Global Legal Fallout From FTX

in the hopes of yielding extreme returns. In some cases with people with their hard earned savings, people allegedly wronged by crypto are increasingly turning to the law for redress. The only problem is how do you fit something so new into laws that are often centuries old. That's the conundrum that lawyers and creditors are confronting in the case of ft X, the crypto exchange that collapsed into bankruptcy

last year. In this episode, we discussed the legal complexities underlying the ft X bankruptcy and how the rules change across jurisdictions from the sunny Bahamas to the cloudy skies of England. Today I am joined by Fisa Osman, a UK barrister. My practice is a cross border litigation and asset recovery with a spin on crypto related matters, and Way Lawyer, a pseudonymous animated penguin who in real life is actually a lawyer at a top UK law firm.

Way Lawyer asked not to be identified by name because he's not authorized to speak on the record by the company he works for. I mean, the reason that anonymous is largely because this is a lot of fun. Being darks is such a big deal. In two you go, oh, you know, you know the farming team, But it turns out they all scan do you anywhere? And when do we did by? And I finally quite musing that one of the leading cryptal Twitter authorities. It's just a penguin

in the suit. So let's set the scene so fire style. When the Bahamas based fd X filed for bankruptcy in November, it kicked off a chain of events that in brold quite a few different legal systems. Can you explain a bit for us what that mishmash looks like? You know, where are we talking about here? Well? I think mishmash

is probably exactly the right word. Although orbit not a technical term, it's probably the best description you can get as we know, if I can call it if you like, the Mothership entity was a Bahamas based company which is regulated in the Bahamas under their regime, and of course SPF did reside there for at the material time, so all concentration was upon the Bahamas for the right reasons,

the actual governing law when it's a government law. The agreements that were between users and f t X were actually English law agreements, and if you look at the user agreements, it does actually stipulate that the law of those user of gives is the law of England. So you have English law which is governing the relationships between the entity and the users in a company which is domicid in the Bahamas. And that really perhaps was the first opening salvos to the whole train of litigation that

took place. Afterwards, you then have the twist where because SPF was effectively ejected from the board, then moves to the US and into US bankruptcy, and that really was the start of the jurisdiction dispute between the US and the Bahamas. And as much to be said as to whether the Bahamas were the right jurisdiction to actually start the process of insolvency and liquidation or whether it was right to move to the US under a Chapter eleven and for the new directors of FTX to commence over there.

And that's a question which is still yet to be fully resolved, although it's got there. It's a lot further forward than it than it was, say even a few days ago. And we'll see if we look at the way that ft X was structured, at least in terms of the big pairent entity, it had reaches all across the globe really like we had ft EXTRA pan and ft X Europe. And how complicated is that making this

situation right now? There is a lot of international relations and international diplomacy in place here, because when you've got a company that's gone under UM, you need to have one you know what we call it is quite a main proceeding, but essentially you need one jurisdiction to take the lead on the insolvency because otherwise, if you had, you know, multiple jurisdictions claiming to lead in song at the same time, then how do you administer the assets

of the mountinational group UM. Many sort of jurisdictions that have very fairly developed legal structures have signed up to something called the Instantral model law in cross Bordel insolvency, which it's it's sort of the international treaty where which determines who gets to run which insolvency and sets the sort sets the rules of the game. Unfortunately, the Bahamas is not a party to that, so we end up

in this position where we're kind of going back to default. Uh, you know default common law ruse as to who gets to claim jurisdiction. But at the same time, UM, the US is often able to claim very wide jurisdiction when it comes to, you know, someone filing for Chapter eleven. For instance, when when this all kicked off, there was a lot of questions, UM in the spaces to how can FTX file for Chapter eleven when it's not even

in the US. And the answer to that is, well, pretty much anyone and everyone can fill from Chapter eleven. Is fairly established case law in the US that if you have assets in the US, any sort of assets whatsoever, you can fall from Chapter eleven, even if that asset is a bank account which you've set up in order to pay a US lawyer. So you could be in Latin America running a you know, business in Latin America with your suppliers in Europe and Asia and whatnot, and

never do anything the US until you go under. You call us lawyer and say, hey, I want to do a Chapter eleven? Can I pay your retainer? By paying the retainer, you become eligible for the Chapter eleven process. It's a difficult one and what we've seen so far

is exactly as you kind of said like that. There's been a bit of a dispute I guess we'd say between the different reagions as to how they want to approach this, with tex As new executives in Delaware being very vehement that they are in charge, but the Bahama is saying that they're in charge and and f ire Star. How have they been getting along so far and what what kind of moves that they made to date that kind of sees them working together to solve these issues. Well,

they haven't really been getting on. That has changed is probably a slight, thank thankfully, thank thankfully, it's there has changed. I'll come on too that in the moment. But when I say historically, I mean it's not in terms of time. This hasn't been a history or event because it's it's really started to implode within the matter what weeks ago, but still in the compass of what we're talking about. I refer to historically the relationship between the US debtors

and the liquidators in the Bahamas. I think there are three points to make here. First of all, I have sympathy with the Bahamas in this sense. It is a Bahamian regulated entity, and I think it is right for the Bahamas and regulated entity regulators to say, look, we have given this thing a license. It is supposed to

comply with our licensing conditions. It hasn't. Therefore, we have taken appropriate steps that are in our law in order to resolve that issue, and in order to keep the integrity of the Bahamas as a jurisdiction, which is good for crypto and good for users as well, I think it is right for the Balhams to say, you know what,

we'll deal with this. Uh. The second point is this, without significant information sharing between the Bahamas and the US, you're going to have Bahamian activity which is sitting in a silo in respect and in comparison to what's happening in the US, and that is not good for recovery. The third point is this it does cause a risk of inconsistent rulings between two different jurisdictions, the Bahamas and the US, and that is quite important. I'll give one

very important example of that. It's probably the most important example, and it's this. There is a live argument as to whether the digital assets are in fact assets which belong to the estate, whether they fall out that, whether they fall out of the bankruptcy estate, or they do not. Now there's been a lot of debate about this. I have a particular point of view. Um some legal analysists do agree with me. Others take a take a different view. But there needs to be some sort of determination as

to whether those digital assets for within the estate. Now where should that determination be made? Number One, there is already an action for the claratory judgment as to whether these assets fall out of the estate or not, which

has already started in the US. That's on foot. But because again we're looking at English law, there is a good argument to say that the best jurisdiction to determine what we have termed that trust argument, whether the assets digital assets are held on trust, is in fact the Bahamas.

Because the Bahamas is a common law jurisdiction which looks at Bohemian case or first, but if it does not find English case law highly persuasive because of these agreements are English English law agreements, there is a very good argument I suggest that in fact, the right jurisdiction and the right judiciary to determine that particular point is the Bahamas instead of the US. After the break, I'll be talking with Fissile and Vassie about the changes being made

to English law that could affect crypto in future. And so then, Lassie, I mean, it's not as simple, I guess as the you know, looking at where these different jurisdictions are. Because also in the Bahamas, liquidators there took a certain amount of assets for themselves were not too sure how much exactly, with potentially the permission of sand Bank of Freed back when this bankruptcy process first started.

And that's also kind of worsening the spat, right I think I wouldn't say that the liquid dators took the money for themselves, not for themselves, but for the like it is in for customers. Yeah, local customers. Correct if you're if you're referring to the amount they claim they see three point five billion dollars at the point of value Tree or five billion dollars in early November. The market value of it is now apparently around three hundred

million dollars if you're referring to debtporol of assets. Considering the company legitimately went into a Bahamas provisional liquidation process, it is you know, not strange at all that the provisional liquid is should be in control of their amount of money. Of that sum of money that the issue arises because exactly as we've discussed, when you've got the US and the Bahamas both certain jurisdiction, someone has to

administer how you deal with that money. And there are many sort of operational issues, and they're also the legal arguments, which is Faisal has just you know, laid out, and it's made a very very good point, um, just to add on to that as well, um that there certainly is politics at play here. Both jurisdictions have a very vested interest not to be embarrassed by this whole FTX situation. So there certainly is you know, pressure on both ends

to do something about it. And it's also worth noting that I think fis alluded to be earlier about Samding effectively kicked out from the board. The timeline of events that's happened is the Bahamas put the Mahman entity into provisional liquidation and then a couple of days later after the extented in the chapter eleven process, and it's a

voluntary Chapter eleven process. So Sam signed the papers to give up power and put in the chapter eleven process, and he didn't spend the weeks afterwards saying I wish I hadn't done that. So clearly there was some sort of pressure on Sam to, you know, step aside, let these guys run it, and these guys want to run in the US, so that's as usual. That's a really

important point. Just two quick points. I've alluded to the fact that this is historic, but all of the particular issues that I have raised, I have patently been recognized by the parties, and there seems to be now sensible coordination and understanding about how the process you should run in parallel. So that's that's a very important thing. And

just one other point to touch on very briefly. We haven't spoken about how the criminal prosecutions, which are definitely taking place in the United States and may well take place in the Bahamas will touch upon all these issues

in regards to the jurisdictional spat in respective insolvency. And the reason I say that is because host criminal conviction in either one or both jurisdictions there maybe have locations for confiscation and for for tua of oursets how that will intersect with one or other of the insolvency proceedings are going on. It is something to be seen. So it's not just a rivalry between the Bahamas in the US. There's a right between the insolvency jurisdiction and the criminal

jurisdiction in the US and in the Bahamas. And this is what makes this uniquely interesting and complex. And you've been both probably kept quite busy this year by the spate of high profile crypto bankruptcies that have been happening. And then yeah, see, I'm interested to understand how you think that the international bit of FTX, how all of this like multiple jurisdictions that we're facing here, How does that look similar or not similar to the bankruptcies we've

seen before, like Celsius and three hours all. Oh, that is a very very try and keep I'll try, I'll try and I'll try and keep it shot shot and seat is possible. I think in short, when you look at Sales and Voyager and they were acting very much like you know, quote unquote crypto banks, where you would deposit money with them, and when you've disposited money with them, it gives them the right to, you know, go and un yield on an interest on it um. With FTS,

it's very different. FTX had no right to deal with the client's assets in that way. The terms make it very clear that FTS not allowed to land up their customers money. They were not allowed to rehypothegate or do anything with those assets. But they did. And that's what turned a case of it all poor management, you know, essentially poor risk management into what looks like alright, fraud

and theft also within that, I guess. Far a start, we've been talking a lot about how English or is very key in this case, but because of the way the ft x is terms of service was structured. But English law itself is kind of undergoing a bit of a transformation at the moment when it comes to shassets. We had an episode earlier this year where we talked to the Law Commission about the proposals they've made to reassess how we view digital assets as property, at least

in this country. What will those kinds of changes mean for if we have bankruptcies like this in future and English straw, as they hope, becomes a little bit of an international de facto for this area. Yeah, again, it's an interesting question, and without going into too much depth, I think the best way to deal with it is as follows that there the Law Commission has looked at whether the law in effect needs to be for want of better term, updated with respects with respect to crypto,

digital assets and so on. And the conclusion it came to, especially in regards to the treatment of crypto was property, is that in fact the English jurisprudence is it's it um, it is sufficient in order to deal with aspects such as this. And if we look at what's happening here,

a lot of this is trust based related legal arguments. Now, trust law and equity is not exactly a modern invention of English jurisprudence, so it's been around for quite a while and I know we're reaching the end of this, but I just wanted to add on to what Faiso was saying and it's often been said that, you know, the trust is the greatest creation of English law, and I fully agree with that, and trust law is in my opinion, from what I've seen in the in the

space generally, it's going to become very relevant because in the crypto space, you know, the legal infrastructure often isn't in place to document on chain arrangements, commercial arrangements, and therefore that there often is a default to using a

trust argument whenever something goes wrong. For instance, you know, if, if and when we get to the point where a massive now implodes inherently, there's going to be a trust argument is to you know, who's been acting as a trust you for the doubt being a decentralized autonomous organization a bit like a little crypto company without any of the structure. It's like a little cryptal company, except it doesn't have any real legal structure or wrapper to it. Yeah,

and everything's governed on change. Yeah, I mean lactually, and I've been geeking out on the legal implications of dolls for a little while now, such as it's so much so I think people are just getting bored of us. They haven't got bored of us already, but he makes an excellent point that if there is to be a development in the law, it's how probably how dolls it to be treated. Are they unincorporated corporated associations? Are their

partnerships and there's something different, etcetera. So there is some development law regards to that, and I think as well when it comes to tracing of assets and intern remedies and freezing orders and disclosure and so on, that's probably

more procedural than it is hard edged law substantive. But I think that's something which is already starting to develop here in England and probably developed even more just getting the right tools in place in order to recover assets and get information in a work because those are assessments. That information is held in a different way with crypto than it is with judicial last great, well, thank you both for joining me. That was really interesting, absolute pleasure.

Thank you very much. Thank you fire Style and Wasassie. You can find more of my reporting on the Bloomberg Terminal and on Bloomberg dot com. For more, be sure to check out our twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heeart Radio. For more shows from I Heeart Radio, visit the iHeart Radio app, Apple Podcasts, or wherever you get your podcasts. Send us your comments, questions, or suggestions for

the show to Crypto at Bloomberg dot net. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Burriro. Our associate producers are Ty Butler and Moses is on the Blake Maples is our engineer. Original music by Leo Sidron. I'm Stacy Maria Shmael. We'll be back tomorrow