be a mix of retail and institutional creditors, the retail primarily from this Gemini Earned situation. And I wondered if you could just talk about how people should expect the institutional versus Gemini earned creditors would be prioritized or treated. We don't know yet because we haven't seen the Gemini contract. If someone sees the Gemini contract with Genesis, send it, I'd love to see it. But I haven't actually seen it. it. When you read the Gemini terms of service, I just happen to randomly read them sometimes. No, someone sent them to me asking me what I thought. And I said, yeah, these are generally,

if you are a Gemini earn customer, you are a general unsecured creditor. That's what the terms of service say, in my opinion. And then now, but it does say that Jim and I, when they lend out your stuff, can sometimes get security interest and will, you know, do its best effort. to protect our customers when we're lending stuff out. So it's possible that Jim and I does have some collateral security interest or whatnot in the Genesis's loan that they gave out. So that's how that sort of plays out. So you are unsecured, but the person that lent your stuff out might be secured.

So let's hope so. But we haven't seen that. The Winklebyes haven't published that unless I missed it somewhere. So if somebody has it, send it to me. I assume they have some security interest, but there's probably more exposure than a full repay or I think they wouldn't be on Twitter, you know, basically trying to pass the buck. Okay. And so 3AC meanwhile has also been insinuating that they were misled about GPTC. And I wondered, you know, what you thought their claims might play out in a Genesis bankruptcy.

So these are now all intertwined, right? We can link Gemini to Genesis and Genesis and Genesis to three ACs because they're a huge creditor. I think it was reported they have over a billion dollar claim, I think a billion, billion, two, something like that. If there's rumors going on about the management of GBT in this instance. Which we should say is grayscale, which is owned by a DCG, which is also the owner of Genesis. Right. And I think one of the issues was affiliated transactions where Genesis was potentially lending people money on GBT shares, which and they would buy GBT series with them, which they would pledge with Genesis, which then get their loans and it would go circular,

which are affiliated transactions, whether it's illegal or unethical or breaking any rules. I don't actually know. I'm not a securities lawyer. But if that's the case, it could potentially hurt their claim in the 3AC's case because they would be able to offset, you know, three arrows would probably bring an action to reduce or offset that claim. And if that were the case, of course, that flows through the Genesis recovery, which then flows through to the Gemini earn account holders recovery, potentially. Wow. Okay. Like reducing it, essentially.

Full contagion is among us. Oh my gosh. Yeah, well, just to throw one other in the mix, you know, Genesis is too big as borrowers were Alameda and 3AC. And I guess all three of them will be in bankruptcy. So just talk about, I just can't even imagine how all that, will to have all three of them in bankruptcy and then yeah can you talk about how that will work let's just say a number of bankruptcy professionals with buying beach houses after all this is over I think they gainfully employed for the next couple years you know in all seriousness yeah

I mean there will be interactions between the estates one of the nice things probably about estates is like no one's getting a hundred cents on the dollar they have the ability to negotiate these estates and they can make deals and get things done probably more efficient efficiently than, you know, Gemini and, you know, Barry like on Twitter, like, you know, or, you know, exchanging words that, you know,

you can't, you can't sort of, what's the phrase? You can't squeeze a rock or whatever. Like, there's only so much if there's no juice left. And once they're in chapter and they can negotiate with their creditors, you know, these states can settle these things

out. So, but yeah, they'll potentially all be in chapter. I don't know if it would file. I don't really understand the earned product and how this is the Gemini's business in general. Oh, well, I don't know if Gemini would file. It would be Genesis. But I, yeah, I'm just a little bit confused because, you know, they were lending to Alameda and 3AC. But they're all in bankruptcy.

So then, like, I'm sort of wondering, like, who has the final, who gets, who gets the funds in the end? well it just all flows up right so like three aces liquidates itself does distributions and that flows up and then you have this it's they're like nested they're almost like nested dockets in a way in a way right um and there are parts of dockets that are nested like Voyager has a three AC claim of about 600 million yeah I thought it was 650 yeah yeah I was getting it mixed up with with uh self suces a three Cs claim they have like a 40 million dollar three Cs claim so those those cases are just nested and you have to wait for them to work out and it'll It'll it'll lengthen some of these cases out.

But there's no reason that, especially in the U.S. bankruptcies, where you can't do interd distributions and things like that. Okay. All right. Well, this has just been a monster episode. I mean, yeah, there's been so much going on with all these different crypto bankruptcies. Clearly, you're having your moment in the limelight because, you know, you started with this so long ago. I don't know if you ever knew that this would become such a big thing.

Now it's like, it's just. consuming the industry. I just thought it would. My view was, if crypto becomes an ecosystem, you'll have restructuring cycles. It's the most volatile asset. And like, I can't think of a more volatile asset class. Okay. Well, clearly you've struck gold, digital goals.

Well, it's been such a pleasure having you on Unchained. Where can people learn more about you and your work? I'm on Twitter and you can DM me generally open to polite DMs. please save the hate mail. And I guess it's just Thomas at 507 Capital if anyone ever wants to email me. Or just Tom at 507 Capital.com. Perfect. All right.

Well, thanks for coming on Unchained. Thanks. Thanks so much for joining us today. To learn more about Tom and all of these crypto bankruptcies, check out the show notes for this episode. Unchained is produced by me, Laura Shin, without from Anthony Yun, Mark Murdoch, Matt Pilchard, Zach Seward, Wandaervanovich, Sam Shri-Ram, Pamajam, Shish, and Sashonk. LK transcription. Thanks for listening.