This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. It's Wednesday, February twenty second. Over the course of this crypto winter, we've seen companies falling like dominoes. Several have filed for bankruptcy, with consequences that continue to reverberate across markets even today. In July twenty twenty two, Celsius became the first, but not the last, of the major crypto
companies to seek bankruptcy protection. Now, consumers and courts alike are grappling with what these collapses all mean. Regulators have sharpened both their rhetoric and their actions against crypto companies and individuals in the market, particularly in the past few months. How are these bankruptcies informing their thinking, what precedents are they setting, and what are the potential consequences for crypto. Joining me now to discuss the growing power and importance
of bankruptcy court judges is Bloomberg Reporto Steve Church. Steve, Welcome to the podcast. Steve, what a pleasure to have you on the show today. Welcome to the podcast. Great to be here. You, like many of my colleagues at Bloomberg, have found yourself caught in the crypto across his in the past year and a bit. How is it that you've been having to do so much reporting on what's
been happening in crypto? Oh, a simple explanation. The crash has put several crypto companies into bankruptcy, and that means I get a chance to sit in court and listen to the confusing things that make crypto world so fascinating. What are some of those fascinating, if confusing things, Oh, A big question about how do you decide who's a creditor and who's a customer. It's as if a bank was allowed to go bankrupt. Banks are not allowed to
go bankrupt in the United States. But if a bank did go bankrupt and you were a depositor, do you own your own money? Technically you don't, So questions like that It's becoming really more interesting in a way that is going to cause headaches for a lot of customers and a lot of crypto investors. I've barely asked you any questions, and you're already blowing people's minds about whether they own their own money, so I have great faith
about where this is going to go. So you've got these big questions like what are some of the companies that have been involved in having these things play out in courts? Well, the biggest on the block right now is of course FTX, the sand Bankman freed company that collapsed it's fraud allegations. Another is a Celsius, another crypto company that went bust, and it's further along an into bankruptcy case than the others. So that's the one to watch in terms of what judges are going to do
and how investors might be treated. Now, I have never had the privilege of being in bankruptcy courts either on either side of this. I've never found a bankruptcy. But I've also never been at these hearings and at these conversations what's happening in courts that's having such important precedents for crypto. I think the main thing is how will customers be treated? That's the most direct thing that's happening. There's some other issues as well that a little more esoteric.
But right now, if you are a crypto customer of say FTX or Celsius, and you had money on the platform. You expect that you're going to get that money paid back to you, But what happens or that money returned to you because you say had an x number of coins and you expect to get X number of coins back.
But in these cases Celsius and FTX especially, they pooled all of your coins with everyone else's coins, and that means that then they lent that money out, so those coins are no longer on the system, that money is no longer enough to cover what you deposited, which means you're really not a customer anymore. You're not a depositor.
You're more like a creditor. And in traditional bankruptcies, creditors don't get a hundred cents on the dollar, or they very rarely do they get less than they are actually owed. And that's what's driving a lot of the crypto investors crazy because they thought their money was safe if they read many of the disclosures and thought that their coins they've deposited or their actual dollars that they deposited would be segregated and kept separate, just like say a bank.
But as we're discovering, crypto firms are not banks. Well, it's so funny that you say that, because that was supposed to be the whole point of crypto is to not be back, and now we're knowing what the downfall is. There are some regulations that protect the little guy. In fact, a lot of regulators you themselves as the first line of defense for regular consumers, especially in the banking world. They really want to protect the little guy more than
the big investors. And in this case, who reads all of the disclosures. When something pops up on your computer screen and it says click agree in order to continue, most people click. They don't read the fine print. What do you not read the seven hundred and fifty words of legally is before you agree to things. I have to admit I tried once many years ago and gave up.
And that's having real consequences because you know, I think in the example of Celsius that you mentioned what the terms of service said, and also with FDx is becoming a real issue for the courts to consider. Yeah. In fact, in Celsius, that was the key distinction for whether you are a creditor or a customer, whether your money will be directly return to you, or whether you have to wait in line like everyone else and just accept a
smaller amount. And the judge looked at these terms of service, and I think there were several hundred thousand people who signed in terms of service in which the company Celsius said, we own your money, right, we control it. You are not segregated from anyone else. You are not protected. Those folks are going to have some heartburn when they look at how much they get back because they may not get everything back. In fact, they're likely not to get
everything back that they put on the system. Right, And if I remember your story correctly, it was something like six hundred thousand people, which is quite a lot of folks who are looking at you nowhere close to anything like the amounts that they had deposited in the first place. Correct. And this is why FTX is so much bigger and so much more frustrating, because it's not several hundred thousand, it's not six hundred thousand, it's millions. Millions of people
are in this similar boat. FTX is not as far along in their case. So really, the decision on whether all those funds were segregated and therefore maybe more protected, has not been made yet. I don't think the FTX lawyers who are running the show, and John Ray, the new FTX CEO who was brought in to clean up the mess. I don't think they've made a final decision, or at least they haven't publicly announced the final decision on how they're going to treat customer deposits. But here's
the economic reality. No matter what they decide, there is not enough money for everybody to collect what they're owed. And if I remember that correctly, you know that was one of the points that a judge made in a recent hearing on FTX that folks should not expect to be able to be made whole in any capacity. Yes, he said that. The lawyers for FTX have said that's it's it's just the reality of the situation. The money is not there that people wish, would wish that they
could another investigations going on to find it. But how much, how many assets will be found and where it will be found, is anybody's guests. No one expects. No one expects one hundred percent recovery in FTX. Yeah, not even the folks who were the most optimistic. I want to go back to something that you said about how you know crypto may have rejected the entire foundation of banks
and the traditional financial sector. But one big advantage to customers and to consumers is rules in place that provide some degree of consumer protection. Regulators woke up in twenty twenty three. It seemed like on a mission they were like, we may have missed some of the stuff in twenty twenty one, twenty twenty two, but now we're coming for everyone.
To what extent do some of these conversations in bankruptcy courts, some of these precedents that you're describing, some of these issues that are being worked through ever inform policy, legislation or is it more of a sentiment thing. I think it's an indirect influence, and you put your finger on it. Sentiment is a good word to use. What will happen is there will be these outrageous findings in court that leak into the public, and in ftx's case, millions of
people will be affected by this. That's going to create pressure on regulators and on Congress in some indirect way. The closest thing to a direct connection will be if a judge makes a ruling that says, from now on, if you're in bankruptcy and you're a crypto company, your assets will be treated as an infill in blank, a security,
as money, as a commodity. If a judge makes that kind of ruling, and it comes from a judge, say in New York or Delaware, where the law has a long precedent, and those judges have long reach of a big reach across investors, you're going to see the professional investor class really take hard look at how they're going to invest in crypto companies in the future, because they look down the line professional investors, the big hedge funds, they look down the line and say, Okay, what if
the worst case happens and this company goes bankrupt, how am I going to be treated? And that could inform how they make their decisions, how they invest what kind of crypto companies they invest in. How much experience do these judges have with crypto prior to crypto prior to the winter none. In fact, it's amazing to listen to the judges talk about the learning curve they've gone through,
and it's been pretty impressive. The judges in New York and in Delaware have spent an enormous amount of time just learning the basics about how crypto works, and when you hear them ask questions, you can tell they've done their homework and they're grasping to understand. They're really trying to get it right. It's impressive, but then again they're undergone. Bankruptcy is famous for moving very quickly to try to get money back, even if it seems slow by the
average person's review. Up next, more from Bloomberg Reports. Steve Church on how a handful of judges are shaping the framework of Crypto. We'll be right back. You know, one of the things that I've noticed in talking to folks about this is bankruptcy law. Nobody understands it who's not either a report I like you who's reporting on this twenty four seven, or a lawyer who's professionally paid to
understand it, or as you mentioned, these judges. Our colleague Jeremy Hill, who I know you work with and who has been on the show a couple of times, has talked a lot about the fact that like, bankruptcy timelines are different from what people might expect from your perspective. When you're explaining that to people, like how fast can this really move? It can move in a matter of months, which is lightning speed in terms of contentious court cases.
If the SEC sues a crypto company to decide how that company should treat customers, that can take years to play out. But if you're in bankruptcy court and the judge has to decide whether your account is segregated and therefore you get back everything you put into it, or whether it was pooled, and you really don't have control, and so you only get back ten cents for every
dollar you put in. Those kinds of decisions create pressure, and pressure causes the bankruptcy judges and the system itself to work at a much faster rate, and so you get to economic decisions, substantive economic decisions, much quicker in bankruptcy court than you do in a traditional lawsuit case.
And from a consumer perspective, that's positive, right, because you know, folks are spending less very expensive time and actually like customer money potentially trying to sort these things out well. Time and money exactly is what you say. If you're waiting for a decision on how much you're going to get back from FTX or from Celsius, and you have to wait years while appeals go forward, and while the
lawyers argue about very obscure pieces of law. That's frustrating, and it reduces what you're going to get back because time costs money, right, so it's you know, the dollar you expect to get back today is only worth eighty cents in a couple of years. The system knows that, and so they push to get things out as quickly as possible. One advantage in the bankruptcy courts is that you can get money out the door and then everyone can argue on appeal and spend years fighting all the
way up to the Supreme Court. But in the meantime, you as a credit you've got your money, You've put it in your pocket. After six months, nine months, sometimes it takes longer than a year or so for you to get your money, but it's much quicker than if you were in a traditional court system, even though you as a consumer, still feel like it's taking a really
long time. Oh, of course, and the frustration is obvious in each of these court hearings where you have many, many, many investors on these zoom because many of the court hearings a handle by zoom. They're on and they're talking directly to the judge and they're asking questions. It's clear that they are invested in the process and they're frustrating. Some of them are very do a very good job
of making their points, but others just wind up complaining. Yeah, you know, this is a comments and all the question kind of vibe to that point, like what is the
wildest thing you've seen in one of these hearings. I think there was one point in an FTX hearing early on when the zoom was not quite under control of the judge, and there were people popping up and asking questions, or their faces would come on the screen and they would try to interject, and the judge kept whackamling and putting them, shutting them off because they're trying to get the hearing done right. And I can imagine that can
be very frustrating for everyone involved. Yeah, you know, when judges have to become like zoom Cole Moderatos, it truly is twenty twenty three, and that's exactly what's been happening in almost all these crypto hearings, not things they prepare you for in law school. Well, Steve, thank you so much for being on the show. I really appreciate you taking the time. Great Thanks Stacy, it was great to
be here. That was Bloomberg Reports to Steve ch. You can find more of his reporting on the Bloomberg Terminal and on Bloomberg dot com, and be sure to check out over twice weekly newsletter, Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio 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 Farouk and Sharon Barrero. Our associate producers are Ty Butler and Moses on um Desta wonder At is our engineer. Original music by Leo Sidron. I'm Stacy Marie Schmel. We'll be back tomorrow. The