Unchained - Why FTX Might Try to Claw Back Funds From Retail Customers- Ep. 547

Episode Date: September 22, 2023

As lawsuits continue to pile up in the FTX saga, FTX chief John Ray III is focused on clawing back funds from former affiliates to pay back creditors. But how might that play out in court? Founder of 117 Partners Thomas Braziel, who specializes in the trading of bankruptcy claims, explains the different paths Ray may choose to go down and the potential outcomes of these cases. Listen to the episode on Apple Podcasts, Spotify, Overcast, Podcast Addict, Pocket Casts, Stitcher, Castbox, Google Podcasts, Amazon Music, or on your favorite podcast platform. Show highlights: The chances of FTX winning in court against Sam Bankman-Fried’s parents The case against Barbara Fried and Joseph Bankman  Whether civil cases could turn into criminal ones Whether bankruptcy proceedings and the criminal case against Sam Bankman-Fried are a coordinated effort  What retail clawbacks are and the likelihood that FTX will pursue them Thank you to our sponsors! Crypto.com Arbitrum Foundation Thales DAO Toku Guest Thomas Braziel, founder of 117 Partners Previous appearances on Unchained: 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 of Unchained on Sam Bankman-Fried and FTX: The Chopping Block: Was FTX a Scam From the Very Beginning?  How Much Prison Time Is FTX’s Sam Bankman-Fried Facing?  Why the Legal Process for FTX and Sam Bankman-Fried Could Take Years The Chopping Block: SBF Wants to Win in the Court of Public Opinion. Will He? Jesse Powell and Kevin Zhou on How FTX and Alameda Lost $10 Billion Is the Collapse of Crypto Lending Over, or Is It Just Starting? 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? Sam Bankman-Fried on How to Prevent the Next Terra and 3AC Unchained:  New Suit Claims That FTX Kept Its Fraud All in the Family Stanford University Will Return $5.5 Million to FTX FTX Sues SBF’s Parents to Claw Back Misappropriated Funds: Report Full text of the FTX lawsuit against Bankman and Fried CoinDesk: Sam Bankman-Fried’s Dad Thought His Son Wasn’t Paying Him Enough, So He Got Mom Involved Bloomberg: How Sam Bankman-Fried’s Elite Parents Enabled His Crypto Empire The Verge: The best stuff Sam Bankman-Fried’s parents bought using FTX money Learn more about your ad choices. Visit megaphone.fm/adchoices

I mean, these are all fraudulent transfers, potentially while the debtor was insolvent, potentially while it was coming into with funds. So clearly all that money has to come back. I think that's pretty easy. The question is like, what's it worth now and who can actually pay it back? Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, author of The Cryptopians.

I started covering crypto eight years ago, and as a senior editor at Forbes, was the first Mainstream Rear Reporter to cover Cryptocurrency. see full-time. This is the September 22nd, 2023 episode of Unchained. Toku makes implementing global token compensation and incentive awards simple. With Toku, you get unmatched legal and tax tech support to grant and

administer your global team's tokens. Make it simple today with Toku. Today's episode is brought to you by overtime markets, your premier Web3 Sportsbook. The innovative protocol is changing the game one match at a time. Powered by Thales, explore more, at overtime markets.xy-Z. Arbitrum's leading layer two scaling solution offers you ultra-cheap

and lightning-fast transactions, all with security rooted on Ethereum. Visit arbitram.io today. With the crypto.com app, you can buy, trade, and spend crypto in one place. Download and get $25 with the code, Laura. Link in the description. Today's guest is Thomas Brazil, founder of 117 partners. Welcome, Thomas. Hey, Laura. Good to see you again. This week, FTCS sued Joseph Bankman and Barbara Freed, the parents of former FTCX CEO Sam Bankman Freed, alleging that Bankman was intimately involved in a number of the allegedly fraudulent schemes, such as silencing someone who threatened to expose the alleged FTCS fraud, the purchase of property in the Mohamas. Barbara Fried encouraged the use of strong donors as to campaign finance laws, or allegedly,

and both were accused generally of either knowing or ignoring the red flags that FTCX was insolvent. Was this development surprising or expected? Thanks for having you on Laura. Good to see you, as always. Was it surprising? No, I don't think it was that surprising. I think what was in the lawsuits in bankruptcy referred to an adversary proceeding, but what was seen in the adversary proceeding was probably a bit shocking the actual details.

But I think people knew that they were pretty involved. And I think that was some of the he that were getting post him getting, you know, Kermen complaining against them was that, you know, why is he hanging out with his parents? Weren't they involved in a lot of parts of the business? And people were saying things like that. I don't think it's that unexpected. People, I think, long knew that there were some real estate transactions where they were gifted or given some certain real estate in Bahamas.

But to see it all laid out in the complaint, or I should say, in that, I have a procedure proceeding was interesting, you know. And, yeah. Which items in particular really struck you? I guess just the involvement, like in the actual day-to-day stuff. I mean, if you come from a corporate background or were a tax lawyer, which is that, I guess, was, you know, and is that there wasn't more, I don't know, structure to the organization. I mean, you know, the dichotomy between what people thought pre-petition, what John Ray has sort of said post-petition, and now some of the revelations coming out about the pre-petition. I mean, it's just kind of amazing to think about people that, you know, might have been a moral corporate background and saying, like, if the business is so profitable, why are you cutting corners? And, you know, to be fair to these guys, like in the, you know, in the light of day, sunlight of bankruptcy court, which as, you know, people in bankruptcy say, like my parents would say, like, the last place you want to be as a criminal is in bankruptcy court because there's so much sunlight on everything, you know, everything is good scrutinized. And to be fair to people, sometimes the stuff gets overly scrutinized and they trade people.

pick stuff that went on. But it seemed pretty damning some of the stuff. And, you know, there's, let's see what the responses will be. I mean, it's good for the estate and it's good for creditors, because I'm sure they want to see, you know, sort of retribution. But in terms of recoveries, I don't think it's going to be incredibly meaningful, you know, $10, 20, 30, 40, $50 million. I mean, that's, I don't know, maybe two months of bankruptcy fees. So. And so, you know, earlier when we were talking about, like, how some of the things are particularly damning, like if you were to kind of say FTCS will win in court, you know, for these reasons, like which were the particular acts that you think probably will put things over the edge to?

Oh, yeah. I think almost all the stuff, though, the win on the merits of just the fraudulent conveyance. I mean, these are all fraudulent transfers, potentially while the debtor was insolvent, potentially while it was coming with funds. So clearly all that money has to come back. I think that's pretty easy. The question is like, what's it worth now? And who can actually pay it back? Like if money was given to a charity, can you actually go and get it back? Like, meaning is it there? Has it been spent kind of stuff?

And, you know, you can only squeeze, you know, whatever, a rock so hard. So the question will be, you know, what is the real estate and the Bahamas worth, the $10 million or whatever that was gifted to them? Where did that money end up going? Can they trace it? So it seems to cost money and then to do. And then the question is like, how much of an effort you want to make? And of course, you know, all that can be stopped by a criminal investigation. which there isn't a complaint,

but clearly some of the activity could be considered criminal. And I think, you know, I won't pretend to be a criminal lawyer or a lawyer at all. But when you're bringing lawsuits, I mean, basically these are kind of like preponderance of evidence standards versus like, you know, higher standards you might have for criminal complaints. So it's easier for John Ray to like stitch together some stuff they know and slap an AP and sue these guys.

But it's a little harder. from a criminal side. But all of it just on facially, I mean, of course, as my lawyer likes to tell me, like, you know, facts matter, Thomas. So as more discovery happens, and they take discovery, we'll see. But on the face of it, I mean, it looks pretty obvious that it's sort of slam dunk. Just the question is what they'll actually be able to recover. Yeah, I think one of the ones that stuck out at me simply because I could very easily imagine myself in a similar position with my own parents and I could just picture what my mother would say. And it was when they purchased the Bahamas property and everything was just getting billed or allegedly in the complaint to FTCS.

And the parents didn't even make an attempt to pay to furnish their home themselves. And I could just imagine if something similar was happening with my mother, she would be like, wait, is this okay that we're doing this? Like, you know, she would have so many questions about the money and like what was okay, what was kosher, what was not. Like, I could just practically hear her in my head, but at least, you know, from what the complaint described, it didn't feel at all like the parents had any of those qualms. So that was... Yeah, he wasn't 100% owner of FTX. So it is bizarre that those red flags wouldn't have been, or people wouldn't have been like, hey, I know that you think this is okay, but I don't. Like someone would have said something. Maybe they thought it was a drop in the

ocean. But if FDX is so wildly profitable and I'll meet it was so wildly profitable, they didn't need to cut in corners and have them picking up the checks. I mean, it would have been easy to, for Sam to just be like, no, I'm picking this up personally or something. Well, one thing that I also notice is that the document hedges its language saying things like, quote, Bankland and Freed either knew or ignored bright red flags revealing that SPF and other insiders were orchestrating the scheme. And again, you know, I saw later again, it was like they either knew or blatantly ignored. So. Right. Yes.

That's because the standard for these civil cases is much lower. You know, like, if you were trying to criminally try them, you'd have to like really show that they knew because they're going to say they didn't know. They didn't know, right? But the standard for like breach of fiduciary duty or, you know, kind of unjust enrichment, it's a much lower standard. All you have to basically show is a reasonable person should have known, you know. Oh, oh, I see. Yeah, so that's why they keep saying that. So you're saying, so basically they don't know whether or not they knew, but it doesn't matter for what they're trying to do.

Is that what you're saying? I will respectfully say that I'm not a lawyer, but a stress investor. And what people usually say is what the standard is usually what a reasonable person should have known, steps are reasonable person should have taken, best practices that a board should have taken. So like a board of director, if somebody runs off with money and a company, they don't have to necessarily show that they knew the person stole the money, but did they take any steps a reasonable person would have taken to like verify that the money was there or that the person wasn't esconding with money or whatever. So it's this reasonable person standard that I think you trigger under Delaware and a lot of jurisdictions for breach of

due share duty or breach of loyalty, duty of care that you have mainly in the boardroom, but also I think he's a C-suite executive. And it sounds like he was sort of melding between the two. Okay, so basically, yeah, they're just trying to meet that standard. Right. For their purposes, they don't need to go beyond. And Barbara Freed, you know, also, so as far as I understand from reading this, you know, Sam Pinkman was definitely involved more in the day-to-day.

You know, he was often listed with FTCS management. He, you know, could make executive decisions on his own at, you know, one point saying, oh, I'm just going to make this decision without Sam, like we don't need to involve him, that kind of thing. So Barbara Fried was not involved at that level. However, it did say that she was a key influence on the campaign donations, and I wondered what your takeaway was in that regard in terms of her involvement there. Campaign finance fraud? Yeah. Again, I don't have too much to say other than it's just bizarre that, you know, so many corners were cut in regards to stuff. I don't have a real view on. Again, it's like it helps them build. the story that they can, you know, just slam dunk, take back any money that was taken out of the estate at any point in the last couple of years by Barbara and the husband.

But I don't think that I don't know how a real view on that. Yeah. Okay. Yeah. And as far as I understand, I don't think they're married. They're domestic partners. Just to clarify, yeah. All right. So in a moment, we're going to talk about what the consequences could be after, you know, from this document. But first, a quick word from the sponsors who make the show possible. Toku makes managing global token compensation and incentive awards simple. Are you designing your token compensation plan and grant templates with multiple law firms? Are you managing cliffs, vesting, and taxable events in a spreadsheet? Are you distributing tokens to your team manually?

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And with the recent launch of orbit, Arbitrum welcomes you to build your very own tailor-made layer 3, or an orbit chain. Propel your project and community forward by visiting Arbitrum.io today. Overtime Markets is your premier Web3 sportsbook. Overtime is an industry-leading Web3 protocol where users can immerse themselves in the thrilling world of sports. Leveraging the benefits of decentralization and blockchain technology, overtime leads the charge in innovation. while offering fans juicy token rewards for sports events. Overtime supports over 40 leagues and utilizes advanced smart contracts to ensure a seamless user experience. Discover the future of sports trading at overtimemarkets.xy Z. Back to my conversation with Thomas. So you kind of alluded to this

earlier and it's simply where your mind goes when you read the complaint, but it sounds like this is leading to a criminal case. You know, do you agree that that is. so and if so, you know, when do you think we might see that, et cetera? You know, of course, I don't focus on criminal stuff. I mean, I'm mainly focused on bankruptcy court stuff. Clearly, when you read it, it rises to the level with something that could be criminal. I mean, when people see this stuff, I mean, even take the complaint against Sam in the freezing of the Robin Hood shares, which I guess were recently sold, I guess that's some news that was reported, I guess, two weeks ago. I mean, it's not actually such a great thing that they get criminally

indicted or get a criminal complaint against them because it stops the lawsuit against them and it also will deplete the assets that the state will be able to get because basically they'll be fighting a criminal trial, you know, until the civil files tried, you know, any money they've got

they can fight, they can use to defend themselves in the criminal case. So it's clearly something they're looking into but as you can see, is they're going down the wrong of FTX insiders, I think you know, his mom and dad are probably a little lower in the total poll than the people they've been going after. But it's, it's clearly something where they could face something. But these things take many, many years. I mean, you know, I think

for criminal indictments, I mean, they can be years, years after the, after the activity. So the civil, again, is faster. The bankruptcy is a lot faster, but that could be, you know, coming down the pike. Yeah, for sure. Yeah. Although, I mean, at least historically, the charges against Sam were, I think, sort of record-breaking. I don't know if they're literally record-breaking, but they were extremely fast. So many people commented on that at the time last year. One thing that I wanted to ask you about also was the parents released a statement to Coin Desk after this news of the lawsuit saying, quote, this is a dangerous attempt to intimidate Joe and Barbara and undermine the jury process just days before their child's trial begins. And I wondered what your thoughts were on that statement.

I mean, I don't want to curse on your pod. I don't think John Ray cares about, you know, Sam's criminal trial. I don't think there's any orchestration. They probably, he probably doesn't even know that, like, the jury selection is going on. I mean, maybe he does, but it's just not a focus. So. Okay. So basically, the FTX bankruptcy pursuit is just happening on its own timeline.

And Sam's trial is happening on its own timeline. And the two are, like, unrelated. I'm sure that the investigators, whether the SEC or the DOJ, have a request for information, subpoenas on the estate, which the state has to meet, but for the most part, and I'm sure they work, you know, they pass information. But generally speaking, like the SEC, the DOJ, it's a one-way street. They request information on you. You give it to them. They don't really tell you what they're doing. And so I don't think John is in any way, you know, any sort of coordinated effort. I just think it's, he's really focused on creditors. credit recoveries and prosecuting the file of, you know, going through all these things. And he's got a bunch of stuff teed up. You've seen a few other amsterdam proceedings that have been filed. And he's just going, picking them off one by one, you know, sort of working the file, adjudicating each file, and just doing what he's supposed to be doing.

So I really did think the timing is, you know, maybe to them it feels like it's coordinated, but I guarantee you it's not. And so earlier when you were saying that the amounts that could be, by suing the parents are small compared to the around $8 billion that are owed to the creditors. You know, what does that say to you that this is, you know, where they're at right now? Does it say to you that they're kind of near the end of trying to get money back from people? Or like, yeah, what is the significance of that? All the lawsuits we've seen are really fraudulent transfer lawsuits or fraudulent conveyance lawsuits.

And I'll use the term because everybody uses it, but I hate it. Like within clawbacks, within bankruptcy, you have fraudulent transfers and you have preferences. They haven't started on any real preferences. They've only filed frauds and transfers. Basically, deals that were unfavorable to the estate. Now, maybe there's some other insiders, but most of those insiders have claims, and those lawsuits will really be about objecting their claims as insiders that were unjust in Richmond or something like that. Those will probably be dealt with the claim objection.

So right now, he's getting, he put, they filed on, July 31st, I did the date for you. They filed the draft plan, which they're trying to get done by next July 31st, 2021, 2024. So that's where he's really heading. This is the plan. And as part of that, he's filed all the lawsuits he wants to file for fraudulent conveyance, fraudulent transfers.

So basically bad deals that the estate did or somebody that took advantage of the estate or something that Sam did that was sort of like an insider deal. And then, and they're going, you are, you're right, right. They're kind of getting lower, lower down. But they haven't really started if they're going to bring any east. or preferential payment stuff. And this is a hot topic, a lot of retail investors, I'm sure worried about it. But there are also a lot of large creditor counterparties.

I will not name names, but you know them. Like all the big firms in crypto that would have traded with FDX are going to have some preference exposure. And the question is going to be, that'll be the big next probably shoes to drop are those lawsuits. How are they going to be handled? Are they going to be settled early and they can offset their claims? I mean, John, I think, is said publicly, and he definitely said to me that he really wants to shrink the denominator to improve recoveries. And I think he was referring to stuff like that.

You know, I think under the bankruptcy code, he has to consider going after preferences. But I think as a starting matter, those will probably be the next set of a big lawsuit. So yes, I, you know, short answer to your question, yes, I think he's sort of going down the rung of interesting fraudulent transfer cases. to bring. Okay. Yeah. And this lawsuit against the parents did also prompt Stanford University to say that it would return money that was donated to them. You know, the way that came up in the suit was that the suit alleged, quote, Bankman was involved in these donations that did not benefit the FTX group and instead amounted to naked self-dealing by Bankman who sought to curry favor with and enrich his employer at the FTC's expense. You know, that was an additional amount of money that they were able to get.

But you're right. It's not a large amount. I've seen so many bizarre insider dealings from trying to buy people's claims. And not all bad. It's not like these people were bad, but just weird, back of the envelope, like, sure, here's 10 million bucks. Yeah, here, here's a million bucks type of transactions with no papering, no contract. You have, you have to question. And like, why did Sam do that? Like, I don't know that it was to, I mean, whatever. We can't get into psychology. He was ed.

What are you thinking? But it's some very bizarre stuff. I mean, employees with bonuses that were never, they never had contracts, the bonuses were in crypto, there's no record of the bonus. I mean, like, a whatever, a Slack message or a telegram message. Just bizarre stuff that you would not normally be anyway. Yeah. So speaking of clawbacks, I believe the lawyers are considering doing what are called retail clawbacks, meaning clawbacks from the people that are essentially also the creditors themselves.

So explain, you know, a little bit more about that and whether or not you think that's likely to happen and how that will be decided. Gosh, where do I start? We've talked about this one before last time, but just to go into it, and I saw that before I came on, that biology and tweeted about clawbacks. or preferences, which is pretty funny. It's made it all the way up the poll of theology. But the idea of... Apology, Sreeny Boston. Yeah. Yeah, sorry.

For the record. Are there multipleologies? Well, just not everybody is like super into cryptos. No, I know. No, I'm joking. I wouldn't even know how to say his last name, so I appreciate you saying it for me. So on preferences, there's really no distinction between a preference that belongs to a business or an individual. Of course, it sort of talks.

talking to the heartstrings a bit more. If it's an individual who was just trading their account, they were just moving money around the way you would in your brokerage account or your bank account and you think, well, hang on, wait, I got to pay that money back. Like, I was lucky to get a little bit off. What do you mean I got to pay it back?

So there's that that comes into it when it's a retail person, probably more so than it was an institution. But generally speaking, clawbacks or preferences in a 546 section of bankruptcy code, not that's important. The idea is within 90 days of bankruptcy, you received the payment

that was preferential in nature, even if you didn't know it. You don't have to have knowledge because the idea is you got a payment that was preferential. And so the other creditors are out because you took money out. And so they're getting less because you basically took money out of a tub that wasn't full. And so it's presumed that there was insolvent. And so you have some, of course, defenses to preferences and we can walk through those. But of course, most people are very scared, I think, on the retail side of preferences.

I think there are a lot of good defenses to preferences. And again, we can walk through them. But the estate did come out recently and say that, they were kind of showing what the preference exposure looked like to their, to, you know, or I should say exposure, but their potential preferences they could go after. And it looks pretty ugly because, um, a few things. One, they showed that there was like $9 billion in the last 15 days. There isn't a lot of case law on-

That was removed from the exchange. Right. It was removed from the exchange before the petition date. And there isn't a lot of case law on banks filing for bankruptcy because they can't since 1986, I think it might even been earlier, but 1986 onward, they could not file for bankruptcy. There isn't a lot of case law. There is some case law before 1986, and there's some subsequent 1926 about extraordinary periods where you can't argue what's called ordinary course defense. And this is a big defense that a lot of people use in traditional bankruptcy and in the crypto bankruptcies around preferential payments, which could be potentially clawed back.

And I think creditors will make that. I think the terms of service are not going to stand up, but people will still try to argue that. And there are some other defenses if you want to go them. But basically the idea is if $9 billion went off the platform, that $9 billion could be clawed back, you know, lawsuit by lawsuit by lawsuit, and you would have to pay that money in before your other claim, the remainder of your claimant that you have in the estate would be allowed. And they have the power of offset. So let's say you have a million dollar claim and you took off a million dollars in the preference period. They can literally offset your claim with the preference. So it's kind of, you know, on one level you think, oh, this is great,

can help recoveries, but it's kind of a bloody way to get there. But this effectively what happened in Madoff and happens in all the big bankruptcies, which is they do look at clawbacks. The better your defense is, you know, ordinary course of business is probably the leading defense, new value defense, meaning I deposited, I deposited after I withdrew money. Let's see if you can keep going. So ordinary course, new value. And yeah, those are the big ones.

There might be one more. But then the other one that people are talking about, is the safe harbor, which is, allows for, oh, gosh, I don't want to go into this. The transactions between financial intermediaries cannot be clawed back under a thing called 546E of the bankruptcy code. This is put in during the 2005 updates to the bankruptcy code. And the idea is you don't want financial contagion. And so the way you prevent financial contagion is transactions between financial intermediaries

cannot be sort of clawed back, right? So like if you get a financial crisis like 2000, or bank run. You don't really want other banks having to pay other banks back if they all go under because it just creates contagion. What happens is everybody tries to suck money out of the system because they're worried about preferences. And I actually think it's important for the crypto ecosystem to probably argue for $54060 treatment. But no one's taking me up on that. And just to clarify, like an example of that on FTCS would be what? Like to trading firms that are trading on FTCS or like I don't even know if they have no.

It comes off the platform. So let's say a market making firm. Yeah, let's say, let's say another big financial institution that people might have capital at that's in crypto is trading with FDX and they have balances on FTCS. And let's say during the preference period, they pulled off $20 million. And now if people think all of a sudden like, well, hang on, these guys have a $20 dollar preference, I should pull my money from them. Like, I don't know, NXO or like name your, you know, I don't know, crack. I don't know. Someone else in trading or like, I should really pull my money.

Or even if I'm an investor, like, let's say I'm an investor with a market making firm. And you're like, oh my gosh, they have a big preference. Like, they could go after them. Like, I should really pull my money. Oh, got it. And so it creates contagion within, um, within the system. Or that's what the thought is. And that's why, five, four, six, you exist. Generally, it's like, if, Fidelity is trading with TRO price or things like that. So when you have all these Wall Street brokerage firms, but it also applies to, it says financial intermediary is what the code says. And of course, this has been like super heavily litigated, like all the way up to the Supreme

Court a few times or many times, you know, what the definition of financial intermediary is and stuff like this. And it's a very highly technical thing. But it is a potential defense. And we'll see how John. and the guys at FDX go about arguing it. I think the judge, when people forget that the judge is going to be very sympathetic

to the idea that if there was a bank run in the last 15 days, the people got to pay that money back. Now, he might let it say, okay, ordinary course defense applies to everything in October or, you know, whatever, the other 60, 70 days. But in those last 10 or 15 days when there was a huge bank run, I'm not allowing you to argue ordinary course defense. But now that defense is out.

But now you have to argue. new value. Well, people were just pulling money out. So new value isn't going to apply to a lot of those withdraws because the deposits already happened. There's not going to be a deposit of subsequently those withdrawals. So then you're left with 5406E, which is a very expensive proposition to be arguing. So it can meaningfully help recoveries, but it's also going to come off the town of flesh of other creditors. Right. I mean, the way I look at that is that it's almost like the estate wants to socialize the losses amongst everybody. So in order to do that, they have to claw back the funds, create one big pool again,

and then cut them all by the same percentage before paying everybody out. So, you know, honestly, it's not that different from what Bitfinex did. Well, Mountcoggs didn't, but Bitfinex did something similar. Oh, did they? I didn't know that. That's smart. Okay. After their hack, yeah.

But what they did was they introduced that token, which I think, think basically there were some different options on like whether or not you took the token or you took cash or you could trade the token or you could just hold on to it and like hope that the value of the token would eventually rise. And I think it was based on something like the revenues of the exchange. And so then eventually at a certain point when the revenues had, you know, come in enough, the exchange actually was able to buy everybody out who had any of those tokens left. So, you know, it doesn't sound like the state is going to do anything like that, but they will, sounds like, or at least they're considering doing the socializing of the losses.

Well, yeah. I think it's a nice, well, I would say for larger firms, they're probably going to want settlements. Like if you name like the Housseau of crypto who is trading, how we're trading partners with FTCX, I assume they're going to, you know, when they have like a hundred million dollar preference. Like there's going to be like, hey, like let's not burn a ball in legal fees. Like let's let's figure out a solution. But who knows?

I mean, those are kind of lawsuits that will happen towards the end of the bankruptcy and they'll be going on for years and years and years. Like that's the kind of stuff that could be going on in 10 years from now. And so when would you like, are you imagining that there will be a decision on whether or not to try to attempt the retail clawbacks like at a certain point? Like can you put a date on that? Right, the debtor has two days from the petition to basically start filing them to bring causes of action, as they're called, in the Bankruptcy Code. And yeah, I mean, so November, what are going to be November soon?

And then it will not be November now, it would be November 24, right, is when they have to bring them by. Oh, okay. So if they're going to do that, then we would see it before that at some point. I mean, the way that code kind of works is like the debtor has the right but not the obligation to do. a lot of stuff. This is one of those things. Got it. Well, if you were to get odds, like, what odds would you give that they're going to

do it? I mean, I think they kind of have to, they kind of have to try it on. I just don't know how successful they'll be. If I was in a firm and I had the financial wherewithal,

like I would totally fight this. If I didn't, you know, I would mitigate the risk. maybe sell it to somebody, non-recourse, someone wants to buy a claim and fight my preference, or just, you know, be ready to fight it. So, but if you, if it's like, hey, this is not, we're not in the business of like, you know, fighting this stuff and once the market hears about this, it's not going to help our brand equity, then you're going to want to deal with it, you know?

So, and if you're a smaller retail trader, you probably even, you don't have better odds because you need to hire a real counsel if it's like a million dollar plus preference. But it's a smaller preference, it's hard for them to bring cases. and actually collect. So what is it? What if someone said? Like possessions, nine tenths of the law?

I mean, it's kind of a joke, but also like it's, it's hard for them to collect, you know, a $200,000 preference from a retail client. So I don't want to, like,

get people spooked, like, if they're a small retail client, even like someone with like a $20,000 preference. I mean, imagine how hard it is for the apparatus of John and, you know, $2,000 an hour lawyers

to collect something like that, just very hard. Right. Okay, yeah, so it's probably only the bigger creditors that they would go after. All right, well, this has been very illuminating. Thank you so much for coming on and chained. Thanks, Laura. Don't forget.

Next of is the weekly news recap. Today, presented by veteran crypto reporter and Columbia University Night Batchett Fellow Michael Del Castillo. Stick around for this week in crypto after this short break. Join over 80 million people using crypto.com, one of the easiest places to buy, trade, and spend over 250 cryptocurrencies. Spend your crypto anywhere using the crypto.com visa card. Get up to 5% cash back instantly, plus 100% rebates for your Netflix and Spotify subscriptions, and zero annual fees. Download the crypto.com app now and get $25 with the code Laura. Link in the description.

Hello, and thanks for tuning into this week's Unchained Weekly News Recap. This is Michael Del Castillo, a Knight Badget Fellow at Columbia University. This week, federal magistrate judge Zia Faruqi denied the U.S. Securities and Exchange Commission's request to inspect Binance U.S. software, urging the regulatory body to narrow its demands for additional information. The SEC has been keen to scrutinized Binance U.S.'s relationship with Crypto custodian Sefu, which, according to its own site, rebranded from Binance custody in February and is, quote, the only institutional custody partner of the Binance Exchange, end quote. According to a statement from the company, Safu takes its name from Binance's secure asset fund

for users, or S-A-F-U, Safu, an emergency insurance fund that CoinDesk last year reported had $700 million worth of BNB in one account, now holding only $286 million worth of BNB, and $300 million worth of Bitcoin in another account, now holding $700 million dollars worth of Bitcoin in another account, now holding $430 million worth of Bitcoin. While the assets remain in the accounts previously associated with Binance's insurance fund, a month after Sefu was rebranded, Binance released a statement saying it would start using two different stable coins. This is all to say that the SECC now has come to suspect that Binance U.S. and Sefu might not be quite as, quote, separate as Sefu's press release sought to make it appear, accusing the custodian of facilitating the movement of U.S.

customer funds abroad. Binance CEO Chang Peng Ciziz Zhao denied the SEC's claims that Binance U.S. use Sefu for handling customer assets. In a social media post, he wrote, quote, Binance U.S. does not use and has never used Sefu or Binance custody. You can't just make this stuff up, end quote. That said, the judge has encouraged both parties to cooperate and try to find a middle ground to move the case forward. In a recent development that signals heightened scrutiny of the crypto industry, the head of the SEC's crypto assets and cyber unit, David Hirsch, announced that the agency is intensifying its focus on businesses operating similarly to industry giants like Coinbase and Binance. During Hersh's address at a day-long event in Chicago for

both current and former SEC employees, he emphasized that the regulatory body is not limiting its investigations to prominent exchanges, but is extending its probes into intermediaries and decentralized finance products. Despite facing recent legal setbacks, including the previously mentioned denied request to access finance U.S. software and challenges in cases related to crypto investment firms, the SEC remains steadfast in its mission, Hirsch affirmed. quote, we're going to continue to bring those charges, end quote. He said, indicating what appears to be the continuation of a steadfast approach to monitoring firms that potentially violate federal security's laws. However, Hirsch also acknowledged constraints on the agency, including its limited

enforcement budget, which could hamper additional investigations against well-funded exchanges embroiled in complex federal legal battles. In this week's episode of the chopping block, ZeroX Labs founder Will Warren talked about the challenges smaller startups face in dealing with a lawsuit, with legal fees amounting to large percentages of their capital raised. It remains to be seen whether small D5 projects will be able to survive the U.S. regulatory onslaught. Making matters potentially much worse for those in the crypto industry, should any of these lightly funded startups lose their legal battles, it could set precedents that impact the rest of the industry. Meanwhile, in Washington, D.C., U.S. Senator Elizabeth Warren, a member of the Democratic Party,

gained robust support for her digital asset anti-money laundering act, a legislative effort initiated in July 2003 to curb illicit activities facilitated by cryptocurrencies. The bill, backed by a growing coalition of 10 senators, all Democrats or caucus with the Democratic Party, aims to tighten regulatory loopholes and impose stringent know-your-customer and anti-money laundering requirements on many participants in the crypto sector, including wallet providers and miners. In a statement, Warrant emphasized the urgency to halt criminal enterprises exploiting the digital asset ecosystem. In related news, New York's historically influential financial regulator, the same one behind the controversial Bit License, proposed stricter guidelines for cryptocurrency listings focusing on technology, market, and regulatory risk. assessments. Contrary to Tether's previous claim that it would halt secured loans by the end of

this year, the stable coin issuer has continued to issue USDT-denominated loans to its clients, the Wall Street Journal reports. Tether's latest quarterly financial update revealed a loan portfolio of $5.5 billion as of June 30 that's actually an increase from the $5.3 billion in the previous quarter. Tether spokesperson Alex Welsh, in fact, confirmed, the new loans, stating they were issued to, quote, longstanding clients, end quote, to prevent liquidity depletion or unfavorable collateral sales. Welsh added that Tether now aims to end its loans by next year. Welsh went on to defend Tether's actions, citing $3.3 billion in excess reserves, and criticizing traditional financial institutions for not meeting crypto customer demand.

The company's loan practices remain under scrutiny, as its balance sheets lack transparency about which assets are being used as collateral to stabilize Tether's price. Ironically, though, more transparent stable coin issuers like Circle behind the U.S. D.C. stable coin continue to see the market caps of their stable assets decline. The legal skirmish between Gemini Trust and the Digital Currency Group, DCG, intensified this week as Gemini vehemently opposed DECG. DCG's recent recovery proposal for Genesis Global Creditors. In a filing on September 15, Gemini's legal team denounced the plan as a total mirage, accusing DCG of presenting, quote, contrived, misleading, and inaccurate assertions, end quote, to Genesis creditors. The proposal suggested a recovery rate

of 70% to 90% for unsecured creditors, with Gemini Earned users potentially seeing a 95% to 110% to 110% recovery. It'll be interesting to see how a more than 100% recovery could pan out. Gemini insists that the proposed recovery rates do not reflect the real value terms. The ongoing dispute marked by allegations of fraud and legal entanglements sees both companies grappling with a lawsuit filed by the SEC earlier this year. The Ethereum-based decentralized exchange protocol balancer faced yet another security breach on Tuesday night and urged users to refrain from interacting with its website. Following an attack last month that led to $900,000 worth of losses at the time, representatives of the platform on Tuesday tweeted a warning about a front-end attack,

which at the time of the tweet they wrote was still being investigated. Early reports from blockchain security firms indicate that approximately $238,000 of cryptocurrency might have been siphoned off. Following the previous attack, users were advised to exercise caution as the website seemed to have suffered a redirect attack, tricking users into thinking they were using a real investor interface when, in fact, they were willfully turning over their assets to the thieves. Following this attack, it looks like that warning might have been worth paying attention to. Hong Kong police intensified their investigation into the JPEC's crypto exchange, arresting six individuals, including crypto-influencer Joseph Lamb,

alleging they misled the public regarding the exchange's licensing and other operational aspects. The crackdown reportedly follows over 1,400 complaints made to local authorities and suspected involvement of assets worth approximately $1 billion Hong Kong dollars or about $128 million U.S. dollars. Meanwhile, the exchange faces a liquidity crisis with halted operations and skyrocketed withdraw fees, which JPEX attributes to, quote, malicious and quote, actions by third-party market makers. Of course, it's entirely possible that these were just investors, making a better bet than the exchange could or wanted to handle. Japan Securities and Futures Commission or SFC had previously flagged JPEX for allegedly falsely claiming it had a valid

license. The exchange, asserting its commitment to continue operations, is actively negotiating with market makers to resolve the cash flow shortage. In the face of plummeting Bitcoin NFT, sales and a broader asset class downturn, the creator of the Bitcoin Ordinals protocol, KC. Rodomor, is advocating for a revamp of the current inscription numbering system that lets users draw or inscribe images and other data directly into the Bitcoin blockchain. In a post on the GitHub repository that houses the Ordinals code base, the software engineer argued that the existing method has led to complex code and hindered progress. Initially, the numbering was designed to remain stable, meaning inscriptions would retain their original numbers forever.

However, maintaining the stability has proven to be a significant challenge, especially with alterations to the inscription protocol. The current system assigns negative numbers to unrecognized inscriptions, creating what Rodomor calls, quote, cursed, end quote, inscriptions, that fail to indicate the order of creation and adding complexity and bugs to the system. Rodomor proposes integrating these cursed numbers into the main sequence and eliminating their use in URLs. This adjustment, he notes, would result in what he says are minimal changes, with new numbers differing by about 1% from the old ones. When Ordinals first launched this January, they were controversial for potentially bogging down Bitcoin transaction volumes by creating traffic that some viewed as being not fundamental to Bitcoin's core value proposition.

while others saw them as a crucial step to remaining competitive against the likes of Ethereum, which started to popularize NFTs as far back as 2015. Those concerns have waned of late, with ordinal's volume down 97% between May and August, according to a DAP-R radar report. As always, there's plenty going on in DFI and DOWs. Here's a quick round-up. Over 70% of ape coin Dow members backed proposal AIP-297, co-authored by Anamoko Brand's chairman Yatsu

to create a sister Dow and NFT community treasury for influential NFT acquisitions. Layer 1 blockchain network Kanto set it plans to transition to an Ethereum Layer 2 utilizing the Polygon chain development kit for a network emphasizing the integration of real world assets. The creators of Layer 2 network optimism announced a $26 million air drop

distributing 19.4 million opi tokens to 31,870 addresses as part of their engagement and reward strategy. After much deliberation, the founder of F2Pool, a crypto mining operating business, decided to refund 19.8 Bitcoin to blockchain infrastructure firm Paxos after the firm inadvertently paid a whopping $520,000 fee on a relatively tiny $2,000 transaction. him. Mark Cuban, the American billionaire investor, reportedly lost $870,000 in a defy-related scam. Looking for something more fun? Genesis is rebranding. You may wonder why? To what? Take a closer listen to stand-up comedian Ginny Hogan's take on the whole matter. Huge news. Genesis is changing its name to Exodus, or at least its mission. Last week, the company announced its plan to sunset. A term

definitely created by a person who has never looked at a sunset. All its trading services worldwide. The sun comes back a few hours later. Your spokesperson said that this decision was made voluntarily, which is very good because I cannot support non-consensual sunsets. This is filed Chapter 11 bankruptcy earlier this year, but at the time, they thought that their parent company, DCG, would bail them out. But no, Daddy's out of cash too. This is literally the plot of Schitt's Creek. The news is that Genesis has assured users that they'll be made nearly whole. The bad news is that they haven't specified what that means.

Genesis owes its creditors nearly $3.5 billion. Some, such as the Winklevoss twins of Gemini, say that that is wholly insufficient. Okay, Winklevye, here's the rock. Use your strong, rowing arms to squeeze some water out of it. For any Genesis users out there, you have until Wednesday to finish up your trades. 48 hours is an eternity in crypto. There's still plenty of time to lose thousands of dollars. And that's all for thou?

Thanks so much for joining us today. Unchained knows it's very hard to keep up with the latest news in the crypto. system. That's why they have a daily and weekly newsletter to get you covered. Sign up for free and receive the latest updates right in your inbox Monday through Friday. Check out the show notes and subscribe to their substack today. Unchained is produced by Laura Shin with help from Kevin Fuchs, Matt Pilchard, Juan Oronovich, Megan Gavis, Ginny Hogan, Shawshank, and Margaret Curia. This weekly recap was written by Juan Aronovich and edited by myself, Michael

Al Castillo. Thanks so much for listening. Looking forward to chatting with you next week. Unchained is now a part of the Coin Desk Podcast Network. For the latest in digital assets, check out Markets Daily, seven days a week with new host, Noel Atchison. Follow the CoinDesk Podcast Network for some of the best shows in crypto.