Unchained - The Chopping Block: Will Genesis Creditors Be Made Whole? - Ep. 447

Episode Date: January 25, 2023

Welcome to “The Chopping Block!” – where crypto insiders Haseeb Qureshi, Robert Leshner, Tom Schmidt, and Tarun Chitra chop it up about the latest news. This week, they covered: why the markets were up so much recently how and why Genesis entered into bankruptcy why the hole in DCG's financials are potentially much bigger than previously reported the differences between the bankruptcies of FTX and Genesis whether 3AC founders Su Zhu and Kyle Davies will find success with their new exchange what will happen to GTBC now that a huge portion has already been liquidated whether Tarun is predicting "the start of a new supercycle" the large percentage of vested SOL held by the FTX estate how SBF is still trying to win the public  Hosts Haseeb Qureshi, managing partner at Dragonfly Capital Tarun Chitra, managing partner at Robot Ventures Robert Leshner, founder of Compound  Tom Schmidt, general partner at Dragonfly Capital Links Disclosures Genesis:  Bloomberg: FTX Bankruptcy Judge Backs Company Law Firm, Rejects Last Minute ‘Rumors’ CoinDesk:  Crypto Lender Genesis Global Capital Is FTX's Largest Unsecured Creditor Crypto Trading Firm Cumberland DRW Disputes Genesis Exposure CNBC:  Crypto firms Genesis and Gemini charged by SEC with selling unregistered securities Crypto publication CoinDesk hires Lazard to explore sale as crisis deepens at parent company DCG Unchained:  Is Genesis’s Prepackaged Bankruptcy The Ultimate Sacrifice?  Gemini Ends Its Earn Program and Calls for Barry Silbert’s Ouster DCG Under Investigation by DOJ and SEC: Report Genesis CEO Says Firm Needs More Time to Find a Solution FTX: Unchained:  SBF Says Excel Spreadsheet Proves FTX US Is Solvent WSJ: New FTX Chief Says Crypto Exchange Could Restart The Block: FTX debtors identify $5.5 billion of liquid assets in ’Herculean effort’ 3AC/GTX:  Unchained: 3AC Founders Are Raising $25M for ‘GTX’ Learn more about your ad choices. Visit megaphone.fm/adchoices

Not a dividend. It's a tale of two Kwan. Now, your losses are on someone else's balance. Generally speaking, air drops are kind of pointless anyways. Unnamed trading firms who are very involved. D5.Eat is the ultimate policy. DFI protocols are the antidote to this problem. All right.

Hello, everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So quick intros. First we got Tom, the DFI Maven and Master of Memes. Next up, we've got Robert, the Cryptoconistur, and Captain of Compound.

Then we've got Tarun, the Gigabrain, and Grand Puba at Contlet. And finally, you've got myself, I'm the head-hipe-hite man at Dragonfly. All four of us are early-stage investors in crypto, but I want to caveat that nothing we say here is an investment advice, legal advice, or even life advice. Please see ChoppingBlock.X, Y, Z for more disclosures. All right, so it has been an interesting week because markets, for the first time and a long time, are actually up. We've seen crypto and alts rally really significantly, basically about 30.

percent plus in the last week, which has been, you know, it's been down only essentially since, you know, since fall. And this is the first time that we've seen some signs of life in the markets. There's been some macro tailwinds, so, you know, broader growth assets are doing well. But we've seen crazy runups, especially in Alt-L-1s. Like Solana, you know, on one of the previous shows, we were talking about how Solana seemed to have been put in its grave after the collapse of FTX. Solana is now back up to where it started up. Aptos is up over 300%. man. Liquid steak and derogers are up like crazy. The L2s are driving hard. What have you guys been noticing in this market? And what do you think is driving all this? I just want to say I'm happy

that I on this show said that Salana hitting going under 10 was their ETH 88 dollar moment. You did say that. You did say that. You're always the Salana, you know, light at the end of the tunnel guy. I just think it's really hard to build communities that don't disappear on like the moment the prices down and like they have done that and you have to like in this industry i think that that goes probably the farthest of anything i mean so a lot of metrics still look really good right they are one of the most in terms of daily actives one of the most used blockchain still in existence so i was i was definitely surprised at how aggressively it sold off you know today it's sitting at around like twenty three twenty four dollars and it's sold to below 10 which i thought was just bananas like it

it became like number 30 or something on core market cap, despite the fact that it's still one of the only household names among layer one blockchains. So now it's gone back and reclaimed its throne, which seems appropriate. I mean, Solana still has issues. And of course, Defi on Solana has gotten completely destroyed. And we now have the, you know, the Mango Markets case is starting to play out. And so, you know, I think there's definitely headwinds facing Solana. But it clearly should be sitting higher than a lot of these, you know, zombie L1s.

that are sitting somewhere in the top 30. Yeah, it feels like some of this is narrative driven, right? With the Shanghai upgrade coming up, people getting excited about with staking derivatives and, you know, with withdrawals coming up and maybe making, maybe making, you know, some of those assets more attractive. But part of it also seems to be kind of uncorrelated. We were talking a little bit about, like, optimisms, retroair drop period on stop. And so, like, their transactions just kind of totally fall off a cliff in the past few days.

And yet the token is still doing quite well. So there's definitely a lot of beta. maybe a little bit of alpha in some of these sectors. But, and then obviously, yeah, a lot of the macro tail wins. It looks like some of it was liquidation driven. So, you know, all things kind of combined. I also want to say, I think that 2021, like this is a very boring reason and a reason that doesn't apply to all of crypto, but I think a significant portion of crypto, which is

2021 taxes probably took people an insane amount of time to do. And I think the first time people probably could have like, figured out their true ability to make new purchases may have been January 2023. So there might just be some very boring systematic stuff like that. Because like I know in normal finance, like a lot of people I know basically said something akin to that for like why their funds were like net zero in the market for the last six months and then started investing in. So yeah, I heard, you know, some speculation that people were afraid of funds being wound down or redemptions that were, you know, dated for January.

And so now that we're past those, presumably past the lion's share of those, it just kind of, you know, there's a certain degree of seller exhaustion that you just run out of people who want to sell. And once all the assets rotate in a stronger hands, and it's like, okay, well, we're kind of done. Another element of it must surely be that people,

people were very worried about contagion after FTX. And of course, we saw some of that with Genesis, which we'll talk about it some length today. It's kind of like, okay, well, who else is going to fall? It doesn't really seem like there's that, many other dominoes that are that closely situated. At this point, it's like, okay, we kind of know what's going to happen. And what markets hate more than anything is uncertainty. So once that uncertainty subsides, at least to a degree, it makes it easier for markets to sort of get repriced

without people, you know, being afraid of being in the line of fire. So now that said, liquidity is still pretty bad. And obviously, a lot of people have gotten hurt over the last few months. So you don't want to be too sanguine. A very relatively small moves can affect the market in very large way with liquidity being the shallow. So, you know, who knows where it goes from here. But it is a, it's definitely a good opening to a new year. And I hope that things, I hope that things continue with this trend because last year was so brutal. And it was brutal just end to end, right? There was almost no respite last year. So having a nice kind of 30% rally to start off the year, I think bodes well for the industry. Having just like a little bit of good news every once in a while,

I think is healthy. But with that good news being acknowledged, let's move on to the bad news. So Genesis has filed for bankruptcy. So the last time we were talking, we were detailing the back and forth between DCG and Gemini. Gemini, of course, is the biggest creditor to Genesis.

Genesis is a subsidiary of DCG. And there was this big fight going on. And there was a speculation that the creditors of Genesis may decide to negotiate a pre-packaged bankruptcy. So a pre-packaged bankruptcy, basically means that instead of fighting it out in bankruptcy court, you decide exactly how the pie is going to get split up in the bankruptcy,

what the settlements are going to be. But the bankruptcy court itself basically just shepherds this agreement along, make sure that it gets instantiated, but everybody already knows what they're getting and how things are going to get done. So that allows a bankruptcy to be much less expensive and move much faster. So there was speculation that this was going to happen and the way it was going to be structured was some cash paid out of front, a forbearance period, meaning that people were going to be patient and wait to get the rest of their

consideration back. And then they were also going to get some equity conversion into DCG. So creditors to Genesis would own equity in DCG, and they would get some payouts over time from DCG, right? That was roughly how this negotiation was going. But apparently this negotiation fell apart because Genesis was pushed into bankruptcy. We don't know yet by whom. It could have been, you know, it's really hard to tell. It could have been Gemini at this point, because it's very clear that even after the bankruptcy was initiated, Cameron is still coming after DCG, still tweeting that DCG is acting in bad faith,

and they were forced to do this because, you know, these guys are stonewalling them. But now the stakes are higher now that they are in bankruptcy. Robert, do you have any color on, like, how exactly they were entered into bankruptcy? Yeah, Genesis itself filed for bankruptcy. So it wasn't an involuntary bankruptcy filing. Genesis pushed themselves into bankruptcy.

I see. And so why do you think they decided to file themselves into bankruptcy, given that presumably it's worse for everyone than a negotiated settlement? Yeah, it's a great question. So, you know, the first day hearings are tomorrow in advance of that. You know, a number of piece of information and documents have been filed. I would recommend everyone read them for themselves as opposed to getting a non-lawyer such as myself's opinion on them. but you can find the documents at restructuring.org.orghum.com slash genesis. And there's a lot here already. I'll give a quick rundown of my personal read of them, which could contain inaccuracies,

so don't take it as gospel. Read the documents for yourself and form your own opinions. But there was a huge amount of information that goes through who the creditors are and the rough state of the business. This is like in preparation for the first day hearings. This was provided by Genesis. The business doesn't sound like it's in great shape. You know, the biggest question is who, how many assets do they actually have and how much

do they owe people? Based on, you know, a quick read of it, they had a lot less cash on hand than digital assets than most people would think, which means the whole is potentially a lot bigger than has been reported by Genesis, by DCG, etc. The more interesting thing is that, you know, there was a, you know, pre-packed bankruptcy plan that was filed. Now, this plan is not what the rumors on Twitter were, where there would be a forbearance period and that there would be, you know, some DCG equity and all of this. The plan, which you can find on the documents, is actually really simple. It says

either the creditors agree to equitization and they wind up owning this business, which, by the way, the business is probably a worthless husk of a business, even if it restarts operations. or they don't agree and it's pushed into liquidation. If it goes through liquidation, there's actually two classes of creditors which get treated differently. And having any creditors treated differently is always a huge red flag and pretty weird. But it proposes that there's Gemini as a creditor group and, quote, institutional borrower, institutional creditors as the other group.

And they actually get treated differently. So the way it's worded, and I can see that this plan is probably not going to get approved because it seems ridiculous on its face. But the way it's worded is there's a trust set up with all of the assets to be sold, you know, to distribute to all of the creditors, whether they're, you know, Gemini earn creditors or whether they're institutional creditors in a pro rata basis. for the institutional creditors, there's still like a to be concluded like dollar amount. It's like an empty input field. But it says DCG will contribute some unknown amount of money as a DCG contribution on top for the institutional creditors. So that could be $1. That could be $1 billion.

It could make the creditors whole. It could not make them whole. It's unknown. Like the outcome's wildly different based on. and how big that dollar sign is, it's probably based on them selling off assets like coin desk and whatever and then using that to plug the hole. I have no idea what the number would be.

And it says for Gemini creditors, there'd be a Gemini contribution. So I think it was like deliberately like, and I'm not a lawyer, but like it seemed like a slap in the face intentionally towards Gemini, which is like, oh, for those other guys, we're going to kick in money. And for you, you're going to have to kick in money so retail doesn't get screwed in some

proportion. You know, I don't know who would approve this plan and how. I think the idea is that Barry used to work in restructuring and all of this stuff. I think the idea is that there's some game theory where if the DCG contribution is large enough, there's enough non-G creditors to approve this plan and screw over Gemini and come out okay. And then, you know, Barry can raise his hands and say, like, mission accomplished, you know, we did great. You know, there's a successful resolution and everyone's happy and, you know, it comes out of bankruptcy very quickly. But, you know, we'll see what happens.

It's, you know, tomorrow's our of the first day hearings. And, you know, there's going to be a lot of information that comes out and a lot of analysis that comes out. I think all of our opinions are going to evolve very quickly in the next couple of days and weeks. Quick question. Just as a moment of levity, who do you think will generate more fees for bankruptcy lawyers? SBF, FTX or DCG slash MN? Definitely, FTCX. Yeah, FTCX by a mile.

But by like 10 times, I'm just curious. I was watching the Madoff and Netflix special. I didn't realize that the trustee had a billion. I thought they earned like $100 million. So I was off by a factor of 10. So that's why I was kind of curious about your estimates of this because it is actually quite a large chunk of change in a lot of cases. Well, so remember that DCG is one of the largest.

interested parties here. So they have a, like, with FTCX, FTCS was basically abandoned, right? Like, all the FTAX leadership is gone. And so there is really nobody to kind of keep the show orderly, right? So the lawyers can just kind of, they're just, you know,

they can basically just pick it apart and there's almost no limitations provided that a bankruptcy judge doesn't think that they're like way out of line. So like with FTX, there was a story about Sullivan and Cromwell, basically like swooping in like vultures and just,

flagrantly charging massive fees and, you know, routing around all these conflicts of interest, which nobody could stop, right? Because there's nobody really there to run the show besides the lawyers. Whereas in the case of Genesis and DCG, like, DCG has a real interest in maximizing the recovery because, of course, they're one of the people who are going to participate in that recovery. So Gemini as well. So I don't think this is the same kind of situation. And the complexity of the bankruptcy is going to be quite a lot lower than after. FTCX, right? Like FTCS, I mean, people are projecting it's going to take multiple years. This one is probably not even going to take a year. It would be my guess. You think less than a year. That's your prediction. I believe so. I mean, I don't know. Robert, what do you think? I think if people can agree to a prepackaged set of terms, it'll be pretty quick. I think if they don't, it's a total cluster. If there's lawsuits from the Winkovye twins, I mean, you know, if anything is contested, I think this, you know, gets dragged out. dramatically. There's already people contesting some of like the very simple facts that have already

come out, like a number of creditors. I've stood up and say like, hey, you got the amount that I'm owed completely wrong. Like one example is like, you know, Cumberland came out and said, you know, oh, it says you owe us like 18 or 19 million. And like that's wrong. You owe us $40,000. Like, you know, like there's already confusion and dispute us in basic facts. And, you know, there's another one that came out. Another credit came out and said, $150 million. credit was, you know, incorrect and that, you know, the filing was on an incredibly sloppy manner. You know, in both these cases, it seems like they were, like, potentially overestimating the total dollar value of the creditors, potentially also underestimating the dollar value of the assets, but,

you know, potentially to, like, you know, spook everyone into a rapid settlement. You know, so I think, like, there might be facts that get disputed along the way. I think people are going to, you know, have to figure out, you know, who owes whom and what. Like, if they can't even agree on the basics, then this becomes a lot harder, especially as it relates to Gem and I earn, who's going to be negotiating pretty hard. Congrats on not being one of the top 50 unsecured creditors, by the way. Yeah, no one wants to be in the top 50. That would be really unfortunate. Is that a congrats or is that like a, you know, would you rather, you'd rather be in one of the top 50 creditors because of

it means, you know, you have more money to potentially recover. That's right. Yeah. No, it could also mean you were smart enough to remove your money prior to the. That's another way to look at it. So, so. But, okay, actually, can we just take two seconds to talk about the list of the top 50? Because there were some very weird people. Like, I was like, by bit, the Stellar Foundation, Decentraland.

I mean, Decentraland, I guess, like, if I remember correctly during the pandemic, Barry was always shilling it on Twitter. So I'm guessing he owned a bunch, but... Well, they also have the gray scale of manor trust, right? Right, right, right. That's right. Yeah, a bunch of interesting names. I mean, there were two...

So the three big businesses, or four, I guess, big businesses that seem to be entwined in the top 50 credit list. So one is Van Eck, which, of course, is, you know, trying to run some of these ETFs. Abre, which is, you know, sort of another institutional lender. I don't know if you call them institutional, but they're another lender. and then Donut, which is one of these, what are they called, sort of crypto neobanks. DeFi Molot, I believe. Donut was also. D.5.

Why do they call a defy mullet, Tom? Because it's business in the front, the party in the back. I guess this is maybe the opposite and that it was actually not a defy mullet and we're just putting it on Genesis. Yeah, it was kind of the opposite. It was almost like, you know, retail in the front. This is just a buzz cut. Yeah. What's the inverse of a mullet?

Yeah, I like, I really don't know that. Bangs, really big bangs. Really big bangs. Yeah. Really big bangs. Okay, well, they got banged pretty good at this one. All the creditors, DRW, of course, is contested. They'll be the owner of Cumberland, who they say that they're not actually big creditors.

Marana, which is affiliate with Bybit, Stellar Foundation, another big creditor. Now, a bunch of the creditors are still redacted, so we actually don't know who they are. I was actually, I was surprised, Robert, to your point, like, you know, with FTX, there was so much fog of war because the recordkeeping was so terrible. That, you know, that's also part of the reason why I think you should expect the FTX liquidation. takes so long is that there's so little clarity about, you know, the accounting and who owns what and when were the customer balance supposed to be snapshoted. You know, Genesis is like a real grown-up business. They have much better record-keeping. So it seems like it's very strange that we already have so much incorrect information in the filing when this stuff should be really

easy to figure out. Like, I think Cumberland claimed that they that they liquidated the collateral of Genesis, like in November or something, like a while back. They claimed that they had liquidated the collateral. And so what the hell is they doing on a January petition? But so technically speaking, we haven't seen a balance sheet yet from Genesis, but we should get one soon to actually see like the real state of what's on the balance sheet. But we do know that they have roughly $5.1 billion of liabilities and about $1 billion, a little bit more than $1 billion of liquid crypto assets. That indicates that, you know, in the worst case, a recovery might be something like $0.20 on the dollar. But of course, there's a lot of other stuff in there. There's the promissory

note, there's, you know, other, other receivables that they have. One of the big elements that people have pointed out is that there was a loan to Alameda of $2.6 billion, which is roughly half the value of all the current liabilities of Genesis. So if that loan is subject to clawback, meaning that the FTX bankruptcy says, hey, guess what, this takes precedence, this was in the last 90 days. So we're going to claw this back because it was not in the ordinary course of business. then the gen basically half of whatever, half of the dollar value, or basically 50 cents to the dollar would be lost from Genesis,

which might be potentially, you know, the entire recovery or a significant portion of it. So right now it's pretty hard to project what you would get in a Genesis recovery from what I've heard claims are trading at 20, 25 cents on the dollar. That generally implies, you know, usually when these people are buying claims,

you know, they're buying looking for like a two, three X. So that means that if you hold it to mature, there's a good chance that markets are projecting, you know, 50 to 75% descent recovery. But at this point, there's so little that we know. It's hard to say. And as you said, Robert, there's very likely to be lawsuits, you know, this whole thing between Gemini and DCG about the account of the current asset representations about the promissory note. That's still up in the air.

We've yet to see if that's going to be adjudicated. So there's a lot of question marks still about this bankruptcy. So we'll learn more soon. But, Tarun, I do expect that this thing is going to move faster and we're going to learn a lot more, a lot more quickly than we have with FTX. Yeah, when you're speaking of claims, I hear those a new claims exchange to trade that. That's right. That's right. So what are the other interesting and connected pieces of news is that we have a comeback tour from some crypto villains.

So the Three Arrows guys, Kyle and Suu, they were reported as being founders of a new exchange called GTX, alongside Mark Lamb, the founder of Coinflex. So CoinFlex, if you recall, was an exchange that went into bankruptcy because of, what's his name, Roger Verre. Roger Verre, that's right. And so these guys, they ended up partnering up together

to build an exchange for trading bankruptcy claims. Because, of course, that is now the store of value in crypto has moved on for Bitcoin to bankruptcy claims. they were lambasted on Twitter. The name is GTX. Why is it called GTX? It's called GTX because G is one letter after F, I think. That's why they're calling a GTX.

And then after they got skewered on crypto Twitter, they decided to change the name from GTX to something else. So they're going to announce later the new name for the exchange. I was talking to you, Robert, you're telling me you guys didn't take the pitch. We have not spoken to them yet. But I heard that you guys spoke to them, right? We did, we did. They told us we were their first call.

I'm sure you were the first of many first calls. We may have been. We may have been. I will say when we talk to them, I told them, like, look, guys, I don't know that this is investable. But I will offer you one piece of advice. Please change the fucking name for GTX. There's absolutely no way that this is a good idea for it to name this company

GTX. And I guess they didn't listen because when the news came out, they just got completely destroyed on Twitter for it. But they are changing the name now. But apparently they've lined up the capital and this thing is going to get funded. You know, like these guys are, you know, for whatever you might think of them, they clearly have a big following. And a lot of people still find them to be very influential. So I can believe they're going to pull something off. And Lord knows the bankruptcy claims in crypto are proliferating.

So I can see it happening. All I have to say is CoinFlex was a very weird exchange. I just hope that they don't build this entire thing on Bitcoin Cash again. One of the reasons Roger Verr was a large CoinFlex user before he became a large CoinFlex abuser is that they built and did most of their settlement on Bitcoin Cash. Wait, didn't they have any RC20?

Yeah, eventually. But like they started as a bit, how do you think they attracted the certain types of users? that they had. What were they settling on Bitcoin Cash? You're like, like 50% of their balances or something were in Bitcoin Cash. Like the majority of their volume was BCH for a long time. Oh, so they were attracting that volume, but they weren't like settling, you know, other contracts.

But they were attracting that volume because you had to post BCH to margin. No, but certainly not only BCH, right? Not only, but not only, but they were like Bitmex where it was like it was a pretty dominant. Like, their wallets were probably the biggest BCH active wallets. Right. So I just, the only word of advice outside of the horrible name is I do really hope that they try to take some lessons learned in exchange technologies since then. Yeah. Well, actually, it's funny enough somewhat connected because, of course, the three arrows guys, they were brought down by the GBTC trade.

And we actually learned something from the filings about the GBTC trade, which is that if you recall when Genesis was filing for bankruptcy, GBT plummeted in value. And apparently part of the reason for this is that Gemini had actually pledged 31 million GBT shares to Genesis for Gemini Earn, which were liquidated. And so a lot of these, there actually is very large overhang of GBTC has already been liquidated, meaning that, you know, it's quite possible, actually, that in the coming weeks, we'll see that there's much less fear around GVTC and some of the gray scale products, just because

of the fact that Genesis has already unloaded a big portion of their GVTC assets that they have on hand. Supposedly, they have another 30 million of GBTC behind that, but, you know, basically half of what we initially thought that they were going to have on hand. Yeah. The NAVGAP has already been recovering a bit over the past week, I think in part just because there's officers in that this for selling, right? It's like 5% of all GPTC shares being sold on the market, which is just quite a lot. Yeah, which is pretty nuts. What is the, what is the discount now? And I assume when markets open on Monday, we'll see a refresh price there. Yeah, I think it's around 40%. So still quite large, but, you know, up off of lip with the high 40 or something like that, we're at bottom.

Nature is healing. Yeah, nature's healing. I think Heath E was like trading below 50%. discount. It was really bad. Yeah, I think it hit like a 60% discount at one point. 60. Yeah, yeah, yeah, yeah. Absolutely insane. So yeah, DCG is now exploring a sale, as you mentioned, Robert, of CoinDesk. And what I've heard is that, you know, the bids they're fetching are like 20 million-ish, which is much lower than what they were hoping to get. It's mostly media companies that are bidding for it. So despite the fact that public markets have recovered, it seems like private markets are still, you know, pretty icy right now.

In before Justin Son or Charles Hoskinson bid for Cardon for CoinDest. That is true. That is true. Especially if we see Binance step in. I think we might see a heartier bid. I mean, Binance, didn't they spend so much money on Forbes? They paid $400 million for coin market cap. Well, that's a different story. That's a different story. I feel like that makes more sense. Yeah, they probably made money from that. I could believe it. I could believe it. I mean.

But no, no, they did. They bought a lot of press coverage. You are sort of right, but I don't remember. I mean, the problem is, like, it's very hard to compare anyone because FTX shown brightly in spending money on PR more than anyone else. So much so that everyone else probably looks like a, you know, it looks like one of those GPT3, GPT4 horrible memes of like this many parameters and this many parameters. But, yeah.

I see. Okay. All right. Well, moving on, oh, sorry, the last piece of news connected to this, and this is also a little bit surprising. So right after Genesis filed for bankruptcy, the SEC swooped in to save everybody at the last minute and slapped both Gemini and Genesis with charges of unregistered securities offerings. So we also saw the same thing actually happened to NXO, a settlement with the SEC for I think 40 million, a pretty significant settlement. But Genesis and Gemini were both charged and saying, hey, you guys were marketing and offering this to retail customers. This is a security.

It should have been registered. And so really hitting them while they're down and protecting basically no one, the SEC has come back in once again after disaster has already been guaranteed. So this will likely also play into the expected recovery, of course, is like what will the, you know, how will these charges be evaluated and what will the penalties be? be. I suspect the SEC is going to be, you know, the SEC is basically going to say, like, look, this, we're going to, you know, punish potentially DCG and Gemini and get them to throw in more for the recovery of especially retail investors in the, in the bankruptcy. That'd be my, that'd be my guess of how this is going to play out. But it's too early to say. But this may actually sweeten the deal for for the recovery and for retail investors who are caught up in this. But it might also

not. It's hard to say at this point. So one thing I had seen people speculate on, and I don't know enough to actually have a strong belief on this, is that Gemini may also be like having to be a little careful about bankruptcy because of like this indictment. Because I think if it goes through and it's declared a security, all the earn users are allowed to sue them. Whereas if it's like a loan that isn't, they're not. It's like the recourse condition changes. And so like if the SEC's claim goes through, then like Gemini may actually, it might be cheaper for them to go to bankruptcy than to try to fight the future legal claims.

I don't, I have no clue about the, I, again, I, the stuff is so insanely boring to me personally compared to like real crypto stuff. I just like, don't actually don't know. There's something, um, a bit ominous. So there's, we were talking about GTX earlier, and there's already a couple other claims marketplaces out there, including one called X claim, where you can trade, you know, your FTCS claim or your block-fite claim or whatever. And it's funny because it's, you know, kind of morbid, because it looks like a normal sort of finance startup kind of thing, but they're,

there's sort of like green and emojis around like these, these bankruptcies and like people trading their, their claims of these bankruptcies. And they have like a pending section. So like they have Silvergate and Gemini, like, stay tuned. We're monitoring. It's like an upcoming product. And I feel like it's just like very, you know, it's funny when like, or it's normal father starts to do that. Like, you know, I certainly hope not. I certainly hope there's no upcoming product here. Jeez. Geez. Well, but the banks have been recovering, right? Yeah. I don't, I find it hard to believe something like Silvergate, but yeah, who knows? Well, Silvergate would be hard to, I think, settle because they're a public company and it seems like

a very easy. Not just a public-created bank. Yeah, yeah, yeah, yeah. The Silvergate one seems like whoever made this site didn't think very hard about the settlement aspect of it. But, you know, maybe if we take the glass half full version of this claim stuff is this might actually be a really good time for the CDS market to develop in crypto. In the sense of like 1994 when like the CDS market started, it was like due to these like large scale commodity company bankers. True, can you explain what a CDS is? Sorry, CDS is a credit default swap. It's like a way for you to bet.

It's like a bank, it's like, you know, morally similar to bankruptcy claim, of course, might be different exactly in the structuring. But it's a way for investors to bet on a company defaulting. And so they buy these claims where if a company defaults, then they get paid out. And then people can take both sides of that at a very, very high level. Of course, in the last 10 years, there have been a bunch of really crazy. I don't know if I want to call them scandals or good trades, but in traditional finance, where people figured out a bunch of very famous hedge funds figured out this idea of

go give a loan to a company that you own a CDS on and tell them that you'll give them the loan only if they synthetically default, which causes the other side of the CDS to have to pay that side of the CDS and there was all this type of weird stuff going on. I think the cool part about the crypto version of this is that... Actually, this is kind of like prediction market, like assassination markets in prediction markets where like you open a prediction market on something and then you're very motivated to kill someone

in order to make the prediction market come true. But synthetically. For sure, for sure. Get someone to fake their own death. But synthetic, yeah. Yeah, so like there's like GSO, which is like this big product refund. And I think, I figure if there's Blackstone,

there have been a couple of these. There's this one company, called Kodare, which had this, like, very large lawsuit. I find this stuff more fascinating than the crypto bankruptcies, because the crypto ones just seem filled with, filled with, like, less strategy and more bluster, it's so it seems. But the interesting thing about the credit default stock market was like it, it started right before a huge bull market in 1994. That was like right before the like beginning of the run up into the Asian financial crisis.

And it was like sort of the new financial product that caused some of the, the, excitement of that time. Obviously, there are tech companies, but post-Asian financial crisis, obviously, it was like the run-up into the 99 bull market. So I actually would say that there's a non-trivial probability that these claims markets actually are, I hate, now I feel like I hate myself because they sound like one of those, like anything is bullish for Bitcoin type of people. But I actually think if these claims things get a ton of liquidity, it might be like

the credit default market, which caused its own little. that's a cause or do you think that's just like it just happened to play out that way? It doesn't seem like that's a cause for a bull market. Well, I think sometimes when there are just new instruments that people have not figured out how to value correctly, that have a lot of interest and actually have some notion of like guaranteed payoffs, which, you know, in this case, there will be some payoff for some of these claims, right? So like there is money sitting there locked and you're speculating on it. It's not just like a prediction market of like I'm speculating on this pure.

since I am speculating on this pool of cash and the percentage that gets distributed. So what you're telling us, so, Turin, what you're telling us is that three arrows is going to kick off the next bull market with GTX. Sounds like that's what you're saying. Sounds like you should invest, to be honest. I'm not saying that. I'm not saying that. I'm not saying anything of that form.

I'm just more pointing out that this type of product could actually, you know, if we look at different points in financial history, you know, after some certain types of crashes, like, this type of product can be useful for bringing in the capital. Tarun is predicting the start of a new super cycle. That sounds like what. I think that's what I'm hearing. I'm not,

I'm not saying that. That's Haseeb's, you know, interpretation. I'll let anyone interpret how they will. But I think this claims thing will be very interesting because you can structure them. As you're seeing,

the difference between like X claim and claims market, I think those are the two like live ones. The exact payout structure is different and settlements it's different. I think these have a little more legs than your normal prediction market because, again, you're speculating on a real pool of cash, right? You're not just speculating on like, I'm hoping that there are enough people in the future who want to speculate on this so that there's a larger pool of cash to get distributed, right? You've gotten rid of that. There is actually, there are assets. And so, you know, in that sense, it's like a very clean

prediction market type of process. And I think obviously this industry is set up to build things to speculate on that. So that's sort of a glass half full. I mean, that is precisely the story that the GTX guys are telling, which is that, look, you've got this proliferation of assets, which are all these bankruptcy claims, right? And like, you know, people don't have cash anymore. Interest rates are high. Everyone's gotten wrecked. But they do have these bankruptcy claims. And most of the people who have these bankruptcy claims are degenerates, and they love crypto trading, which is why they lost all this money in the first place. So if you can give them away a place to monetize that one asset they have left, you can bring them back into the fold of crypto trading, especially if prices start to recover. You know, you can get them to use it as collateral, you can get them to sell it and get cash and then, you know, give them incentives to trade.

And so that's the story of GTX. If Kyle and Sue are listening to this, they owe me a tide for giving them to blithe. masters thing because I feel like that was like a bike master's sort of famous she she sort of gets credit for inventing the cd s i think like there's it's a little bit disputed but uh i think i think i i'm owed a tie that if i gave you the year that turun is asking for an advisory role at gtx in case anyone's listening not not no no no i'm just saying you know provenance i want okay just put just make sure you put tarun's face right on the center of the gtx home page endorsed by Tarun. Make sure that's there. Ideas by

Tarun. Ideas. Ideas by Tarun. Cool. But I think, like, how do you guys feel about these claims markets? I mean, they obviously have a huge set of problems, right? Like, how do I guarantee settlement? How do I lock up the claims people? How do I guarantee their pay out? How do I, like, source liquidity for one side at certain times? But, like, you know, just like ignoring the fact that

we have certain people marketing it. Like, what's your, what's your sort of, like, take on the evolution of that product. Well, I feel like all of the enforcement of like paying out the claims and all of that stuff is just legal contracts the old way, right? It would be a lot cooler if you could use smart contracts for any of this stuff, but it's old school contracts for all of this stuff, right? Like you can't enforce any of it besides just, hey, contract law, you agreed to sell this.

Yeah, there's a lot of legal nuance here. But there's one thing you can do, which is the locked salana. owned by FTX and Alameda, you can speculate on who gets that. And when that gets sold. There's a bunch of on-chain assets here you could actually speculate on based on what's in the legal contracts. And then you use the change in those as like a settlement. Yeah.

Unfortunately, it's a minority in most of these cases of the actual bankruptcy claims or the value of the bankruptcy claims. I think for... I think the Falano is actually pretty big. It's like 11% of the FD. What? 11% of the FTV I thought it's like eight to

I thought it's like eight it's like yeah it's like it's like almost a billion right now is that right that is a crazy amount of soul no no no no no no we should definitely go fact check that but I'm pretty sure they have like

a very large amount of soul that would be great for this claims market if it is if it is that amount I had no idea that was true I thought it was like half that okay yeah my so my take on the idea of this claims market in the first place. So obviously we already have some, right?

There is X claim and whatever the other one is. So generally speaking, you know, the first order, as a venture capital is looking at an investment like that, the first thing that you want to think is like, okay, if this is a brilliant market that people really want access to, they should already be tripping over themselves for the current version of that product. Right. Maybe an even better version of that product turbocharges it. But generally speaking, when you have a product that people really want, they're going to find

a way to get it, even if it's in a suboptimal form. Now, I don't know that much about Xclaim, but it seems like it's like okay, decent traction, but it's not like crazy. Now, that being said, you know, the story behind GTX is a little bit different, which is that, you know, the claims market is a wedge to get people initially into the market, but then it just sort of becomes a crypto exchange, right? And that seems like an interesting wedge as a way to build up, you know, way to get DGens in the door and get them to start trading crypto like any other exchange.

The trouble with it is that it does seem like, look, you know, bankruptcies are very, they're very pro-cyclical, right? When the market's going down, you're going to get a lot of bankruptcies and a lot of bankruptcy claims to trade. When the market's going up,

nobody's declaring bankruptcy, so there's not going to be any bankruptcy claims. And then you're just a normal crypto exchange and you've got nothing in particular that's unique that gets people in the door. So to my mind, it sort of feels like a, one-time kind of, you know, sort of marketing advantage that you can use to get yourself

off the ground. If that fails, you sort of got one, you've got one rocket booster. And if that rocket booster doesn't get you into orbit, then you're kind of just another crypto exchange and you've got to compete on the merits. So that seems to me like the, at least probably the bear case for the story is that, yeah, you're going to get some people who are coming to trade bankruptcy claims. A lot of them will just trade once, sell for cash and then leave. And then a smaller number of people will actually help you build a business from those deposits that you get or those users who come in the door. It is, I agree with this. I think, I mean, I think what is interesting is how many people are clamoring for FTX to be restarted.

Like, even after FTX declared bankruptcy, it's sort of mildly related where people feel like there is some gap in the market because they're like, look, I loved you, the FTXUX, I love the cross-margining. And yet now it's gone. And, you know, nothing is really replacing it. And now even John J. Ray was discussing this week the possibility of like restarting FTX. So it's like I agree with respect to like, hey, this is sort of a small moment in time market for these for these bankruptcy claims. But like there is sort of a push of like who's going to sort of come fill that gap or, you know, our finance and and you know, the other big exchange is going to develop their own sort of similar products. By the way, I just looked it up. So FTX and Almeida and combined had 50.5 million soul. which is over a billion now.

And it completely vests in 2028. So I think the vast majority of it is actually, because they did those crazy seven-year vests. 20-28. Even with their soul. What? Yes. And so there's a lot.

There's a lot sitting there. Was this the ecosystem sales? Those were seven-year vests? I guess so. Oh, wait. You're talking about serum. I'm talking about salinas. No, no, I'm talking about salana.

That's like the crazy part. They agreed to a longer vest. vest than the default. What? That's insane. That's so insane. That's crazy. Yeah. There's a Solano Foundation blog post talking about the $50.5 million.

So $54.5 million, you could definitely bootstrap a prediction market on betting on how that gets distributed. I think that's enough money. But it also means you need like a trustee for seven years to like manage the liquidation of this soul. You know, made off was much longer than that. So it's not that crazy. Yeah, I do think the whole wind down process has dust that they just like continue to like collect the report on for years and years and years. Yeah, it's going to be, it's going to be painful.

Well, with respect to FTX, we did get a story that the liquid airs identified $5.5 billion in liquid assets for the FTX total estate. We still don't have a good number on the liabilities. So we don't know what that represents in terms of a, you know, a percentage recovery. but it's at least better than some people were originally anticipating. Now, Sam, in The Times, this is our last show, Sam has come out with his own substack. And in the substack, he's basically doing the same thing he was doing before,

but with a lot more words and a lot more charts and a lot more homespun Excel sheets, basically trying to claim that FTXUS is still solvent, and that Sullivan and Cromwell, which was the law firm that was appointed to oversee the bankruptcy, that Sullivan and Cromwell basically, and the FTX liquidators have essentially been either delinquent or outright, you know, fraudulent in making it so that FTXUS has not remained solvent, despite the fact that at the time of the filing,

FTCS was completely solvent. There was a complaint filed by Ryan Miller, who was the chief regulatory officer for FTX, claiming that there were a bunch of irregularities and or ethical issues with Sullivan and Cromwell, The judge overruled these complaints. A basis that no, Sullivan and Cromwell is fine. Screw off. But it's raised a lot of eyebrows, I think, about perhaps, in fact, Sam was correct. And that at the time, supposedly one of the things in the complaint was the claim that FTXUS, because it was the most solvent, it had the most cash on hand,

FTXUS was used to pay the bankruptcy fees to Sullivan and Cromwell on behalf of the other filing entities. but that at the time, FDXUS may have been solvent but no longer is after all of the expenses paid to lawyers. I think it was the other way around. I think it was Daniel Friedberg, who was another FTX lawyer, was complaining that Ryan wanted to retain S&C because he came from. I'm sorry. I got it backwards.

And so, yeah. And so that was kind of the weird part. Yeah. So there's some circular circle jerk thing going on with respect to Sullivan and Cromwell. But it seems that the, it seems that for the. it seems that for the most part the bankruptcy lawyer is sorry the bankruptcy judge

is just like whatever suck it up it happens so I don't know what to make of it I don't know what your guys view was on this whole drama you know if if you are a Jane and you you kill a hundred people

but you accidentally step on a grasshopper you're still probably guilty in your moral in the moral compass of your particular religion, even though the grasshopper may have been, like, unintentionally killed. And I sort of feel like, yeah, sure, there was sort of probably some, like, not perfect reasoning about something in this case. And I'm sure lawyers are maximizing fees. But, like, this is, like, trying to, like, just, like, charade over the fact that, like,

that everything else happened. And he has two, and that the DOJ has his two close associates of some form ratting on him. So like, who cares? Like, this is just like smoke and mirrors in my mind. Well, it's definitely meant to distract from the core issues, right? The core issues are the collapse of an exchange most likely due to tens of billions of dollars of fraud. And you're right. Like, you might find other issues in process. And in some cases, the issues in process are more important than the underlying thing because, you know, when you get process right or wrong, it impacts every future case ever. And like sometimes you see things overturned or whatever due to process, but you're right. Like in this case, the event is so massive and the process seems so

small that like process is a intentional distraction. It does feel like part of what's so interesting about this case. I mean, we're basically seeing one of the largest corporate frauds of the last couple decades play out. And anytime that you have something that's that catastrophic, you just get all sorts of vultures coming out trying to capitalize on that process. And, you know, I don't know enough to be able to tell whether Sullivan and Cromwell is there. There certainly seems to be a lot of smoke. I don't know how to evaluate the fire. It's kind of an education for all of us just to see, like, when things go this fucking wrong, what happens and how many other things also go wrong downstream, you know.

And so that that kind of feels like the story that we're all going to learn from this. I bet you, I bet you the same thing was true with a lot of the other cases like Madoff. Oh, absolutely. Like, I'm sure that like there was some over, right? Like if you watch the Madoff thing,

like there are tons of people who are like, oh, the process screwed us because the trustee took too much money, whatever, right? Like, I don't think it's possible to have committed such a large crime. And then it's unwinding doesn't cause. its own problems. But like, come on, this is just a PR thing.

Like, I do really get the feeling that perhaps in this way, Sam might still be somewhat delusional in that he thinks that the PR game that got him to where he got in 2021 is still the correct strategy to be deploying at this time and that, like, it will continue to work. It does seem that he's moderated. It does seem that he's moderated, right? Like, he's not coming on Twitter spaces anymore. He's not doing shows anymore. He's not doing interviews anymore.

He is just like these two sub-sac pieces and then retweeting everything that's negative at Sullivan and Cromwell is basically what he's down to. So it does seem like he's probably listening to someone's advice at this point. But I mean, even then, like at the, you know, for instance, how many, how many things have you heard from Chabuco? How many things have you heard from Carolyn? I don't think he's really following that. He still has this fundamental belief that like he's going to talk his way out of this, which I, at least it seems like it, right? Like, it doesn't feel like he's like acknowledged that.

I agree. He still is trying to win over with whatever arguments he has, the Court of Public Opinion. And most of the arguments, I don't think matter. You know, oh, FTX, US shouldn't have been put into bankruptcy. Therefore, I'm innocent. Like, it's ridiculous. But, like, he's still trying to make, you know,

what he thinks are logical arguments using very long-form blog posts. which are usually convincing to the average person. And bad Excel skills. And bad Excel skills. A lot of people picking on his Excel skills. Because that's all he has. What's wrong with his Excel skills? The Excel spreadsheets looked fine to me.

I saw everyone on Twitter dunking on his Excel tables, and I was like, they looked like fine to me. But if you're all a bunch of management consultants or something. No, I just thought it was like, it was more like he has no provenance in the sheets. He just takes a screenshot of like five numbers. written and they're all exactly the same. And I was like, there's no fucking way you have zero variance between your number and Sullivan Cromwell's number. And you're not even tracking like that. You know what I mean? Like, just like basic like sanity checks, like, oh, they're exactly equal,

really? Like, there's a lot of stuff there where you're like, I don't believe, how could you even believe this? Or he's like, oh, these are the numbers as I remember them from Monster. It's like, all right, buddy. Yeah. Yeah. I mean, the big claimant's most recent post was like, oh, there's a $400 million bank account sitting somewhere that, like, you know, the auditors didn't take into account. It's like, I find that hard to believe that they couldn't find a bank account, which is like, you know, the easiest thing to find. To be fair, I will say, I am still one thing I still don't understand and hope to understand

as this unfold is like, where did this $5 billion come from? And like, why couldn't that have actually been used to process withdrawals? Well, because there, I mean, if there's more liabilities than assets, right, if you keep processing withdrawals and it's just a race to the exit. So that is where you do want to say. And the withdrawals are in a specific asset that the customer has in their letter at FTX. For sure. It won't match the assets that FTX in. For sure. But they were claiming that they were like liquid stables, ETH, right?

Like I was actually like if you, and I was like a little bit surprised by that aspect of this $5 billion recovery that they were like very liquid crypto and stables. Because in November and December, all the things you heard were like they had nothing at all. Well, no, no. I mean, we know they had a bunch of FTT and Seoul and all this other stuff. No, no, this doesn't include that. It explicitly states it does not include that. It explicitly states that stable quint and liquid crypto, which is like that was what was surprising.

I see. Well, soul is liquid. I mean, if they have. That's a lot. That's a lot to have that. True, true, true. Yeah, the soul might be one 20% of that. But I just think $5 billion.

out of, even if it's like 13, is actually a way higher recovery ratio than I would have predicted. I agree. But it also tracks where the claims are being priced, right? So claims are being priced at like, you know, 10 to 15 cents, which again, if you sort of look forward and say, okay, it's going to take many years to get this paid back, you might eventually get 40 cents of the dollar, 50 cents of the dollar. That's roughly where, you know, if claims are trading a 15 cents today and then, you know, the people who are buying them from you make roughly a 3x, assuming that things go right. That's about how they were being priced

from the beginning. One interesting thing, speaking of the liquidators, so the Alameda liquidators were found on chain, just like bumbling around, getting liquidated, like sending a bunch of failed transactions.

Like, they just had no idea what they were doing. It was crazy to see who are these fucking liquidators who keep getting liquidated on Ave, losing tons and tons of money for all the...

It's like, what is this clown show? John Ray's... team are not veteran teachers. I'm just like, do you just pay one Twitter DGEN just like, you know, a hundred bucks an hour to tell you how AVE works? The Twitter DGEN is going to take all the money. Yeah, don't give them the money.

Just have them explain to you how AVE works, you know? Like, this is not that complicated. Just screen share, you know? I just think there's also this factor. Like, stuff like this, though, does make me wonder how the $5 billion is I would agree with that. I would agree with that. It makes it a lot harder to trust any of these processes seeing

what's going on with the Alameda liquidation? As they say, it's not real until it's actually cash. They might say it's $5 billion, but I am curious about their process to liquidate that into assets that can be distributed to the creditors because, you know, if they're counting illiquid assets in there, it's going to be really annoying when people see them, you know, being monetized. You know, a very nice thought experiment that I taught,

I spent some time talking about with some friends who are more an AI type of stuff. And was, you know, Anthropic, this machine learning company that, whose series B was done by Sam, Nishad, and Caroline, $500 million series B, which came from the loans, is trying to raise, like, upround.

And so one question that, and I guess that's been publicly reported, whatever. But one question is like, sure, like, you know, that most, all that money, theoretically should be going to have creditors. But there's also this question of who signs the series C docs if, like, say, all three of them were in jail. Was it with FTX, was it on the FTX balance sheet or Alameda?

Technically, no, but it's in the bankruptcy proceedings. Because it's kind of like the Robin Hood chairs. There were C's, like, forfeiture style. So it's like, I actually am very curious of like the procedural stuff of like how an illiquid asset owned by this thing and this huge nuclear bomb waste, that is like, because the market is crazy, is trying to raise this huge upround. I assume either the bankruptcy court or the, you know, debtors.

Like if the DOJ sees you do, then it's the DOJ, right? Yeah. Can you imagine the DOJ signing the Series C docks? Well, Mr. Turun, I remember actually bringing you back to the dropping. Like, weren't you talking all sorts of shit about the anthropic investment? And now, you know, with Claude and GP3 and all this stuff. Yeah. It actually looks like an amazing investment.

Yeah, you're just saying it about to raise an up-round. Maybe that was the smartest thing that said you. Maybe this is going to make the FTX creditors whole. You never know. I know. I made a bunch of jokes on Twitter about two weeks ago. The irony would just be incredible. The irony would be, but I'm much more of a fan of adept and, you know, open AI and a couple other people.

definitely not. But mainly because they are, you know, EA porn. Of course. So you're not ready to recant. You're not ready to recant. Okay. No. Got it.

But if they make the creditors hold, I'll be hilarious. I really think, like, Microsoft investing in OpenAI caused FTX creditors to be made whole. That would be like such a funny, like, human centipede of capitalism. Human centipede of capitalism. All right. I think we got the title of the show. All right, well, we're up on time. So I think with that, we're going to wrap.

Thank you, everybody, and we'll be back soon. See, y'all.