Unchained - How the Top One-Third of FTX Creditors Are Boosting the Payouts for Everyone Else - Ep. 643

Episode Date: May 10, 2024

Listen to the episode on Apple Podcasts, Spotify, Pods, Fountain, Overcast, Podcast Addict, Pocket Casts, Castbox, Google Podcasts, Amazon Music, or on your favorite podcast platform. Thomas Braziel, managing partner at 117 Partners, dives into the draft FTX bankruptcy plan, which was praised for paying out at more than 100% in dollar terms, but has a number of intricacies that are drawing criticisms from creditors—including a group that is urging creditors to vote not.  The episode delves into the nuances of the proposed payout, explaining how the estate was able to pay back more than 100% than the dollar value of the claims, why some creditors are being pitted against each other, and why it might get approved even “over the kicking and screaming” of some creditors.  Braziel gives his insights into the the rapid formation of this plan, the controversial role of Sullivan and Cromwell, and the logistical challenges posed by what may end up being paper check payouts.  Show highlights: Why the plan that was filed this week is such big news How it was never even possible for creditors to be made whole in crypto asset terms How the majority of depositors actually had stablecoins on the FTX platform Why there are “inter-creditor” disputes What a "cramdown" is and why it's significant in this case Criticisms of the plan, and why larger investors, especially with crypto holdings, are having their gains socialized Whether the FTX estate made mistakes by selling some of its positions before they 10x’ed Why FTX didn't reboot its platform  What conflicts of interest might arise from law firm Sullivan and Cromwell The tax implications for creditors who are non-US taxpayers How the claims are going to be distributed Whether the creditors will favor the proposal and the next steps  Thank you to our sponsors! iTrustCapital Polkadot VaultCraft Guest Thomas Braziel, Managing Partner at 117 Partners Previous appearances on Unchained: Why FTX Might Try to Claw Back Funds From Retail Customers Will FTX Reboot? Here’s John Ray’s Internal Deadline for Making a Decision Will FTX Customers Ever Recover Their Assets? Two Insolvency Experts Weigh In Will Celsius Survive the Bankruptcy Process? How Crypto Bankruptcy Claims Buyers Will Profit From the Collapse of FTX Links Previous coverage on Unchained of the FTX bankruptcy: Jesse Powell and Kevin Zhou on How FTX and Alameda Lost $10 Billion Did the Bahamian Government Direct SBF and Gary Wang to Hack FTX? The Chopping Block: Why Lenders Didn’t Liquidate Alameda When It Was Underwater  Erik Voorhees and Cobie on Why FTX Loaned Out Customers’ Assets The Chopping Block: FTX: The Biggest Collapse in the History of Crypto? Creditors plan: Unchained: 98% of FTX Creditors to Receive 118% Claims Payout Thomas’ summary of the plan Dollarization:  Unchained: Is it Fair That Crypto Bankruptcies Are Denominated in Dollars? Here’s a Solution to Dollarization Criticism of the plan: Nicholas Hall’s thread  Sunil Kavuri’s opinion on X Zach Guzman on the sale of Anthropic Taxes: Thomas’ thread on the taxes for creditors Learn more about your ad choices. Visit megaphone.fm/adchoices

That's their argument. Their argument is like, well, hang on a second. I'm up 10x. You're up 1x. Why am I giving up my 10x for a 2x? You know, that's kind of argument. It's not quite like that, but it's, I'm showing you the extreme of it. Like someone that had Solana could say they're up 10x and someone that had a meme coin that's at zero. You know, now they're dollarized, which they love. Hi, everyone. Welcome to Unchained. Your no hype resource for all things crypto. I'm your host, Laura Shin. author of The Cryptobians. I started covering crypto eight years ago and as the senior editor of Forbes was the first matriam reader partner to cover cryptocurrency full-time. This is the May 10th, 2024 episode of Unchained. Did you know Unchained is much more than a podcast? Last year, we unveiled a completely redesigned website enriching your experience for the latest news, insightful analysis, compelling op-eds, and comprehensive learning articles and guides for beginners. Explore all this and more at Unchained Crypto.com. With I trust capital, you can buy and sell crypto and attack

advantage retirement account. Enjoy significant tax advantages, 24-7 access, and the industry's lowest fees. Pocodod is the original and leading layer zero blockchain with over 2,000-plus developers, and the Pocodot 2.0 upgrade will be a massive accelerator for the ecosystem. Join the community at Pogo dot network slash ecosystem slash community. Deploy custom crypto strategies and boost your yield with perpetual options on VaultCraft, the universal defy adapter for supercharging your crypto. Learn more on VaultCraft.io. With Amex Platinum, $400 in annual credits for travel and dining

means you not only satisfy your travel bug, but your taste buds too. That's the powerful backing of Amex. Conditions apply. Today's guest is Thomas Brazil, managing partner at 117 partners. Welcome, Tom. Hi, Laura. Good to see you. There was some... somewhat positive news this week that the FTX estate had filed its bankruptcy plan. And I say somewhat

because that comes with a big fat caveat, which I'm sure most people in the crypto world will know and I'm sure we'll get into. But why don't you just give us the basics on what this news was and why it was being lauded. Yeah, sure. So it's great news in terms of it being a milestone. We can pick apart to the plan. But basically the first substantive draft of a bankruptcy plan and what's called a disclosure statement were filed two evenings ago. I've kind of lost track of times because I haven't slept much because of just all of the, trying to read all the documents, summarize them for people that ask, and at the same time deal with claimants that now that the numbers are out there

are interested in trying to sell. So a good way to think of a bankruptcy plan is like a contract. And this is like, you know, my parents are bankruptcy lawyers. And thanks for having me on. So we'll say it's kind of like everybody agrees to this contract. and then the court stamps it in. And the contract has to have certain provisions. Those provisions are the bankruptcy code.

Basically, it has to follow those provisions. And for purposes of confirmation of a bankruptcy plan, the biggest section that you have, there are a lot of sections you have to meet and it's under 1129 of the bankruptcy code. But what was basically filed is this first real draft where people got to see the numbers of what the debtor is putting forward

and what the ad hoc committee and the UCC is still thinking of joining consensually the unscure creditors committee, that is the official committee, but it looks like this is a nice first draft, and we can pick that apart. And then the big part as well, the contract is the plan. And then the part that kind of tells you how we got here and where we're going is a disclosure statement. That's a little bit like a book report for what the plan is going to try to do and accomplish. Because, you know, the plan is written kind of in legally, so sometimes it's hard to understand. And the disclosure statement tries to

give the motivation as well as tries to air out or elucidate what the plan is trying to accomplish. Okay. But the bottom line is that they're actually going to pay out more than 100% of the claims. And the reason why I said before that this was quote unquote somewhat positive news is because, obviously, this doesn't mean for the people who had crypto on the exchange, they will definitely receive far less in value than what they lost. So for instance, if you held one Bitcoin, on FTX, you'll get back about $19,600, according to Matt Levine, who calculated that. And, you know, most people are aware of that right now. Bitcoin is now trading at more than $61,000. So obviously, it's less than a third of the current value. And, you know, I did see some commentary

kind of in the common section of articles on mainstream media where people were confused and they thought, oh, like, does this mean, you know, that Sam Bank of Free didn't commit a crime? And Just to make fully clear, you know, the customers of FTCX, they did not agree to become investors in a venture fund. You know, their agreement with FTCS was that FTCS would keep their assets safe, not that they would invest them long term. So, you know, none of this news means that Sam Pinkfrey was not guilty of fraud or anything like that. So just to clarify things, you know, that I've seen, some misconceptions I've seen. But it is uncommon for bankruptcies to return more than what the creditor's claims are for. So how did the estate manage to do that?

So before I go on to answer your question, I want to comment a little bit when you said. The creditors definitely are being made whole in a crypto sense of the word. And that's important to remember. And that was really never going to be, it was always going to be very hard, if not impossible, to make creditors whole on a crypto for crypto basis. And really that speaks to the fact of why we're even here on a dollar at petition date value basis were made whole with post-position intros plus some upside sharing and the government received government fines is basically the rise in crypto.

There were a lot of great assets that John and his team were able to sort of either liquidate or sell off or pull back via project advanced or other causes of actions that they were able to pull back assets into the estate. But the other big thing was, of course, just salonar ripping, going from I think 20 or even maybe $18 at the time of the petition to. whatever it is now, $150. You know, there were some great venture apps that's in there, but there were, you know, also like Bitcoin improving in value.

I did see Matt Levine's article, by the way. He says 18,000. I think at the petition date, Bitcoin was around that number. So if you do a, if you're getting 118, you're getting more than that, right? So it's more like 20 something. And that's not 60,000, which is what Bitcoin's out this afternoon. You know, it just depends. If you were a lot of people as well, I think one of the things,

If you actually look at the composition of assets that were in the estate at the time of the position, a lot of people were selling really hard their crypto in trying to liquidate so they could get money off or trying to get their money off. So actually the claim composition, about two-thirds of the actual depositors assets are in stable coin and fiat. And then, of course, you have another spectrum of like sort of meme coins and things like that, some even lock tokens. So there's actually a small portion of people you're talking about here.

I think they're the loudest voices. and they probably should be because they're the ones that feel like they're kind of, is the word monetizing or sort of like they're kind of lifting the boats of the other people and they feel like, hey, well, hang on a second. Like that doesn't feel equitable to me. And we can talk about that. Those are like inter-creditor issues. The claims are always going to be dollarized because if you look at the bankruptcy code, the U.S. Bankrupts Code is pretty clear that you have to dollarize under 502 B of the Bankruptcy Code, like Section 502. But I think the question was going to be, well, hang on a second. And I don't want to jump ahead.

because I know we're going to talk a little about this, but there are people that are still making title never changed hands arguments. And those are still going on. Someone brought a what's called declaratory judgment. And that's been continued. The judge has authority to basically to keep continuing that. This plan is out now. And the people that they're trying to bring this are frankly kind of a small faction of creditors. They have the right to be heard. They should be heard. And I respect, you know, that they will bring their arguments. But I think they have a tall order ahead of them because you have the bus moving in a very fast direction towards confirmation, which is John Ray and the debtor, plus the fact that 60 plus 65 plus percent of the creditors were in Stable Coin anyway going into the bankruptcy,

plus you have the stress terms that bought up $4 billion in claims or $4.5 billion in claims as petition. So you have a lot of constituencies now that don't really care about that argument. And so not that shouldn't be heard, but that it's a tall order for them to bring it. And they're more to it than just pointing to the terms of service and saying, oh, look, Sam said that, title never changed his hand. Sam said a lot of things that were not true and could be considered unconscionable or not necessarily enforceable. So. Okay. Well, so a couple of things. First, this whole issue about the dollarization of crypto claims in bankruptcy is, you know, it's been a sticking point for a long time, starting with Mount Cox, which happened more than 10

years ago. And actually on the unchained website today, we did publish an op-ed from some lawyers from Allen and Overy who created a proposal for what could be done otherwise, actually. So we'll put that in the show notes for people to check out. But the other thing I wanted to ask about was when you talk about the intercreditor issues, so you're saying basically like people who are saying like, oh, I had Saul on the platform. It's because of the fact that, you know, I had that money on the platform that people are getting more. It's like socializing their gains.

Is that what? Right. Oh, okay. That's their argument. Their argument is like, well, hang on a second. I'm up 10x. you're up 1x, why am I giving up my 10x for a 2x? You know, that's kind of argument. It's not quite like that, I'm showing you the extreme of it. Like someone that had Salana could say they're up 10x

and someone that had a meme coin that's at zero. Now they're dollarized, which they love. And I can appreciate that, but I think it's hard. You do need a rule stick at some point. And I also think the bankruptcy code is pretty clear on 502Bs and applicability, meaning dollarization. I'm not saying that, and I haven't read this op-bed piece, that there aren't alternatives, and we could talk about those, and people can still present them. This is just a draft. That should be clear that this is just a draft proposal from the debtor. It's just they don't make it lightly. A lot of time and effort went into this with a lot of constituents to try to make it something that's approvable from a bankruptcy code perspective,

but also to maybe get the required votes to get it through as well. Which you don't necessarily need. You could still do a cram down. What is the cram down? The cram down is basically that you go to the court and say, we don't have the votes for honor, but this follows and comports with the bankruptcy code and section 1129 for purchase of clamp confirmation. We think you should confirm it anyway, over the kicking and screaming of the impaired accepting class that we haven't got the votes to approve it. So you can do cram dance. Yeah, yeah, yeah, yeah. I mean, I don't think people maybe don't realize that they think,

oh, we'll just block the plan. It's like, yeah, there are no girl gotchas in bankruptcy because it's a court of equity, meaning the judge has, like, the unilateral authority to do anything to bring equity to a situation. I said, unilateral, there are boundaries, but they have a wide berth to interpret the code and do things that they think bring equity to a situation. Kind of like the declaratory judgment thing, like the judge doesn't really want to, doesn't want to rule on it yet. So they keep sort of punting the issue. When traditionally, when you follow as declaratory judgments, it's supposed to be heard within a certain, like, specific time frame that's pretty short. And that's why people do them. But, you know, this is like the theory versus the practice.

bankruptcy. I would note just before we move on to something else is, okay, you can say, okay, title never changes hands, things and guys where they feel like they were all in Salana and they should get that uplift, those are hard to help unless they actually win the title argument. But generally, for the creditors, like 90 plus percent of the value is going to them. You know, so even if you did it differently, it's not like you're going to get a different result. You know, there's only so much value in the estate. There's what, 14, 15, 16 billion dollars of assets. That's all there is. It's not going to change because we're changing the way the plan works. Now, intercreditor might change based upon what you think is right. And I was a little,

not surprised, but I wasn't sure if they were going to try to get a bump for people that had crypto versus stablecoin, like if you had Bitcoin and you had Salana or something in your account, and that was a big contributed uplift, you weren't going to get a little bonus. But I guess this is kind of what the debtor and the ad hoc kind of put together. And I assume the UCC is pretty close to fully supporting this. Okay. Yeah, I personally do think it probably would have made sense if they'd given the people with stable coins like 100% and then everybody else got the uplift. But one last thing before we move on more into some of the criticisms was just quickly, I wanted to ask that the speed with which they came up with this plan is, I think, like,

really remarkable. Apparently, you know, for instance, Enron took about three years to get its bankruptcy plan in place. So would allow this to be finished so quickly? Oh, I think just how fast they were able to get to like 100% plus repay based on petition date values. Now, again, we can start arguing over who gets the uplift, but you still have to dollarize, and then you can start talking about how the excess spoils get cut up. I think a lot of it is, so that's actually what led to the speed. And also, John said a pretty aggressive timetable, you know, love it or hate it. And, you know, it's hard to say, you know, it's like there's

certain business judgment. People, I think, sometimes conflate business judgment with somebody being a bad, bad guy, like, you know, just being out, like, just having, like, poor ethics or something. And those are two different things. I'm not saying, like, every single little thing someone does is a perfect judgment, but I will give them the benefit of the doubt for the most part and, like, let them, you know, sort of run the file or run the case the way that they, they see fit within reason. Okay. Yeah. I mean, because, you know, it is surprising considering that, obviously, he said this was the messiest case most disorganized he's ever seen. So in a moment, we're going to talk about, the multiple criticisms of this plan, but first a quick word from the sponsors who make this show possible.

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Back to my conversation with Tom. So as we mentioned, we've already gotten into it. There are some different criticisms of the plan. And probably the one of the most outspoken critics is Sineal Kavori, who's a creditor who is also a representative of the largest creditor group. And he is actually recommending that people vote no on the plan. So what are his criticisms? So yeah, I'll summarize his criticisms. We also maybe should have gone over just like the rough outline of the plan for people I just want to get the take. Sorry, go ahead. Basically, majority of the creditors are going to be international below 50,000. They're going to get cashed out, 50,000 US dollars. Anybody with that, a 50,000 or less than what's called a convenience class, and they're going to get cashed out

and basically get 118 cents on a dollar based on your petition date values. Those the biggest biggest in number or amount of actual claims. That'll help with the administration of the case, bring down the administrative burn, also take care of a lot of small creditors. So anybody with 50,000 and above is not in the convenience class, and they will be looking at 127 to 145. And those numbers are projections based on the liquidation value of what they get for their remaining assets. I mean, you still have anthropic to sell. They still have magic eaten to sell. He still got a number of tertiary things to sell, and that'll be based on, you know, just what they can get over the course of the next year or two. And they're pushing for plan confirmation. Basically this summer,

they're talking about voting this summer in plan confirmation in September with payments going out within 60 days of that confirmation. So if you push forward in two months, that's November checks for basically anybody with 50,000 and below. And you might get interim distributions for 50,000 up a few months later, call it doesn't specify in 60 days for the larger. creditors. The other parts that are interesting are FTCS is getting basically same treatment. FTCU, some question marks around what these people are actually getting. They're definitely getting 100 cents, but the question is, are they getting 118? Are they getting 117 and 145? The plan was extremely unclear because that's being run out of Cyprus. Also, I think there's some Bahamian

creditors that are part of, you know, basically the FTX. FX digital markets. Digital markets. have some tricky claim issues that we're seeing pop up. Lastly, any big, broad pushers. Oh, and of course, no preferences. They're basically waiving all customer preferences as long as you vote in favor of the plan and you're not an insider and didn't have constructive knowledge of, you know, the bankruptcy, things like that. And explain preferences again? Ah, yeah, and preferences. Everybody's favorite topic. Basically, any withdrawal made in your account within 90 days before the petition date is subject to what's called a 547, Section 547 preference action by the bankruptcy state. And, you know, there were defenses to preferences, but given the

recoveries in the case, the debtors basically come out in the plan and said, look, we're going to waive all preferences. As long as you vote for the plan, you'll get a release from the preference. I mean, it's good to see. It's also kind of like, okay, you're giving us something you were going to have to give us anyway. That's how the law basically works. We're giving you something we were going to have to give you anyway, because you can't go after preferences if you have 100% repay cases. I mean, not only is it moot, because when you pay in a preference, you get a claim for that amount that you paid in, if it's a hundred-scent repay, you basically are giving $100 and then getting $100 back later. So it's not something to. Also, just under the operation of the code, you can't actually pursue them under $5.47, because you didn't get more than you would get in the liquidation. So those are the big broad brushstrokes of the plan. Okay, so now let's talk about these criticisms of Sineal Kavuri and other people like him. Sineal's big argument is around title not changing hands, and he's pointing to the terms of serves.

I think he has a decent argument because they're pretty specifically, they specifically say, you know, title remains with you the whole time. The issue is there's so much more from a legal standpoint that you need to develop and the facts actually matter. So you can't just like point to the contract and say, hey, this is what it says. So he's got a pretty tough road to hoe or road to hoe, whatever you say it, to get to the result he wants. I mean, I would also say a few things. I know, I don't know if this is just from public knowledge or how I know, but he's, I'm pretty sure his claim is specifically FTT tokens. So I'm not even sure what he's doing is helpful to his own position. Maybe he just feels like he still wants to try to push for it.

But I'm not sure it's so great for FTT. T-T tokens. I mean, currently, that was the other two big parts that I missed, both of Pref Equity, so all the VCs had invested in FTX over the years and FTT token are getting zero in the proposed plan now. These things could shape-shift over time. Maybe some of the venture capital's come out. Maybe somebody with a big FTT position comes out and tries to push for different treatment. But right now, it's looking like it's pretty uphill. So I think the title argument is been kind marginalized by this plan coming out. And I think that the guys should really, if they, if they feel strongly, they should try to bring it. I'm not sure how to help Sineal himself personally, but I think

for people that maybe had Bitcoin, Ethereum and Solana, big, big portions of their account, it's something to consider and listen to what he has to say and see if you want to join him. I don't know exactly if he has like a formal group, because technically when you form groups, you're like supposed to follow, I think it's a 1990 or 2019, like who's a part of your actual group. But hey, I mean, it's interesting. to see and kind of fascinating to watch, like creditors actually organize in kind of new and interesting ways, honestly, over Twitter or something like that and over like telegram groups. So the bankruptcy has never, never seen that before.

And so just to clarify, like, basically you are saying that he might get together people who held valuable crypto to say, like, the profits here should not be socialized. Right. But as you point out, I do think I read somewhere that he had $2 million for the FCT tokens on the exchange, I will have to check to see if I can find that. Just a quick note, everyone, after we wrapped, Cineal confirmed for me that he had $2 million worth of Bitcoin, ether, and British pounds on FTCs, as well as a small amount of FTT. So, you know, in this case where, you know, they were saying, like, people with FTT

aren't going to get anything. Like, it's sort of weird. Like, it contradicts. You know, I don't know what his other assets were. Yeah. But look, I think it's a valiant fight to go after. The other, I think, named party is Noi Capital or NOAA Capital out of Switzerland. I know the guys there.

I mean, I've just interacted with them over the case. Nice guys. I think they have, I'll say, a claim that fits that description, you know, where they feel like they're being socialized. Their profits are being socialized. And I think it's worth a shot. Maybe it ends up making it where the settlement is a bump to people that had that. You know, maybe call it 10% bump, maybe 20% bump. But it's not going to just, they're not just going to give it to you.

And I think we've seen through the course of this case, at least in my opinion, John's pretty hard driving and he's not just going to give it to. He's going to make you actually, you know, come and litigate it. And so he's not going to give it to you until he has to to maybe get the votes if that's needed. But again, there's still crammed down stuff like that. You always like to see things consensual and judges do as well. So maybe there's a compromise. Maybe, you know, you walk all the way to the 11th hour and then literally right at plan confirmation,

there's a little bump just to get the votes and to break. you know, no offense to probably break open and half the people leave his thing to vote yes for the plan. So this sort of jockeying will happen many times in bankruptcy and you'll see iterations of plans to get the votes basically to be able to get confirmation consensually. Okay. Do you want to just call out certain decisions that the FTX group made, which personally, you know, I do agree that they're a little bit confusing. So, you know, one of the criticisms that Sunil made was that the estate has, quote, destroyed an estimated, over $10 billion in value for FTCS creditors.

So I don't know about that number, but one example that the block reported was they said that FTCS sold a stake in Mistin Labs and token warrants for the Suey token, and they sold it for $96 million. And now the block reported, at least this week, that the tokens are now worth more than $900 million. So I wondered if you thought that Sunil's claims in that regard had merit.

Again, this is like a business judgment rule versus like an ethical issue. I don't know, you know, it's easy to say like, you know, if they would have sold come out of the gate and I don't know, sold Salana for $30. Everyone would be like, you did it again. You lost $4 billion. So I think it's a little hard to like, you know, whatever you call that, Monday morning quarterback it. I think, you know, the estate, of course, this is like a historic, you know, bankruptcy and a historic crypto bankruptcy. And so I'm sure. stuff like that definitely happened. That was a stark one. I know that a lot of people pointed out. And I don't know the actual timing, but again, I think it's a business judgment issue and the estate was trying to, it was very early in the case and the state was trying to get money in. You know, recently I had heard through the grapevine that they had a pretty sizable piece of Magic Eden, which now because Salon is back and because a meme coin's kind of coming in being a, not that they weren't a thing, but becoming sort of in vogue. you've got, you know, and then I guess they sort of take the poll position with Solana and like NFTs that are on that versus OpenC. And they're talking about a very aggressive valuation for it. Now, if the estate would have sold that in the very beginning of the bankruptcy for $10 million, which I think the original investment, that would look very dumb because now apparently this is worth, you know, a few hundred million dollars. So I'm not, I'm just sort of playing devil's advocate a little bit on this.

Again, I think it's a business judgment versus like an ethical issue. Okay. Yeah. And then last quick thing, and probably this also falls under the, I guess, category of business judgment. But I did see also people are criticizing them for not doing the FTX 2.0 reboot, which, you know, potentially, crypto exchanges, they do make good money. So I was surprised that they went down so deep on it. And, and, you know, I heard probably like yourself rumors about certain bids that were put in and how, you know, the state wasn't taking us seriously. And I heard. some of these rumors from certain firms that shall remain nameless. You know, I can't speak to it. I don't think from a bankruptcy perspective, you know, like if you think of a state professional trying to get into his head, you know, John or any of those state professionals, like they really just want to look good. You know, they want to have the highest recovery, make the most amount of fees for

themselves, and look the best. I mean, if someone's going to write a $500 million check and let them restart the exchange and you look like a genius, that's great. I think the problem that the FDX2Poenter really ran into is feasibility issues. And I don't think any of the, I know BitFinex was a positive example because there was a debt recovery token. But outside of that, I can't think of any crypto sort of exchanges or any sort of these CFI platforms, let's call them in crypto, that were able to successfully reorganize in the traditional sentiment where there's a reboot. Okay. Yeah, let's also talk about the Sullivan and Cromwell issue, because I guess, they've earned more than $320 million on this case, and they are named as defendants in the class action lawsuit that I think Simeel and other people have brought. So, you know, obviously amongst a certain set, their controversial figures, obviously Sam Pinkman-Fried has had a beef with them and says, you know, they have this conflict of interest. So I did see people taking exception to the fact that in this plan, there's a so-called exculpation clause that means that they and others involved cannot be sued.

What are your thoughts on that? Oh, man, this is like hot topic in bankruptcy, even outside of crypto, these releases in exculpation clauses, even at third-party releases, like, anyway. So there was clearly some conflicts of interest. If I recall from the docket, there is Conflicts Council that was hired to look into pre-petition activity by Solent Cromwell. I think it was Quinn-Emmanuel, which are no slouches when it comes to looking at, you know, just pre-position behavior.

So that's good to see. I can't speak that much to it. It'd be nice to have a different counselor that wasn't conflicted, but we're kind of here. And I like to think they're, you know, you're talking about some of the biggest law firms in the world. So it's not like they chose like some rinky dink law firm

that was already helping Sam pre-petition it. I mean, and sometimes people will make these connections. And it's like, well, okay, yeah, but Goldman's like probably one of the better counterparties. Yeah, okay, maybe there's a connection, but also it's a big firm. And you can say the same thing about a lot of,

lot of these big firms like, you know, sometimes the joke and people, lawyers, the lawyer joke of, you know, if there's no conflict, there's no interest. But I really think it doesn't look great. I think it should be investigated. I think Quinn, as independent counsel, is investigating it. And in this third part, the sort of lawsuit outside of the bankruptcy is interesting. We'll see. They'll probably be able to shake the trees and get something. And, you know, maybe they did, you know, the claimants deserve it. It doesn't, it doesn't look great, but I think we're kind of here. and it's so far removed from the bankruptcy. I don't really keep up with it too much.

But, you know, anybody that thinks they have a cause of action like that should consider bringing it. I know it's another part of your question, but that's how I would say. I mean, yeah, no, I basically was just asking, you know, what your thoughts were on that. I did want to also just ask about this, a fact that the U.S. government is going to withholds 24% in backup withholding at the time of the payouts. So what does that mean for the non-U.S. taxpayers who are accredited? So it's rather unfortunate, but we, you know, we've had these issues when we've

participated in either foreign bankruptcies or U.S. bankruptcies where my client was, you know, an whatever, an offshore entity of some kind, is they do many times not, you know, they want to be pretty conservative. They don't, they don't want to, you know, get in trouble for not withholding, withholding tax. And if you read, you know, the IRS code, this comes up a decent amount, is my point in bankruptcy. And it is quite possible that people will have withholding tax issues. Someone was saying, well, there's no withholding tax in BlockFi, and they seem to be just fine. I'm like, so I looked at the plan, actually, I was just looking at literally last night, and that's not actually the case. There is some withholding tax issues. So people need to consider it.

There is a dual track where you can go down and file a claim in the Bahamas. And my understanding, and this is, you know, someone who's read a lot on this, on these subjects because it's been coming up in the bankruptcy, but not as a tax expert, that there is no withholding tax in the Bahamas. So if something really concerns you and you've talked to your lawyer and you've spoken to a tax advisor, maybe that's a good route for you. Otherwise, you know, of course, there's an active market for claims. And I think some of the trade claim guys are using this to get people to come out and sell their claims. I think it needs to be thought through, but there is potential to have withholding. And it's something you need to think about and see if there's a way to potentially not like

I guess in I'll tell you in BlockFi, you have to fill out a form that says this is effectively connected income to the states. But my understanding is once you do that, I think you have to follow return. So I think it's just something you really need to talk about a tax expert about. But for the smaller creditors who maybe don't have the capital, maybe some people can band together and get some tax advice on this. But the thing about the bankruptcy estate is they're really, they're not going to give you too much clarity on it. It's because they don't, they themselves don't want to be giving out tax advice. So it's, It's tough on the individual creditor.

I think there'll be more, this is the kind of thing where as the plan and the disclosure statement sort of get massaged and you see version two and three, you will see more clarity and more specific clarification around these topics, like how the distribution process will work, what the holding tax will be. And that'll be really good for predators. So I know there's been, you were talking about problems that people were seeing the plan. Those are big problems. I see logistical issues that need to be not addressed, but just massage. and talk to with the big constituencies about what are affecting creditors with holding tax and logistics of distributions are two big topics that I think will need to be addressed. Okay, we'll go into that more about logistics of distributions because, you know, I did see one of

the issues people have with this is the fact that like paper checks are being used. So, yeah, talk a little bit more about that. So the current version of the plan, again, it's a draft. it's very vague and it basically says, you know, we're going to be paying out U.S. dollars. And I don't think it doesn't say checks, but I think for the way it's worded, people are summarizing that like, hey, that's just basically it could be a check in the mail because they don't specify wires. So I think it's possible they're going to get more clarity on this. And what will probably end up happening is for smaller creditors will be checks for larger

creditors, they'll have the option to do check or wire. I also think if you read the plan, one other justical issue is they say U.S. dollars. I think, you know, someone in Germany or in London or in Singapore in Hong Kong or wherever, they're going to have issues with this. So I think they're going to probably have to move to multi-currency, potentially. I don't think they're going to do stable coins.

I know a lot of people are upset. They're like, hey, we're crypto bros. We want to be in crypto. Or we're crypto people. We want to be in crypto. And I think that that's going to be a toll order because it's going to add a lot of administrative expense and complexity. I know people think, oh, no, actually, it's even easier.

I just don't see that in the cards as possible. And if something really feel strongly about should push forward, I wouldn't recommend writing a letter, but trying to talk to other creditor bodies and see if you can get their support, maybe through the UCC or the ad hoc. But I do see those two big things. Like probably having more payment agents

and also having multi-currency will be something that will maybe be added as the versions of the plans for the versions come out. Okay, yeah. It's one of those things where it is definitely easier for all the claimants or creditors, but then it pushes the burden of that on the bankruptcy estate and they may not be fully set up, you know, to do that. But anyway,

I guess the last thing to ask just is, you know, how likely is it? Do you think that creditors will vote no? And like what are kind of the next steps, you know, for all this? So the next steps are the plans out there. The UCC hasn't fully committed to supporting it, the unskured creditors committee, just to be clear. The ad hoc, I'm pretty sure I'm most positive has. So that's a big creditor body. Remember, the ad hoc is, I think, four plus billion dollars of creditor claims. A lot of the big distress firms are part of the ad hoc. It was their way of having a voice without being on the official creditors committee because they didn't own claims at the petition date. I mean, you technically can be on there, but the unscript creditors committee was formed

in the first couple of weeks of the bankruptcy. So a lot of these guys didn't have large positions. So the next steps are really, you'll probably see the plan talked about in the next couple of court hearings, people will start bringing up issues. The judge will start, you know, asking the debtor, hey, what are you doing about this? And what do you think of this person's issue? And is there a way to consensually resolve this? Judges love to not decide things and basically push everybody into the settlement. What they do is, do you really want me to rule on this to one side? And they say, do you really want me to rule in this? I think you guys can figure out a solution. You guys aren't that far apart. And so you'll see that over the next couple of months. Then in the

summer, basically once the disclosure statement and sort of plan are approved for voting or solicitation purposes, that'll be coming out. People will get ballots. And in this summer, you'll be voting, basically probably checking a box, logging in, checking a box, and like maybe putting in some code just to, you know, to verify who you are, that kind of thing. So the ballots, the voting, and then plan confirmation in September and hopefully distributions later in the year. So that's the rough outline. And within that, you will see all those little faction, all those little issues we were talking about, whether some people will maybe start filing objections to the plan because they don't like some portion of it. You will see stuff like that on the docket.

They'll be pretty limited in scope. And then you'll have people that'll file wild motions that will just not have any bearing on anything. And then you'll have like the Seneal title never changes hands, you know, in terms of service argument, which will see. where that comes to a head, and if that honestly could end up being pushed even post confirmation, which is kind of crazy. But then there would have to be some hold back. So that would hold back more capital for people with over 50K claims from getting their money, because you'd have to hold back and reserve the capital in case the state lost that argument. And then a lot of it had to flow to those parties. So that makes any sense. So you can always have plan confirmations and

still after confirmation have a decent amount of arguments and litigation going on. And you're just reserving capital back. Okay. All right. Well, clearly this is going to drag out much further. But thank you so much, Thomas, for explaining all this on Unchained. Oh, Lord, thanks for having me on. Don't forget. Next up is a weekly news recap. Today, presented by Wondercraft AI. Stick around for this week in crypto after this short break. Hey, all, I'm excited to share some news with you. Unchained has launched a new Crypto and Macro podcast. I highly recommend you watch the first episode of Bits and Bips, exploring how crypto and macro collide, one basis point at a time. Hosted by experts James Sefer, Alex Kruger, and Joe McCann,

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19 plus, Ontario only. If you have questions or concerns about your gambling or the gambling of someone close to you, please go to conicsonterio.ca. Welcome to this week's crypto roundup. In today's recap, we explore Binance's handling of allegations against a high-value client, the progress of Ethereum's EIP-7702 for its. Pectra upgrade, SEC's enforcement against Robin Hood Crypto, gray scale's withdrawal of its Ethereum futures ETF application, the rise of fantasy top and pump dot fun and defy rankings,

the Athena and Bybit partnership to boost USDA, and the challenges facing air drops, highlighted by mode's price drop. Thanks for tuning in to the weekly news recap. Let's begin. Binance faces criticism for handling of allegations against a high value client. According to a report from the Wall Street Journal, Binance's commitment to thwarting suspicious trading was tested when an internal investigation revealed that a high-profile client, known for a lavish lifestyle, including owning a Lamborghini, was manipulating markets. Despite these findings, Binance chose to retain the client and dismiss the investigator who uncovered the malpractice. This decision sparked concerns among former company insiders, suggesting that Binance prioritized profit generation from large clients over implementing robust markets. surveillance. Such actions seem contradictory to the platform's stated goal of ensuring a safe and

trusted trading environment. The situation reflects a broader issue within the crypto industry, where large exchanges face scrutiny for potentially overlooking manipulative practices to preserve lucrative trading fees. Binance, however, has denied these allegations, asserting a strong commitment to market integrity and user safety, regardless of the financial stature of its users. A company spokesperson emphasized their rigorous, surveillance framework designed to combat market abuse and uphold the platform's safety. Vitalik Bouturin's EIP-7702 gains momentum for Ethereum's Pectra upgrade. Ethereum Improvement Proposal 7702, introduced by co-founder Vitalik Bouturin and his team,

is rapidly gaining traction among developers, suggesting its potential inclusion in Ethereum's next hard fork, named Pectra. It seeks to enhance Ethereum by allowing externally owned accounts to temporarily transform into smart contract wallets for a single transaction, reverting to their original state thereafter. The proposal emerges from extensive discussions within the Ethereum community, particularly around earlier improvement proposals like EIP 3074 and EIP 4337. EIP 7702 is designed to refine the path toward what's termed account abstraction, aiming to convert all EOAs into smart account wallets, thereby boosting both security and user experience.

Lucas Shore, co-founder of Wallet Infrastructure Maker Safe, highlighted EIP 7702's advantages over EIP 3074, noting its leaner approach and compatibility with ERC4337, which prevents the emergence of fragmented ecosystems within Ethereum. Additionally, EIP 7702 addresses concerns about quantum computing threats by enabling the use of stronger cryptographic schemes and quantum resistant technologies. Robin Hood Crypto Faces SEC enforcement action. Robin Hood, a prominent retail trading platform, has received a Wells notice from the U.S. Securities and Exchange Commission regarding the crypto tokens traded on its platform. Issued on May 4th, the notice is a preliminary step by the SEC to bring enforcement action, indicating possible violations of securities law. Robin Hood's chief legal officer, Dan Gallagher, expressed confidence in the legitimacy of their listings.

He stated, we firmly believe that the assets listed on our platform are not securities. The company is prepared to defend its stance, with CEO Vlad Tenev indicating readiness to contest the matter in court if necessary. This move comes amidst a broader SEC crackdown on the digital currency industry, with the regulator asserting that most cryptocurrency tokens are securities. Robin Hood, which has previously attempted to register as a special purpose broker dealer for digital assets faced a setback in its efforts and has since delisted certain tokens like Solana, Cardano, and Polygon. Following the SEC's action, Robin Hood shares experienced initial volatility,

but ultimately rose by 2%. Grayscale withdraws Ethereum futures ETF application amid regulatory uncertainty. Grayscale has unexpectedly withdrawn its application for an Ethereum futures trust ETF with the SEC, a move that has puzzled many. Initially filed on September 19, 23, the application was retracted on May 3rd after the SEC delayed its decision three times with a final verdict due on May 30th. James Seyffart, a Bloomberg ETF analyst, commented on the withdrawal, suggesting that the original filing may have been a strategic move by Grayscale. This was essentially a Trojan horse filing to create the same circumstances that allowed Grayscale to win the GBT lawsuit, SafeRour. said. However, he also noted that this early withdrawal might have been a way to avoid aggravating the SEC, as it would reduce the regulator's workload. The broader sentiment around the approval

of a spot ether ETF remains pessimistic, with only 7% of market participants on polymarket believing an approval will occur by the end of May. Fantasy Top and Pump. Fund Surge in Defy Rankings by Fees generated. Two relatively new platforms. Fantasytop and Pump. Fund ascended to the sixth and seventh positions among crypto protocols based on fees generated on Wednesday. These platforms, only a few months old, have quickly amassed significant trading volumes and user engagement. Fantasy Top, a decentralized exchange specializing in trading cards featuring prominent crypto personalities, now sits just behind Tron and ahead of the BNB Smart Chain Dex Pancake swap in the rankings. Meanwhile, Pump. Fun, known for its meme coin launch and trading services, currently occupies

the eighth spot. The game fantasy top has turned crypto influencers into Ethereum NFT trading cards. Players earn crypto and in-game prizes by assembling lineups of these cards with their value-driven by real-world Twitter engagement. This inventive approach has captivated crypto-Twitter, leading to a surge in the platform's popularity and fee generation. Athena and Bybit Partnership aims to boost USDA growth. Athena has partnered with the cryptocurrency exchange Bybit to enhance the use of its synthetic dollar, USDA. This collaboration will allow USDA to be used as collateral for trading perpetual futures on

Bybit, offering a yield on this collateral, a feature uncommon among other stable coins, such as USDT. Bybitt's integration includes trading BTC, ETH and Saul through its unified trading trading account, as well as adding BTC, USDA and ETH, USDA spot pairs. Additionally, USDA will be part of Bibbitt's earn platform facilitating launch pool farming for new tokens. Despite a promising start with rapid market cap growth to $2.39 billion, USDE's growth has recently stagnated. Guy Young, founder and CEO of Athena Labs, highlighted the potential impact of this partnership on the stable coin market, suggesting it could challenge the dominance of traditional stable coins

by providing benefits for crypto-native users and optimizing trading efficiency. Mode's price plunge highlights challenges among airdrops. The market's latest airdrop saw Mode's native token drop over 60% immediately after release, signaling potential issues with the overall airdrop strategy. Other platforms such as Camino, Renzo, Parkel, Wormhole, and Friend.com, tech have experienced similar declines post-airdrop, underscoring a growing skepticism about the effectiveness of this approach. Recently, community reactions have played a significant role in shaping

air drop outcomes. For instance, the Eigen Foundation faced intense backlash for its initial distribution plan, prompting a revised allocation to appease angry users. Uniswap founder Hayden Adams has weighed in on the topic, advising projects against being stingy with token distributions, and urging them to create real liquidity from day one. And that's it. Thanks for joining us today. Unchained is produced by me, Laura Shin, with help from Matt Pilcher, Juan Romanovich, Megan Gavis, Pamma Jimdar, and Mark Ricoria.

Thanks for listening. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out markets daily five days a week with host Noel Atchison. Follow the CoinDesk Podcast Network for some of the best shows in crypto.