Unchained - Why the Messy 3AC, Celsius, and Voyager Bankruptcies Will Drag on for Years - Ep.377

Starting point is 00:00:00 Hi, all, just a quick note before we begin. This episode is an interview with a bankruptcy expert, Adam Levitin, and an insolvency expert, Wasi lawyer. It's an incredible conversation on how the bankruptcies of Free Arrow's Capital, Celsius, and Voyager will go down. Just wanted to note that we recorded before Friday afternoon, which is when FTCS offered to allow Voyager customers who opt into the program access to some of their funds early, as long as they create FTCX accounts. So, in case you're wondering why we don't discuss this proposal, that's why. However, in discussing it post-show, Wasi lawyer said it was an incredibly shrewd move and believes

Starting point is 00:00:41 that it's a signal that Sam Bankman-Fried thinks the crypto markets have bottomed. Otherwise, enjoy this incredibly illuminating discussion of how the 3AC, Celsius, and Voyager bankruptcies will go down. Hi, everyone. Welcome to Unchained, your no-hype resource for all things cryptic. I'm your host, Laura Shin. Author of The Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes, was the first

Starting point is 00:01:08 mainstream media reporter to cover cryptocurrency full-time. This is the July 26th, 2022 episode of Unchained. Every other week, Unchained hosts The Shopping Block, where Crypto Insiders, Haseeb Karachi, Tom Schmidt, Robert Leshner, and Tarun Chitra, chop it up about the latest news in the digital asset industry. The next episode is for you, Night Owls, streaming Wednesday, July 27th at 9.30 p.m. Eastern Time on YouTube.com slash C-slash-unchained podcast. Be sure to tune in then. Oasis Network is one of the fastest growing layer one blockchains designed to support privacy, speed, and scalability in Web 3.

Starting point is 00:01:50 Learn more and join the community at oasis protocol.org. harness the full power of the Avalanche network with Core, your new Web3 command center. Built by Aval Labs, Core is more than just a wallet. It's a non-custodial browser extension, engineered for users to seamlessly and securely experience Web3 like never before. Explore Avalanche DAPs, NFTs, and more today. With the Crypto.com app, you can buy, earn, and spend crypto in one place. Download and get $25 with the code Laura, link in the description. Today's topic is the bankruptcies of Celsius, Voyager, and Three Arrow's Capital.

Starting point is 00:02:35 Here to discuss our Wasi lawyer, a hentai anime penguin in a suit, I mean, a lawyer specializing in restructuring and insolvency, and Adam Levitin, Georgetown Law Professor and Principal at Gordian Crypto Advisors. Welcome Wasey Lawyer and Adam. Hello, it's good to be here today. Hi, everyone. It's good to be here today as not Darth Vader. We're just going to dive right into what appears to be the mediest issue, and that is something called custodial funds. Why don't you just define what that is for the listeners and why this is such a big issue in, I think, particularly in Celsius and the Voyager cases? Yeah, sure. I think the point about custody funds has been. it's been thrown around a lot recently because, well, when you've deposited in assets into a company or a bank that has failed,

Starting point is 00:03:28 I think what you want is you want to custody because when you, when something's in custody, the title to that asset doesn't actually pass over to the company you have deposited it with. So what that means is that when the company goes into insolvency, those assets are segregated and it doesn't go into a general pool to pay back all. other insecure creditists. So you get, what is those that have assets in custody would be able to get those assets back. So I think that the starting point here is a question of what is, what is this stuff? So you have customers who placed funds with, say, Celsius or Voyager. And the question is, whose property are those funds? Do they remain property of the customer? Or are they property of Celsius or Voyager? And if they are property of Celsius or Voyager,

Starting point is 00:04:19 then the customer has a claim in the bankruptcy. The customer is just a creditor and is going to get treated differently in the bankruptcy than if it's the customer's property. Because if it is actually the customer's property, it will actually ultimately get returned to the customer. How fast? That's, you know, there may be a little bit of a delay, but the customer will get the property back if it's the customer's property. And this is going to be one of the big questions in both Celsius and Voyager's bankruptcy.

Starting point is 00:04:48 And it may be different answers in each bankruptcy, and there may be different answers for different groups or types of relationships. So for Celsius, for example, it has the earned product, and the answer there may be different than with Celsius's custody wall. So just to be clear, the earn product is like an interest earning product. Exactly. And with earned Celsius's terms and conditions is, quite clear that if you're using urn, you're making a loan to Celsius.

Starting point is 00:05:24 For Earn, I really don't think there's a lot of ambiguity that it's not customer property. For the other, for the custody wallet, that's where I think it's much trickier. Oh, and so the custody wallet is essentially like Celsius just storing your assets and then it gets pulled and then it's harder to make a claim that you have specific funds in there? Exactly. Laura, I think the equivalent is depositing assets into a safety deposit box and deposit it into a bank. I think that's probably a good parallel. I think that's right.

Starting point is 00:05:57 When you think of it, safe deposit box, that's what we call a bailment. It's like when you check your coat with a coat check valet or you give your car to the parking valet. It's not the parking valet's car. It's still your car. The parking valet is supposed to park it and do nothing else with it, not to take it. take it for a joy ride. The problem is if the parking valet has taken it for a joy ride and the car gets totaled, at that point, you're a creditor of the parking valet. And there may be a bit of an element of that going on in Celsius because Celsius seems to have commingled the custody funds

Starting point is 00:06:36 with other funds. And there's a billion and a half hole or so in Celsius's balance sheet. Wow. So their terms were saying that the customer would have this custodial relationship if they use that earned products, but on the back end? No, no. Oh, wow. No, I don't think that's exactly right, Laura. I think they were quite explicit with the earned product that it would look a lot more like a loan. The issue is with the custody product. That is where all the questions are coming up right now. because I think recently came out in one of these articles, what was actually being said in the bankruptcy court. And it was very clear that with the earned products,

Starting point is 00:07:23 the products where you're generating a yield on it, the term used wasn't exactly right, giving up legal rights to it, but you're giving up proprietary rights to it. You no longer own it. You've lent it to Celsius. Oh, so those are the funds that are commingled. But I think all of them are commingled is the problem.

Starting point is 00:07:41 So we have two categories of funds. Was it supposed to be that when you loaned it, that those would be marked as yours or that those would be pulled together and then you kind of lose that claim of saying like these are definitely mine? We have these two different products. We have Earn and custody. With Earn by itself, pretty clear that it is a loan being made to Celsius. With the custody, it's the terms and conditions are a little less clear. But there's a decent case that it's supposed to be. remain customer property. I just need you to finish out that thought. When you do make a loan to Celsius, does that mean then that you lose that custody relationship? Yes.

Starting point is 00:08:24 Then you're just a creditor. You're taking counterparty risk on Celsius when it happens. When it's custody, you're not meant to take counterparty risk. The equivalent is if you went to a bank and you put a million dollars in a bank and then you put a million dollars into the bank's safety deposit box, if the bank goes under, you are a unsecured creditor for the, amount of the million dollars you deposited into an account, whereas you can claim back what's in the safety deposit, i.e. the full million dollars, because that property was always yours.

Starting point is 00:08:52 Oh, I see. Okay. The problem is that Celsius seems to have commingled the funds that were deposited in the earn capacity with the funds that were deposited in the custody capacity. And it's as if the stuff that's in the safety deposit box got mixed together with the regular bank deposits. Exactly. So essentially they weren't following what the terms of their agreements were. Is that right? I'm not sure that they were actually violating the terms of their agreements.

Starting point is 00:09:24 I believe that Celsius did indicate that it was going on that that it might, that funds might be commingled. The problem is commingling itself wouldn't be an issue if you don't have a shortfall of funds. It's when there isn't enough to pay everyone back, how do you allocate the loss? do you allocate them on maybe a prorated basis among the custody and the earn customers, or do you allocate them all to earn and say, look, the custody stuff we never actually touched? So what's your theory, both of you, about how they'll handle this? I think the practical implication here, right, is if you look at these social just sort of assets and liabilities that they put up on their sort of Alex Schinsky's Chapter 11 declaration,

Starting point is 00:10:11 they've allocated 180 million in custody assets, 180 million in custody liabilities. So if it turns out, and that's why they asked the judge this question, if it turns out that those custody assets liabilities are meant to segregate it, anyone who put their crypto, their money, whatever, assets into custody will be very happy about it because you'll be able to get everything back. You'd get one for one. If it is not treated as a custody relationship and the guys who put assets into custody product,

Starting point is 00:10:41 turned out to be unsecured creditists, then they would share in the pool with all of the other general unsecured creditors. So that's how it worked practically. Yeah, it wasn't clear, it wasn't real clear to me from the Michinsky Declaration how strong of a position Celsius was actually taking on on this issue. Certainly the way the kind of high-level balance sheet breakdown that was presented in the declaration lines up with the way that Wasi lawyer, you know, characterizes it. But I'm not sure if that that was like really a very deliberate thing or not, the Celsius, Celsius's bankruptcy filing does not seem like it was put together super carefully. It would seem like it was kind of a thing that Kirkland and Ellis had to do in a bit of a rush. And I'd be careful about reading too much

Starting point is 00:11:32 into any particular words that get used. Yeah, absolutely. One for later, but absolutely, there's a clear difference between how the Celsius filing looks and what the Voyager filing looks. There's a really interesting divide by kind of also under the surface between the custody and the earned customers. The custody customers are all domestic American accounts. So if you are open, if you were in the UK or Australia or Finland and you wanted to deal with Celsius, you were dealing with Celsius only as an earned customer. And I don't think that's something that's likely to shape the legal treatment, but it's a factor that's lurking in the background where, you know, maybe there's a temptation to treat domestic customers better. I don't think that's going to play out, but that there's at least a possibility there.

Starting point is 00:12:27 Well, I mean, it sounds like the custody customers already generally based on the definition come in with a stronger position, right? Absolutely. It's not that they necessarily win, but they have a, I think they have a decent. an argument, whereas the earned customers, I don't see any way that they're going to end up being anything other than just general unsecured predators. And so how does this all apply to Voyager? Because we've only really been talking about it in relation to Celsius, but I imagine Voyager has a kind of similar situation. Yeah, I think that with Voyager, I think it's going to apply in a similar way.

Starting point is 00:13:05 I mean, Voyager, all their crypto holdings were coming. Voyager was less clear in its terms of use, though, than Celsius. So if you were depositing funds with Voyager, they didn't have kind of two separate products. Instead, the Voyager uses language that kind of indicates, well, it's still your crypto, except the facts are that they get to use it pretty much like Celsius. And that's the trickier situation. If you, instead of having two clear categories, Voyager's sort of sitting in the middle, I suspect the treatment in Voyager is going to be that it gets treated as if its property

Starting point is 00:13:49 of Voyager, and that's the position that Voyager has been taking, is that this is their property, not customer property. But even if it ends up being treated as customer property, and this is a really key point, It's only customer property to the extent that Voyager has the assets. To the extent there's a shortfall, those customers are unsecured creditors for the shortfall. Yeah, absolutely. Yeah. And can we just discuss why it is that retail customers are lower in the pecking order than

Starting point is 00:14:21 institutional investors? They're not. No, they're absolutely not. It all depends on the terms of the arrangement. And to the extent that anyone else lent unsecure to, if an institutional investor lent unsecure to Celsius of Voyager or 3A.C for the matter, they'll be exactly the same pool as the retail investors. If they had security, then they would have security or collateral, then they would have, they would have recourse to their security or collateral.

Starting point is 00:14:51 So all unsecured creditors have the same priority. They all stand alike. So I don't think any of that, I don't think there is any secure. I'm not sure that they're, well, it's not clear that there is any secured credit. Voyager doesn't seem to indicate any secured credit. And Celsius, I think by the time they filed, they paid down all the, that they paid off all the defy loans that may or may not actually be secured. Yes. They paid down off their defy loans prior to the filing because the defy loans were all over collateralized. So it made sense for them to have more assets in the company's balance sheet and, you know, not to have it. But your question about sort of insolency priority, unsecured creditors tend to be dead last. They are dead last.

Starting point is 00:15:38 And the way you get priority over that is, well, there are preferential creditors created by statute. I'm not sure what it is in the U.S., but normally it's, you know, taxes, you know, taxes, old employees. You're forgetting the most important one. You've got to pay the gravediggers. It's the administrative costs of the bankruptcy. Of course. the cost of bankruptcy has come up first. Oh, yes. Kirkland Alley's get paid first.

Starting point is 00:16:04 They already made $3 million. Oh, that's just scratching the surface. I mean, the administrative costs of a bankruptcy can get. It will be high. It will be absolutely incredibly. No, I mean, like in the short amount of time that this has been going, they already made $3 million. I saw an article. I would expect the total fees here for professionals to be over $100 million. Laura, that's why I've been in the room with discussions like before people file for Chapter 11 and normally add creditorside. And the debt is, to the extent it's possible for them, they would sometimes just threaten the Chapter 11. Because once you threaten the Chapter 11,

Starting point is 00:16:44 all the creditors go, okay, shit, all right, fine, let's not do that, please. That's terrible. Because there's going to be so much value leakage to professional fees ahead of me. And I don't get to do anything for months. Okay, yeah, yeah. I mean, you know, I just like seeing that bill that Kirkland and Ellis sent in for three million and then thinking about the various customers who, you know, they have like 100,000 in there or 70,000 or whatever. And I was just like, oh, this is obviously not good for them. But anyway, I did also, when I tweeted about questions people had for you, someone who was a sales news customer asked, how did it work if your Bitcoin loan was liquidated while the

Starting point is 00:17:25 company was frozen and it was not possible to send in funds to protect it or close it off. Can that be reversed and funds retrieved during the bankruptcy process? Let's see if I have a scenario right in my head here. So prior to bankruptcy, someone had borrowed money from Celsius, right? No, it sounds like they were in London. They wanted to pay it off. So it sounds like this is a borrower from, you're a, Celsius has a third group of folks who borrowed money from Celsius and posted collateral

Starting point is 00:18:01 for their loans. And the collateral they posted, I think, may have also been commingled with all the other crypto holdings. So it sounds like they couldn't pay it off. This is someone who wanted to make a payment and Celsius wouldn't accept the payment. Yeah, because it was frozen. Yeah, I think that they probably just have an unsecured claim. against Celsius for breach of contract.

Starting point is 00:18:29 Agreed. And so then? I don't think they get their crypto back. I think that they have a dollar claim and how much that will get paid is anyone's guess. So think of if you have a claim and it's allowed, that's like having an entry ticket. It doesn't mean that you're going to necessarily see any value. It just makes you eligible for a distribution in the bankruptcy.

Starting point is 00:18:52 Laura, maybe it would help if we just did like a minute on kind of an overview of of chapter 11 of the process, would that be? So I'm going to try and do this in like one minute and not talk too long. Here's kind of the very nutshell overview of the U.S. bankruptcy process. When a debtor files for bankruptcy, first thing that happens is something called the automatic stay. This is basically like an injunction against any attempt to collect from the debtor outside of the bankruptcy process. At the same time, there is a new legal entity that's created. It was called the bankruptcy estate.

Starting point is 00:19:26 And the bankruptcy estate has title to all of the debtor's assets no matter where they're located. So what we're doing is we're bringing all the assets and all the claims against those assets together into a single forum and hopefully having a more orderly process. The bankruptcy estate in Chapter 11 is managed by an entity called the debtor in possession or dip. It's not a pejorative. And that just means it's the pre-bankruptcy management running the show, but they're wearing a different hat. The hat that they're wearing now makes them fiduciaries for creditors and shareholders. So creditors will file claims with a claims agent for the court. Stretto is the claims agent for Voyager and Celsius.

Starting point is 00:20:06 And if you don't file a claim, Celsius or Voyager are probably going to just schedule it according to their books and records. And claims are deemed approved unless someone objects, but Celsius and Voyager very well may object to certain claims. So they're going to spend some time looking at all the claims. And if Celsius or Voyer want to do anything outside of the ordinary course of business, they need court approval. So if they don't normally scratch their head, they need to go to the court and make a motion for permission to scratch their head. For the first 120 days, the debtor has the exclusive right to propose a plan of reorganization or liquidation. That 120-day period, though, can be extended to 18 months, so it often is.

Starting point is 00:20:54 So there's going to be a window where only the debtor has the choice of kind of how to move going forward. But there's going to be a very important kind of counterweight to the debtor. There's going to be set up in the next couple of weeks, a thing called the official committee, official creditors committee. That's a body of, a representative body of creditors that's selected by Department of Justice. official called the United States trustee. And the members of the official creditors committee are fiduciaries for the creditors they represent. They will hire their own attorneys and financial advisors. And if you kind of think of how the courtroom is going to be set up, instead of being one table for the prosecutors and one for the defendants, you have one table

Starting point is 00:21:39 where there's going to be the debtors council and typically one table where the official committees council will sit. That kind of gives you a sense of the, the, the relative weight of the parties. Now, here's the thing that's often not understood well about bankruptcy. It's the role of the judge, because there's a bankruptcy judge. And the bankruptcy judge is like a referee, not a quarterback. The judge decides on matters put before him. And that means you need to make a motion for the judge to do something. You're asking the judge to approve or disapprove of something. The judge is not making the plan. The judge is not deciding generally, oh, this is what's fair and what's not. It's that there are very specific issues put before the judge.

Starting point is 00:22:20 And if there is an emotion before the judge, the judge isn't going to act on anything. The judge has hundreds of other cases going on. Other big, other bankrupt large business bankruptcies, lots of consumer bankruptcies. So this is kind of a situation where it's, hey, tell me what I need to decide right now and I'll figure it out. And if it's not an issue that's immediately before me, well, I'm dealing with other problems. And this is a process that's going to be low, it's going to be expensive because the debtors, attorneys and financial advisors, their fees come out at the top, the official committee's attorneys and financial advisors, all of their fees come off the top. And these administrative expenses is a pain the grave digger. That's going to probably in a case like

Starting point is 00:23:06 this easily turn into a hundred million, maybe two would be my guess in that range. And that's money that's not available for customers, and that's just kind of the costs of the process. Wow. Yeah. And how long do you expect both the Celsius and Voyager bankruptcies to take? So it's important to note that Celsius has not found a plan of reorganization yet, but Voyager has. So Voyager has provided a lot more sort of details around what they intend to do. Maybe I can let Adam talk about how these plans work since it's done such a great job. Voyager didn't exactly file a plan of reorganization. So they did kind of a funny move. Yeah, when they file, they included it as a filing of the court, this half-baked plan, except the actual way the Chapter 11 process works is you can't,

Starting point is 00:24:08 what you're going to have to do is ultimately solicit creditors votes. on a place. The creditors are going to have a vote. You cannot solicit their votes until the court has approved a disclosure statement about the plan. And a disclosure statement is going to probably, in a case like this, be a hundred, 150 page document that's going to do everything from laying out the history of how the debtor got here to summarizing what the plan does, how it treats every kind of claim, what the debtor's business model is going forward. And it's supposed to give creditors adequate information to be able to vote on a plan. Do they like it or not? Just filing a plan doesn't let you do anything. You need to get a disclosure statement approved. Otherwise, the plan is

Starting point is 00:24:53 just a piece of paper that sits out there. So I think what Kirkland and Ellis did, and this is something K&E does quite frequently, they'll file kind of just a placeholder plan to give an indication of where they're thinking of going and to try and frame the conversation. It in no way binds Celsius to that being its ultimate plan, Celsius could change direction on a dime. And it doesn't bind to anyone else. It's just a conversation starter. Okay. So when do you think we might get the formal plan?

Starting point is 00:25:26 I think that's going to be sometime, especially for Celsius. Voyager is simpler. Voyager just has a, you know, Voyager's got the problem of figuring out the status of the customer funds. once it does that, I think, you know, the Voyager's big issue is that, you know, it was making, its loan book was ridiculously concentrated, like 58% of its loan book was three euros capital, which is just like the insanity of that is beyond description. So if you were a bank in the United States, you are limited to lending, if it's fully collateralized, 25% of your capital and surplus to a single borrower.

Starting point is 00:26:13 If you figure a bank's capital is 8%, we're talking therefore about no more than 2% of your assets to any one loan. And like people go to jail when banks mess that up like that. That's why Paul Manafort is in jail in part because he was defrauding a bank to get, to go beyond the loan limit. And here we've got 58% of their loan book, which is pretty much all their assets. going to one borrower and 99% are, you know, over six counterparties. Like, ah, it's just nuts.

Starting point is 00:26:47 So if they, you know, there's going to be a big question, can they, is there any model which they can reorganize on? And I'm rather skeptical because like, this is a business that's built on customer trust and who on earth would trust a company that did such a bad job with risk management to ever do and to ever get this right in the future? Maybe their tech stack was decent. I don't really know. But if it was decent, that's something that someone else can buy and pair it up with better risk management.

Starting point is 00:27:18 So the bottom line, how long is this going to take with any of them? It's a huge guess. I think we're looking at these kinds of cases. We're probably looking at something that's approaching two years and how long it actually takes for final distributions could go on longer. And when you said that Voyager had a simpler case than Celsius, is it because the fact that it wasn't the commingling and it really was just the fact that, you know, they had this one huge loan that defaulted? I think so. Celsius has their suggestions that there may have been more funny business going on with Celsius. Voyager just seems to have been incompetent on risk management. Celsius seems to have also had that problem, but if you look at the Keefei lawsuit and some of the letters that are being submitted in the docket, there seems to be a sense of some people that Mashinsky was doing something beyond just being a bad risk manager. Yeah, I completely agree there.

Starting point is 00:28:24 I think it looks like why Voyager has gone over as exactly as Adam said, it's just extended this massive, massive low. into Trieros capital, and otherwise everything was sort of ticking along, apart from their exceedingly crap risk management. And based on sort of the indicative sort of plan, it looks like they just, yeah, their plan is, look, we're just going to move the default risk on tree AC, or at least, you know, we'll move all of that onto the account holders instead. So the draft plan basically says, look, you're an account holder and we owe you money. We're going to give you a bit of cash, a little bit of crypto that we have left, we're going to give you some Voyager tokens, and we're going to give you your share of whatever we managed to recover from Triaro's Capital.

Starting point is 00:29:11 So when we recover anything on Triaro's Capital, it doesn't come into bankruptcy. It doesn't come into the sort of reorganized company. It goes to a third party and it distributes it to, it gets distributed to you. Obviously, that's being incredibly optimistic about what you can actually recover from Triarrows Capital. Chapter 11 plan for Voyager is going to be very closely linked to how the trieroos liquidation plays out. To that to what Adam has said on Celsius is exactly it. There's a lot more sort of funny business going on. When I read the filing, they kind of went, oh, we only lost about $15 million on Luna. We didn't get destroyed that badly. We lost, they lost only about $40 million

Starting point is 00:29:48 on the 3AC loan, which is, you know, a large amount, but small compared to what Voyager has done. but then you start looking at all the strange things that have been doing. They lost 35K if, just lost it because someone they gave it to misplace the keys. You've got a private lending platform unnamed. We don't know who this is. That defaulted and there is now a loss of like something about over 400 million, which they are slowly trying to get recoveries on. And one of my favorite quotes in the whole thing is there were certain asset management decisions that were made

Starting point is 00:30:23 that in hindsight proved problematic. So very vague about that. And yeah, we don't really know what tip them over. It just looks like a series of incredibly bad decisions. Yeah, yeah, definitely with the Celsius one, even when I was just writing questions for the show, I had so many more questions because there were like so many more kind of red flags or question marks there.

Starting point is 00:30:47 But with the Voyager, it seemed a little bit more straightforward, which is, you know, not to say that they didn't mess up hugely. but I actually will, I want to circle back to that question of how much people will be able to get, or rather Voyager will be able to get from 3AC, but first, a quick word from the sponsors who make this show possible. Is your Web3 experience hindered by inadequate crypto wallets and browser extensions? Ava Labs has created Core, a free non-custodial browser extension engineered for Avalanche users to have a more seamless and secure Web3 experience. The Best in Class Avalanche Bridge now offers native support for the Bitcoin network.

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Starting point is 00:32:19 full ecosystem support, along with up to $50,000 in grant funding to create DAPs in Defi, GameFi, or NFTs. Join the community of innovative developers today and build the future of Web3 with Oasis Network. Join over 10 million people using Crypto.com, the easiest place to buy, earn, and spend over 150 cryptocurrencies. Spend your crypto anywhere using the Crypto.com Visa card. Get up to 8% cash back instantly. Plus 100% rebates for your Netflix, Spotify, and Amazon Prime subscriptions. Download the crypto.com app now and get $25 with the code Laura. Link in the description. Back to my conversation with Wasi Lawyer and Adam. So Wasey Lur earlier when you were saying that a big part of what's going to determine how much Voyager customers get is what they can

Starting point is 00:33:17 clawback from 3AC. What is your sense there of how that's looking for people? Because we got a little bit of a taste, you know, a week ago on, it'll be a week by the time this comes out on kind of what assets 3AC has. It's going to be quite difficult to answer the question exactly. What we do know is that from the documents that sort of come out that there is at least $2.8 billion of claims against Trieros capital. right now. We do know that apparently it came on some of the sources that the liquidators have secured $40 million of funds, $40 million and $2.8 billion, pretty massive gap. On top of that, it does look like Trieros capital doesn't really have, it may be the case that they don't

Starting point is 00:34:06 have that many liquid assets. So I think we covered this briefly under the last show, Laura, what sort of assets would they have? They would have equity warrants, token warrants, tokens, tokens that are going to be vested. I mean, they probably hold a crap ton of Luna too. The yacht. Don't forget the yacht. $15 million a yacht, but I don't think it's been delivered yet. I have built yacht.

Starting point is 00:34:30 Yeah. So we've got a ton of NFTs. And one thing that's going to be quite interesting is how these. So what I read the recognition in filing in Singapore, maybe this is for the three arrows bit later on or the separate. there's the question of what happens to defiance funds and what happens to the Starry Knight's funds and what happens to this fund called Warbler. So what happens is essentially it looks like Tri-A-C have commingled all of their funds into under one single entity and it looks like Defiant and Starry Knight

Starting point is 00:35:02 and Wobler were actually managed by persons other than Trey-C. So it would be interesting to see how the liquidators rock up to these guys and say hand over everything. Your funds have been liquidated because you're part of a structure that has been so horribly mismanagan. I feel quite bad for those guys actually. Monsi, lawyer, you've been following 3A C more closely than I have. When the liquidators say they've recovered 40 million, that means that they have the, you know, it's either cash that they have control of

Starting point is 00:35:30 or they have the private keys for the digital assets. Not 100% sure on that one, but that's what this, that's come on to report. So they've recovered, quote, unquote, 40 million of assets. So I take it then that for all the other assets, assets, no one knows at this point, or at least the liquidators don't know, who has the private keys. I think it sounds like, and we have to read between the lines here, right, because this is all from the, for what the liquidators have told the courts of, you know, the US and Singapore when

Starting point is 00:36:02 they're applying for recognition. So what we do know is that it seems that Sue and Cal have not been very cooperative. And presumably, these are the guys that are holding a shit down of those keys. At some point, you expect them to play ball, but it does look like, you know, as of the date when the liquidators applied to the Singapore court, and they weren't very cooperative. And no one knows exactly where they are. Apparently, they're going to Dubai. This is like, yeah, we're all the people who are fleeing something in crypto and maybe they just paid off, maybe they just paid off the yacht and they're just sailing the seven sees now. Yeah, I think the yacht is still yet to be delivered and in Europe. Maybe that's

Starting point is 00:36:46 exactly where they're going. Because if you read the filings, they square out $30 million away to a typing Shan entity they're related to, $10 million to an unrecovered wallet. And the cost of the yacht is $50 million. Maybe the downpay most 20%. Hopefully at some point we will find out more on their whereabouts or if they end up in Dubai, we'll just hear about it. So I did also want to then circle back to this other question related to the one that the customer with the Bitcoin loan at Celsius had. So as you guys mentioned, in that case, likely that customer will get dollars back. And what's your sense of how likely it is that a lot of the crypto assets in any of these firms will be turned into dollars? And what's your sense of whether or not the customers would

Starting point is 00:37:32 prefer to have crypto assets versus dollars? Okay. I think just to jump in here first. I think there's a different process. This is a question that's very relevant to both, you know, all three of Celsius, Voyager, three AC. But again, to draw a distinction, three ACs in liquidation. So it's going to be liquidated. It's not going to exist as a company after the process is done.

Starting point is 00:37:53 Whereas Celsius and Voyager thought of Chapter 11, and what they want to do ideally is to continue as a business afterwards. So it may be the case that in the plan of reorganization eventually goes through that you get a mixture of crypto, you get distribution in kind, which is in crypto. or you get it in cash, whatever the plan turns out to be. This becomes a much bigger question for Triarros Capital.

Starting point is 00:38:15 Because if I've lent Bitcoin into Triero's Capital, maybe I want Bitcoin back. Maybe I don't want a US dollar amount. And there's a question of when I convert the Bitcoin to US dollars if the liquidators do choose to do so. So I've looked into this a fair bit, but I know Adam has been to say about it. So I'm just going to throw the mic over to him or opine on how this works, at least in the US. Okay, so in the U.S., there are kind of two pieces we have to look at. First is, what is your claim, and then second, how can that claim get paid? Regarding what your claim is, it doesn't matter what form you extended value to the debtor.

Starting point is 00:38:50 It gets dollarized as of the date of the bankruptcy filing. So for Celsius, you're looking at, you know, the value of the crypto that you were owed on July 13th. and presumably, you know, we can get it down to the minute of the bankruptcy petition. But, you know, if it's Bitcoin, it's around in the 20,000 range. Voyager on July 5th actually turns out to be right around in the same range. So if you had, you know, one Bitcoin parked with Celsius, you have a claim for roughly $20,000. And it doesn't matter that Bitcoin today might be at $23,000.

Starting point is 00:39:29 Your claim is for $20,000. So you don't get any of the market rise. On the other hand, the market falls, your claim is still locked in at 20. The problem is if the market falls, they just don't have the assets to pay you that 20. So this is either way, you get kind of rope it out here. Either way, it works badly for you. Now, that's the bad news on the what is your claim side. The better news for you is on how your claim can be treated.

Starting point is 00:39:57 A Chapter 11 plan can be a plan of reorganization or a plan of liquidation. Usually chapter 11 is thought of as being reorganization, but businesses of any size that want to liquidate will use chapter 11 because it's more flexible than chapter 7. Management stays in place in chapter 11 and chapter 7 it gets moved out. A chapter 11 plan can pay you in any form at once. It's just as law. It has to give you value that is at least as much as you would get in a hypothetical chapter 7 liquidation. but if the market that you know you that value is as of the effective data the plan so you just have to see what the market values they could pay you in bitcoin they could pay you in shitcoin the only question is you know do they have the votes for confirming the plan if you vote again this is a majoritarian rule exercise so it doesn't matter if you vote against a plan if they get the requisite votes and a plan is approved it binds all creditors regardless of what they want.

Starting point is 00:41:01 And to the extent you're not paid under a plan, there's no one you can try and collect from it afterwards. The debt gets discharged unless there's like a third party that you say is liable, it's a guarantor and hasn't gotten a release. Curiously, there are some interesting releases in the Voyager plan. Alameda gets a, is at least proposed to get a release. So if there was some kind of litigation claim against Alameda, that would be gone and creditors wouldn't be able to try and collect from SBF.

Starting point is 00:41:35 Oh, wow. I guess that's maybe because I think they were an investor in Voyager. So is that just something they negotiated from? I assume that this was kind of, I mean, they have, they're kind of wearing all the hats. They have, like, they're the single largest equity investor with, but it's like a nine and a half percent position. they are the second largest loan counterparty, and then they also extended credit back the other way with $75 million, which under the Voyager plan seems to be classified separately and basically just canceled out. Okay.

Starting point is 00:42:14 And yeah, because I thought there was something about the way that it was structured where it was meant to prioritize the customers, but then it like didn't they didn't implement it or something like that? I don't know if the loan agreement looks like that. That's certainly consistent with how the Voyager placeholder plan treats it, that putting in a separate class than customers and then saying that it gets paid nothing would be consistent with that kind of treatment. But I don't know if there was some contractual agreement before the bankruptcy about that.

Starting point is 00:42:53 So I believe there are customers writing in saying that they would prefer that their crypto assets not be dollarized. Do you think that any of the bankruptcy judges or anyone really involved in the bankruptcies will have a sympathetic ear to that? Or do you feel that they'll just follow what the law says? It's not the judge's call on this. The judge doesn't decide what the contents of the plan are. the judge just says yay or nay about whether the plan is confirmable.

Starting point is 00:43:25 So ultimately there's going to have to be a plan confirmation hearing. It's like a little mini trial. And the judge is going to have to decide whether the plan meets a whole list of criteria. And if it does, then the judge doesn't have any discretion about confirming the plan. Even if the judge thinks the plan is a bad idea. Like, do you feel that they'll be sympathetic? No, the decision is made by, you know, just simply voting against the plan. The account holders, the unsecured creditors can simply say this plan doesn't work.

Starting point is 00:43:56 We want a different plan. But as long as there's plan exclusive, the plan, as long as the debtor has plan exclusivity, it's the debtor's call what's in the plan. So the debtor right now is determining what's on the menu. Right. And you can decide whether you can decide whether you want to order or not what's on the menu, but it's a collective decision. You're bound by the collective.

Starting point is 00:44:16 once plan exclusivity lapses, then any creditor that wants can come in and propose a plan. And how long is that period? Up to 18 months. 180. It's extendable up to 18 months, though. Yeah. So how likely is it that you think Celsius or Voyager will be sympathetic to that desire and make that part of their plan? So, Laura, I think it's incredibly, incredibly difficult for anyone administrating a bank

Starting point is 00:44:46 of a state to start dealing in all these different currencies. So I think it would be quite difficult for them to figure out, you know, this whole returning Bitcoin, returning Eve, returning all of these various coins along US dollars. So it'll be difficult. I'm not sure how, I'm sure it'd be quite different because in the Trieros case, it has to be dollarized at some point. With the Chapter 11th, I think you'll just be administrated.

Starting point is 00:45:16 difficult to deal with so many different crypto assets? I think that's a really important point, the administrative difficulties, but also if you're holding all these crypto assets, you're holding assets that are quite volatile. And yes, they might go back to the moon or they might fall. And if you think that you're putting your hat on as a fiduciary for creditors and shareholders, that probably pushes for dollar rising. and just making, you know, selling off all the crypto, do a slow sell-off so you don't crash the market and push down your own prices. But do a slow sell-off, turn it all into dollars and pay out the dollars.

Starting point is 00:45:58 And that's certainly the easiest way to do it. You can imagine there will be some unhappy customers with it. But once if you've dollarized it before you propose a plan, then there's really, there's not much the customers can do to complain. Right. There is no crypto left. Right. I mean, I just think what you said about being a fiduciary, that's like seeing it from a non-cryptop person's perspective because the reason that these people want to keep the crypto assets is because they don't care about the dollar value. They care about the crypto.

Starting point is 00:46:29 So it's like one-eath is one-eath, and that's more valuable than any amount of dollars. So for them, it would be like, well, I don't care what the dollar value is because, you know, I just want the Eith. But anyway, I mean, I understand what you're saying. I would say that for a typical, for a typical kind of hold on for dear life. person. I think that's true, except that's not the, if you're putting your money in Celsius or Voyager, it's because you're looking to get a dollar return. Maybe you take it, maybe you're willing to take the payment in kind in, you know, there's a Celsius token, but ultimately you're looking to get a dollar return. So this is a, this is a different kind of investor than someone who's just

Starting point is 00:47:12 buying Bitcoin and hoping that the market's going to go up. This is actually the type of investor that's a little more risk averse because they want the fixed dollar return rather than just watching the commodity price go up and down. This is a much bigger issue with Triero's capital, actually, because of the investor profile there and how this thing is going to play out. And so I've thought about it as a fair bit and sort of shout out to Gone Be Good because it's been discussing this with me

Starting point is 00:47:39 and it's come out some pretty amazing ideas and thoughts about how this would play out. Because what you have is now you've got investors that a lot of them, I mean, from all of these sources, it shows them extending BTC denominated loans. These are large, large amounts of Bitcoin. And when three arrows went to liquidation, Bitcoin was trading at what, between the 80 to 20K range, closer to 18 probably. And since then, Bitcoin has rebounded a bit. And over the next two years plus, plus, whatever, how long with liquid,

Starting point is 00:48:09 liquidation takes, Bitcoin price could very well recover. So according to, and this is based on a very brief read, I am not a BVI lawyer, but based on a very brief read of how BVI insolvency works, if you've got loans and other currencies, you have to change it to US dollars when you found a proof of claim. So you have to dollarize it. And this is something that people will sort of be thinking about going, I don't really want to have my Bitcoin denominated loans, you know, essentially liquidated at 18k. And then two years later, Bitcoin's like 100K, maybe sue is right, and the super cycle is a real thing. So that's an issue.

Starting point is 00:48:46 And sort of shout out again, gone and be good here. He sort of went well, but if you looked at Bitcoin or his crypto assets as a commodity, then what you're suing for, it could be suing for non-delivery of a commodity. And that is a contractual claim. It's not a liquidated claim. So there isn't a number to it at the moment. But then this still opens. So this opens the door possibly.

Starting point is 00:49:09 to you getting maybe possibly bits of the upside if Bitcoin recovers. But at some point, this unliquitted claim still has to be dollarized. There needs to be a number ascribed to it. And it's a question mark as to when that point of time is, if you ask me, probably requires a lot more thinking around contract law and individual circumstances, etc. Now, listeners might be wondering why if this is the British Virgin Islands, you would dollarize to U.S. dollars. And it's because the British Virgin Islands have used the U.S. dollar as their official currency since the 1950s. It's a weird, weird situation, but I think it's just about geographic proximity.

Starting point is 00:49:54 But based on my reading, it doesn't look like Bitcoin is defined as a currency or as money under the BGI legislation. So the sort of commodities-based interpretation could be could hold some weight here. Oh, interesting. Well, so we'll have to see how that plays out. One other topic that I wanted to be sure that we talk about is there might also be a possibility of clawbacks of pre-bankruptcy transfers. Oh, yes. So, yeah, what kinds of transfers would be classified that way? And then how would we determine whether any of those should be clawed back?

Starting point is 00:50:28 There are two categories that, well, actually three categories that are worth talking about. Probably the most important from a customer perspective are what are called voidable preferences. And the idea is that certain transfers made to creditors in the 90 days before bankruptcy can be unwound. And if you're an unsecured creditor, the transfer is unwindable. There are some defenses. and the most important ones are there's a de minimis amount that it's just not worth litigating over. And then there is an ordinary course of business defense. So if the transfer was in the ordinary course of business of both the debtor,

Starting point is 00:51:13 so if you took money, if you withdrew money from Celsius, let's say, that's a payment to a creditor because Celsius owed you money. You withdrew your funds in the 90 days before bankruptcy. That might be in the ordinary course of Celsius's business to pay withdrawals, right? That happens all the time with presumably with Celsius. But it also has to be in the ordinary course of the customer's business. And that's where I think there's an interesting question. It's not weird to think that a customer might withdraw funds at some point.

Starting point is 00:51:48 but if the customer had been holding funds, holding funds, holding funds, and never withdrew until this one moment, I think it's kind of hard to say that withdrawing funds is actually in the ordinary course of the customer's business. So I think that's an issue. The court will have to figure out if Celsius or Voyager pursue these avoidable preference actions. And I think they're likely to do so because there's a substantial pool of money that could be clawed back that way. Once that money is clawed back, if it is, then the folks whose money got clawed back, they have unsecured claims in the bankruptcy. So you thought you got out before the bankruptcy, and if you didn't get out in 91 days before the bankruptcy or more, you might get

Starting point is 00:52:37 dragged back into the bankruptcy. That's the most important group. There are two other things that can be clawed back. Another thing are what are called fraudulent transfers. It doesn't have to be actual fraud. This is just, you know, transfers made to hinder, delay, or to fraud creditors. I don't think that really exists with Voyager, but maybe with Celsius, especially with transactions, with insiders. Maybe there's something there. And then the other really, really interesting thing in the background for Celsius is going to be the treatment of the redemptions of the defy loan collateral. So defy loans are characterized as being collateralized. And we think collateral, oh, it's a secured loan.

Starting point is 00:53:21 Well, it's certainly functionally secured, but bankruptcy law doesn't care about functional security. It cares about whether a loan, whether if there is something like a security interest, has it been perfected? And that's a term of art, meaning that you've taken certain legal steps that lock in the priority of a security interest. If a security interest has not been perfected, it can be avoided. it's gone. It just becomes unsecured. These defy loans seem to have been secured through just basically a smart contract protocol. That's not going to cut it with bankruptcy. That means that they can be treated as unsecured loans and therefore because they were unsecured loans, you can treat the redemptions as preferences and you can claw back the redemption payment. The problem is these defy protocols,

Starting point is 00:54:16 who are you clawing it back from, right? It's going to be a freaking mess. Yeah, you try, like, there's going to be a huge mess figuring out how, if at all, it's possible to claw funds back from a DFI protocol. I don't know what the answer is, but there is potentially a lot of money at stake and that, you know, if this were $10 million, it might be this isn't worth figuring out. But when you're talking about hundreds of millions, then there's, a lot of pressure to figure out a way to claw back money from everyone who uses a DeFi protocol.

Starting point is 00:54:54 I mean, like, just from the perspective of the smart contract itself, my answer is like, that's not possible. Do you know what I'm saying? Funds can be, well, especially with ether, it's quite easy to track balances, right? You see where money, you know, everyone who put money into a pool, you see who they get the money out of the pool. I think you can trace that. Now, can you actually figure out who own those wallets? Right? That's another mess.

Starting point is 00:55:22 Yeah, and that's incredibly illuminating. To be honest, I've never really thought about the defy loans in that way. It kind of went, oh, well, I guess you're all good for them. They over-caladualized. They managed to get out. But the way you're sort of framed it, I think you're absolutely right, that there would be subject to some sort of clawback claim there. And how you do a clawback against defy protocol,

Starting point is 00:55:46 and DALs, Laura, I think we're going to need about three hours. I'm going to be on three hours and a couple of days of research, and then I'll let you know what could work. The Unincorporated DOWs might be treated as general partnerships where everyone involved is jointly and severally liable, or maybe they're not. I mean, it's... Yeah, Adam, you need to be careful saying that about everyone in the Dow being jointly,

Starting point is 00:56:11 it's very liable because maybe you're giving the U.S. tarot holders an idea about suing every single looter holder in the world. It may not make sense to sue everyone, right? You only sue the deep pockets. It's ultimately going to depend on how a DAO is set up. If a DAO is, you know, some DAO actually have incorporated entities and some don't. And the general partner argument is only for the ones that where there's nothing incorporated. I have to say, even for the beginning part of your clawback description, it sounds like

Starting point is 00:56:39 that would just require human individuals, you know, to send back these crypto assets. which, like, you can't, you know, like those famous instances of, like, people being arrested and then they won't reveal the private key. Like, I mean, I mean, that even just sounds super messy. Well, if you, yeah, it's messy, but the, you know, courts do have the power to hold people who do not comply with court orders in contempt. And that means, among other things, you can, you can, you can put them in jail. Right. I'm just saying that, like, plenty of police have arrested people who still refuse to give about their private keys.

Starting point is 00:57:16 Yeah, I think practically it'll be very, very difficult. But theoretically, you could get a court order and saying pay this amount back. And, you know, if you don't, you're in contempt of court, potentially you could go to jail for it until you review your private keys, pay our monies, potentially. Yeah, I'm just saying, like, you know, it doesn't sound easy to do.

Starting point is 00:57:39 The smart contract to me sounds like nearly impossible, but people are difficult in their own. way, different from some of contracts, but even a two-year-old can be really difficult to manage. But anyway, one other thing that I was so curious about what Celsius was, as everybody has noted, on its balance sheet, they said they valued their CEL tokens or sell tokens at $600 million. That was insane. Yeah, that was insane. Absolutely insane. Yeah, so, I mean, I've tweeted about this. I think the whole is actually $1.8 billion is no $1.2 billion. I can just create your own shit. or describe it 600 million when the market cap is nowhere near that.

Starting point is 00:58:18 Yeah, the market cap is about 215 million. Yeah, something like that. Yeah, or at least when I wrote this script, 215. So I was just wondering, like, first of all, would the bankruptcy kind of judge or whoever's kind of looking at this, would they just consider that like blatantly lying or is there some way to explain how this number could be justified or like what's your take on what they did there? Where it stands right now, it doesn't really matter with a, with, you know, those numbers, those numbers in the Michenski Declaration.

Starting point is 00:58:50 When they, if and when Celsius ever proposes a plan, a plan that's going to need a disclosure statement. And it's going to need to have some discussion about what its assets are and it's going to have to explain itself if it's putting any value on the Celsius tokens. Okay. So at the moment, this is why it sort of seems pulled out of thin. and not even related to the market capital? Yeah, I mean, as Michinsky said, you know, he puts in a little graphic in the declaration of unaudited, high-level financials. Okay.

Starting point is 00:59:28 Yeah. So then the other thing I wanted to ask about this plan was Celsius's intention to basically save itself by mining a lot of Bitcoin. But they need the court to approve them finishing building out the mining center. First of all, was your sense? of how likely it is that that will be approved. How feasible do you think this plan is at helping Celsius recoup its costs? And yeah, just like, I don't know.

Starting point is 00:59:53 A part of me when I was reading all this, I was a little bit like, I feel like a lot of this is so similar to how they ran their business. You know what I'm saying in terms of like the pie in the sky? Yeah. But I was curious to hear your thoughts. Laura, sort of reading the whole thing, it does look like what Celsius has done is they just want to build a mining business. and they've taken a ton of funds from depositists

Starting point is 01:00:16 and basically just channeled all of it into the mining business and they're hoping that this is this mining business is going to take off. I think they're considering an IPO and then they will all magically pay out and then we will pay back off deposit this loans. I think they think that this is how they'll recoup their losses. But anyway, or at least that's what they're claiming. On the initial reading, it almost seems like if you're deposited to Celsius,

Starting point is 01:00:39 you were investing in their mining business, to be honest, just on initial reading. Oh, I think more than that. I mean, so usually you look at the financials of mining companies, and usually they have a good deal of debt that is just to fund the acquisition of their mining rigs. Celsius doesn't have that debt. And at least that's, you know, usually it's done as basically a lease of the rigs is the way it's structured. The reason they don't have that debt is because they finance the rigs with customer funds. So in some ways, that's the good news for Celts.

Starting point is 01:01:12 is a mining business. The rigs don't seem to be collateral for anyone. What's not clear to me is how high Bitcoin prices have to be before for their mining business to be profitable. If Bitcoin is at 20,000, the cost of production might exceed the value of any Bitcoins they can get. So profitability of the mining business is hugely dependent on the price of Bitcoin. And then the problem that all miners have is that it's an arms race. So there was just an announcement this week that one of the rig manufacturers had been able to come up with a next generation, even more energy efficient processor. And I don't know how big the savings, the energy savings are there. But one possible implication is everyone who's just invested hundreds of millions in mining,

Starting point is 01:02:06 rigs, but outdated technology that won't be able to compete. And they're going to have to put in more money to buy the next generation of rigs. It's an iffy business. And one of the challenges any crypto company is going to have in a bankruptcy is that a bankruptcy plan cannot be confirmed by a court unless the court finds that the plan is feasible. This doesn't mean that the plan is a surefire thing. It's going to necessarily work. But it basically has to be that it's more likely than not that the, that the, that the,

Starting point is 01:02:36 plan is going to work, then that the company isn't going to need to be back in bankruptcy needing further financial restructuring. And if you have an industry where the viability of a business is so heavily dependent on swings and asset prices, that gets trickier. It's not unprecedented. We have that with like oil and gas, for example. But here, the mining, it presents a real challenge given that oil and gas, it's not unrealistic. The volatility of oil and gas prices is small compared with Bitcoin, say. Another thing I wanted to ask about was this KFai lawsuit. We briefly mentioned it earlier.

Starting point is 01:03:23 For listeners who don't know, it was filed by Jason Stone, who's a former money manager for Celsius. They did not have a formal contract between them, but he was handed. handling lots of money, hundreds of millions of dollars. Don't you find that funny itself, right? Here's the money manager who's going to manage, you know, enormous sums and yet can't be bothered to have a formal contract. I was having crypto capital deja vu. Do you know what I'm talking about with the Tether case?

Starting point is 01:03:53 Like Tether ended up having to loan hundreds of millions of dollars to the parent company because they had entered into some business agreement with crypto capital. which was like a sort of shady business in Europe and crypto capital had hundreds of millions of dollars of theirs and for whatever reason got tied up in some kind of, I forget, regulatory governmental, something or other. And so Tether ended up giving this massive loan to IFNX as the name of the company. And the New York AG called them out being like, you're saying that you're fully backed, but you just lent all this money out. And so in the end, they just, I think, had agreed to like give

Starting point is 01:04:32 transparency reports after that, but I think they might have had a small fine. But anyway, point is, there was no contract between iPhone X and crypto capital. So it just reminded me so much of this. But essentially, Jason Stone, who also, by the way, was like a non, it was what was this? It was like zero X1BT or something. He was like a popular Twitter account. But he alleged that Celsius manipulated markets and didn't institute basic accounting controls. He also accused the lender of being a Ponzi scheme. He cited certain instances where, for instance, he knew that they had taken a loan from Tether paying X amount of interest, but then were promising customers that they could earn even more in interest, which literally makes zero business sense. But anyway, so he's now suing for

Starting point is 01:05:22 damages for an amount to be determined at trial. And I was just wondering, how likely is it, Do you think that Stone sees any money? And how would his claims be prioritized against that of customers? So this is, first of all, just to point out, this is probably one of those asset deployment decisions, which in hindsight proved problematic. Obviously, absolutely ridiculous that they are managing this ludicrously large amount of money without a formal contract. So that bit of it is probably true because if it weren't, Stalcis would have called it all. all the garbage. The rest of it, I'm having for Adam to sort of expand on it. But if what is

Starting point is 01:06:04 being alleged true, it's obviously things of terrible, terrible mismanagement. But then again, this is this is a one-sided statement at this point. So we have to see how this one plays out. Yeah. Unfortunately for Stone, even if everything he says is true, all he is is a general unsecured creditor. And he stands at the back of the line with all the customers. The fact that he filed a lawsuit doesn't get him anything special. Okay. So we're going to try to do the last few questions sort of in a rapid style. I was wondering for the state regulators that are now investigating Celsius, if there's

Starting point is 01:06:44 any enforcement action or anything, I'm just wondering how will that affect the bankruptcy or I don't know if they're just kind of unrelated or what you see there? Depends what they're seeking. bankruptcy stops any attempt to collect money from the debtor, but if the state regulators are seeking, let's say, a cease and desist order or something is some sort of prohibition on Michinsky engaging in business in the future, right? That's not stayed by the bankruptcy. They would be able to proceed just in parallel with the bankruptcy then. Okay. And something I was just curious about was a lot of people are taking issue with how both Celsius and Voyager, did marketing. It's been called out, for instance, that Alex Mishinsky, the CEO of Celsius, often wore a t-shirt saying, banks are not your friends when, you know, clearly Celsius is like a type of bank. Or the day before they paused the withdrawals. He tweeted at someone who had been

Starting point is 01:07:42 saying, like, hey, I'm hearing people aren't able to withdraw from your platform. And he tweeted back, do you even know one person who has a problem withdrawing from Celsius, why spread FUD, fear, uncertainty and doubt, and misinformation. So, you know, things like that versus like Voyager talking about your funds are like your USDA is FDIC insured, which now the FDIC is actually investigating this. So, you know, do you see like kind of issues with marketing playing any role? I was going to briefly see a huge slew of potential misrepresentation claims across the ball. And because of the way all of these companies operate, right? And I'm not saying just Voyager's Celsius, but also Tri Arrows Capital, even Terra, it's basically entirely based in customer

Starting point is 01:08:27 trust and confidence. And when you're running out of liquidity to start paying off people, what you see all of these guys do with Celsius, with Voyager, and you go back further with 3AC, from the findings, you see sort of Jew and Cal and the employees telling their counterparties, and then you go back further to Doe Quod sort of tweeting, right? What you want to do is you want to try and maintain confidence and make sure that people don't all start leaving. Because when they all start leaving, you have a real problem because they're going to have a background. But then there's a sort of question of how accurate the information that you sort of put out in order to stem the background. And I think this is a question that will take a while to be decided.

Starting point is 01:09:09 There's certainly the possibility of misrepresentation claims. Some of them might be against Celsius and some might be against Ms. Shinsky himself. to the extent that it's a claim against Celsius, I don't think that gets that, that changes anything because if you, Celtsis already owed you $100,000, how are you harmed by the misrepresentation that you didn't yank the money the day before the bankruptcy when it would have been clawed and when it probably would get clogged back anyhow? I don't think it changes what your claim is in the bankruptcy. It's sort of like, you know, two, two breaches of contract don't get you anything more than one

Starting point is 01:09:47 reach of contract. Where it may be different, though, is if there are misrepresentation claims against Mishinsky himself and where he is personally liable, those would not normally be covered by the bankruptcy. That's not a claim against SELCES. It's a claim against Mishinsky. Presumably, any SELCESB bankruptcy plan will have a third-party releases in it, which will deem SELCIS's customers to have released various third parties, including Mishinsky. But that's going to be a hard-fought issue. And lurking in the background is the U.S. law on the on the on the availability of third-party releases may well change before this bankruptcy is finished. And this is, this is a really hotly contested issue in Purdue Farma's bankruptcy with the, the Sackler family.

Starting point is 01:10:42 There's an appeal pending of that right now. And we could see a, We could very well see a change in the law that would limit Mishinsky's ability to get a release in the Celsius bankruptcy. Okay. And I did have people tweeting, asking things like whether any of the co-founders or CEOs of any of these companies. So, you know, Mishinsky or Stephen Erlich of Voyager or Kyle and Sue, what are the odds that any of these people does in a jail time? And you did a question that's going to come up. And right before this, I went and gave myself a 10-minute primer on what Singapore laws look like when it comes to sort of criminal liability for all this.

Starting point is 01:11:26 I'm not that sure about the US, but based on what has actually come out, there's a few ways this plays out. First of all, the Monetary Authority of Singapore has sort of issued a reprimand to the trierals founders. Wait, and just one quick question. So I believe Sue and Kyle are American, but you were saying it's just because three airless was based in Singapore? They were in Singapore at the time they were doing these things. So presumably Singapore criminal law would apply because they were operating Triaros capital out of Singapore. They were the MAS, Montreal Authority in Singapore, issued a reprimand to, I think it was Sue and Carl, maybe just three arrows, saying that they had breached the Securities and Futures Act, I believe. the provision referred to potentially carries a jail term of up to two years, if convicted, if convicted,

Starting point is 01:12:14 that's the main point. Under the general criminal law, I think the UK you have a quite fraud, but I think in Singapore, it just comes as a general category called cheating. And I'm just going to read it out because I've been in front of me. By deceiving any person, whether or not such deception was the sole or main inducement fraudulently or dishonestly induces the person deceive to deliver or cause the delivery of any property to any person

Starting point is 01:12:43 or to consent that any person shall retain any property or intentionally induces the person deceived to do or omit to do anything which you would not do or omit to do if you are not so deceived. And which act or omission causes or is likely to cause damage or harm to any person

Starting point is 01:12:59 in body, mind, reputation or property is it to cheat? So that is a complete. mouthful and sorry for sort of inflicting that on everyone, but essentially there is a question of whether some of the behavior, which you see the correspondence to the affidavit that came out from the 3A liquidators, that Sue and Carl may have sort of misled their investors as to the state of the company, as to the state of the finances of Triarros Capital, and therefore induced these customers to keep their funds within Triarro's capital when they other minds wise might have put it out.

Starting point is 01:13:38 And this is, and this sort of comes back to the sort of article we're discussing earlier before this call, right, where Sue and Carl said the vendors were comfortable with a financial position, but the fact is, based on everything we've seen from all of the WhatsApp messages and discord messages and telegram messages and whatnot, it looks like they just straight up lied about their exposure to terror and their financial position. So there's a question there. But the issue with this criminal stuff is who actually brings the claim. And I Google this and I read through this very briefly, the prosecutor in Singapore is to bring the claim. So the attorneys general chambers is to bring the claim. And they have a discretion as to whether or not to bring it. And this

Starting point is 01:14:21 discretion to be based on, you know, how likely things are going to succeed, you know, whether it's public policy, it's the best interest of, yeah, public policy, et cetera. So the The mitigating mechanism of whether anyone's got to go to jail is whether or not the attorney's general chambers actually decides to prosecute. Okay. Yeah. And I think the blockchain letter sort of would be another piece of evidence, or at least that's what they seem to be trying to imply blockchain.com in terms of the deception.

Starting point is 01:14:52 And so maybe, Adam, you can answer for Mishinsky, because I believe Stephen Erlich probably is Canadian. The fact that their citizenship is not going to determine what law applies. Right. And it's, so, and it's, there could be criminal violations potentially in more than one jurisdiction also. You've got, I think you need to divide this into pre-bankruptcy behavior and behavior in the bankruptcy. For pre-bankruptcy behavior, three euros capital, yeah, there's some indications that there might, there may have been, there may have been fraud, whether that arises to the level of criminal fraud in Singapore or in the U.S., you know, if you have kind of an

Starting point is 01:15:37 underlying fraud, that can then be the predicate for wire fraud or mail fraud. Those would be federal prosecutions. I have no idea if there's any interest at this point from the Department of Justice of even touching this stuff. Celsius also, if you know, if you look what's in the Keefei lawsuit, There's some implications of fraud there, too. And that, you know, if I were Michinsky, I'd be a little concerned about that. And then Celsius has another weird problem. And I think 2018 or 2019, Celsius entered into a consent order with the state of Washington for engaging in unlicensed money transmission, among other things.

Starting point is 01:16:19 And the consent order basically, Celsius just promised it wouldn't do that in Washington anymore. and Salsis stopped taking, having Washington, state of Washington accounts after that. Consent order doesn't really spell out what Washington thought constituted the money transmission. But presumably, if it was unlicensed money transmission in Washington, it would also be that in many other states. And SELCIS doesn't have a money transmitter license. It is a federal felony to operate a money transmission business in the U.S.

Starting point is 01:16:52 without a state license. So there may be another problem there for Celsius. Again, it would require the Department of Justice to actually think this is worth pursuing. And they may just say, you know, look, we've got plenty of other fish to fry. Why get into this whole crypto area, which is politically charged and, you know, let the market sort it out in some way. That's all the pre-bank. They seem to like doing the crypto cases, in my opinion. But anyway.

Starting point is 01:17:21 They like doing the, like, the hat, you know, the, you know, the, hacker cases or the, you know, where it's in the money laundering cases. This is different. That's the pre-bankruptcy stuff. I don't see anything with Voyager yet that indicates anything other. Voyager just seems stupid, but not criminal. You don't go to jail for being stupid. Otherwise, this country would look very different. So, but there's also that what the question, what happened? In the bankruptcy, the, if you knowingly and fraudulently conceal assets. or books and records related to assets from any basically custodian or officer of the court, that is a bankruptcy crime in the U.S. And that might be a problem with three arrows, right?

Starting point is 01:18:11 If they don't turn over the private keys, that, you know, that arguably that's knowingly and fraudulently withholding from custodian or other officer of the court, any recorded information related to the property of financial affairs of a debtor. You can be looking at up to five years of jail time for that. The hook for the, for U.S. law there is that there's this Title 15 case that got filed in the Southern District of New York. And Title 15 cases are really meant to just kind of be a mechanism for coordinating

Starting point is 01:18:48 bankruptcies that are primarily outside of the U.S. the main show is not New York, but to the extent their assets in New York, it creates a coordination mechanism. But that's enough to trigger U.S. bankruptcy crime statutes. Given that the main show is outside the U.S., I don't know if anyone's... I'm happy to sort of jump in here, because I'll just scrolling through this. And yes, there is a criminal offense for dishonest and fraudulent removal or consumer of property to prevent distribution of creditors. So there absolutely is the equivalent in Singapore, and we expect most of the rest of the world. So if they start being incredibly, incredibly non-cooperative, it may seem that they may have to run off to Dubai or somewhere else just to stay out of jail.

Starting point is 01:19:37 Although there is a question of whether there is in Dubai. I don't think Dubai has an extradition treaty with you. No, it doesn't. I've looked into this one. It doesn't have an extradition treaty. Yeah. I mean, so I don't know if you saw it in the Bloomberg article. are in the process of moving to Dubai.

Starting point is 01:19:54 So what does that say to you? They're worried. Yeah, they want to get away from Singapore. They want to get away from the MAS. They definitely don't want to be the U.S. They just want to be, I mean, Dubai is like the place where you go to is, I mean, it's got a pretty dodgy reputation, right? A little bit.

Starting point is 01:20:15 Oh, yeah, I don't like. Nothing that can't be cured by sponsoring. some soccer teams. Okay. Then how long do you expect each of these bankruptcies to play out? Two to three years, I think. Yeah, two to three years is probably probably probably. These are not going to be fast.

Starting point is 01:20:35 I mean, it's hard to give a real accurate guess at this point, but two to three years, I think before we see a plan confirmed. How long it takes for all the assets to be fully administered, fully administered? that could take much longer. Yeah, I think the sort of precedent that we may have for this is, I mean, just look at the Mount Gog's stuff, right? It's taken absolutely years to play out.

Starting point is 01:21:03 Was it 2014 something? Like, way before I even did anything crypto-related or knew what crypto was, that's when it all happened. On the Mount Gog's thing, actually, there's a fairly interesting point here, given the length of time it took because I believe the Bitcoin

Starting point is 01:21:20 they were sitting in Mount God. This goes back to the question we're discussing probably close an hour earlier. The Bitcoin in there appreciated massively in value in the last eight years or so. And it looks like they've actually come to a fair distribution where that there has been some sort of civil rehabilitation proceeding such that the creditors seem to be able to enjoy the upside rather than the company's magically becoming solvent, mainly just by Bitcoin price appreciation. So this may be good news for the 3 AC creditors.

Starting point is 01:21:54 Maybe there is a solution somewhere where you don't get liquidated at 18K when Bitcoin goes to 200k or whatever it is we're hoping. Do you think it's likely that Celsius and Slash Voyager or either one of them will eventually be up and running again as a business? Unlikely. And Watsy lawyer, do you have an opinion? I don't know. It depends.

Starting point is 01:22:18 They clearly want to. They clearly want to because it's chapter 11. But I think Adam's comment is coming from, yeah, the fact that, you know, you need confidence to operate this bank. The filing of 11, yes, they may want to, but you also, even if they, even if Kirkland and Alice looked at this and said, you have no chance of reorganizing, they would still file them for 11, not for 7. Oh, I see. Okay. last question now truly. As you all know, co-founder Sue Zhu of Three Arrow's Capital said that he was creditor of Three Arrow's for $5 million. And co-founder Kyle Dabee's wife, Kelly Chen, said she was owed

Starting point is 01:22:58 $65.7 million. What's the likelihood that Sue and then also Kyle's wife receive anything as creditors? To be honest, it depends on the nature of the loan agreement or of this arrangement. it could not be a legitimate loan. It could be just them claiming that they were owed monies. Because the evidence we've seen that sort of put out is a very short email or document and literally says, okay, we confirm that we owe you this amount of money. Can the shareholder legitimately be a credit of a company?

Starting point is 01:23:30 Yes. Is this the case? We don't know. Is it likely they're going to be net up out of all this? I really doubt it because we can go into this more detail, but don't really like keep Adam with all of the potential clawbacks against Cowan Sue.

Starting point is 01:23:43 I could go on all day about it. You know, potentially wrongful trading, fraudulent trading, unfair preferences, which operates in a very similar way to what Adam described early on, breach of directed duties. There's a whole list

Starting point is 01:23:58 and there's the personal claims that are going to be showing up against them as well. So, yeah, I think we'd probably need more information there. But could it be legitimate? Yes. But is it really? we don't know. You know, I don't know enough about British Virgin Island liquidation proceedings to know how they would be treated. I can say that in a U.S. bankruptcy case, you know,

Starting point is 01:24:20 there is first the question is, do you actually characterize the relationship as a loan, as Wasey lawyer was saying? Or do you say, well, it's actually more like an equity contribution, or maybe it's just bullshit and there is nothing there? But even if you say it's a loan, you know, you would expect to see insiders, in a Chapter 11 case, you'd expect to see insider positions classified separately from other predator claims and probably subordinated, which means in this case, you know, it would be getting nothing. So I would expect for Celsius, for example, that Celsius insiders are going to be put in a different class and will get no recovery. that I can't imagine Machinsky walking away with a penny from Celsius. Adam, can I ask you one question, please? I'm sorry, I've been dying to ask you this question.

Starting point is 01:25:11 On the Voyager sort of draft, the way they've sort of set up the credited classes, is there where they've segregated account holders from unsecured creditors? Is there a world where, you know, because of you guys having cross-class cram down, do you guys, is there a world where account holders say, no, this is a terrible deal? and the secured credit is in the right majority and they get a cram down of the plan. Is that what would that happen?

Starting point is 01:25:35 Yes. You only need one. So bankruptcy voting, there are two ways you can confirm a bankruptcy plan. You can confirm it consensually or with what's called cram down. And that's the plan being crammed down the throats of the non-consenting creditors. We also have a technique called cram up

Starting point is 01:25:55 and you can imagine what that might be. with a consensual plan, it's a little bit of a misnomer. It doesn't mean that everyone agrees to it. It means that every class that is impaired has voted for the plan by a requisite majority. A cram-down plan, in contrast, needs only a single class voting for the plan. And that single class could even be a class that has one creditor in it. There are rules on how you can classify creditors. there's some restrictions.

Starting point is 01:26:28 But you could have a class, maybe it's vendors, or maybe it's a class just of small claims that votes for the, that votes for the plan and they force it down on everyone else. That's entirely possible. All right. Well, we will have to see how it all plays out. So, you guys, this has been an amazing conversation. I so appreciate that you shared your knowledge.

Starting point is 01:26:53 Where can people learn more about each of you and your work? Yes, I mean, I'm an anti-animate penguin in a suit. You can follow me on Twitter, wassy lawyer. Sometimes I'm also a lawyer. So you can follow me on Twitter, too, at Adam Levitton, or I also blog at Credit Slips.org. And otherwise, you can read my scholarship. You can find it on SSRN. Most relevant for this area is a forthcoming article with the very original title of not your keys, not your coins. But it's 70 plus pages of detail about how we might characterize custody relationships

Starting point is 01:27:37 with cryptocurrency exchanges and brokers. And that's coming out in Volume 101 of the Texas Law Review. All right. Well, it has been a pleasure having both of you on Unchained. Awesome. It's been fun to have being here, Laura. Thank you. It's been a pleasure.

Starting point is 01:27:52 Thank you very much. Thanks so much for joining us today to learn more about Adam and Wasey, check out the show notes for this episode. Want exclusive access to even more unchained content? Subscribe to my Bulletin newsletter for weekly roundups and interviews you won't see on the podcast. Visit laura shin.b bulletin.com. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Matt Pilchard, Bonnaranavich, Pam Majimdar, Shashonk, and CLK transcription. Thanks for listening.

Unchained - Why the Messy 3AC, Celsius, and Voyager Bankruptcies Will Drag on for Years - Ep.377

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