Making Money On Crypto Bankruptcies

even more questions. Some restructuring lawyers say that the US Bankruptcy Code still does not adequately address how to handle crypto assets. But just like other bankruptcy cases, there will be winners and losers to explain what happens to crypto assets during these times. I'm joined by bloom reporter Justina Lee. Crypto, as we all know, is a lot more volatile than most assets that the law typically applies to, and Thomas Brazil,

the founder of five oh seven Capital. There will be definitely more dominoes to fall in the crypto space and filings questions like how these firms will deal with it the firm by bankruptcy claims and other types of distressed assets from people who would rather receive funds earlier, even at a discount. Hi, Justina and Thomas, thank you for joining me today. Why did you reach out to Thomas at first for your story? What's what's going on in crypto? Um?

There seemed to have been a lot of bankruptcies as of late. Yeah, exactly, and uh a crypto fund manager introduced me to Thomas, saying that there would be a cool story, and he was right. I mean, bankruptcy last sounds dry. With this first wave of crypto bankruptcies hitting US courts, it was really interesting to see, you know, judges and lawyers trying to draw parallels between the existing

laws and this weird new thing called crypto. And I thought that Thomas was a really good character to tell that story because he wasn't your typical hedge fund manager in the sense that he doesn't really have a PR filter, which is always helpful for journalists, and he seems to only like look into the most niche cases and distressed investing. You know, my parents were bankruptcy lawyers, so I knew

a lot about bankruptcy law. I never really worked a big distress firm, but I knew enough to sort of be dangerous and was always hunting around, like just insolving seas and bankruptcies. Crypto is probably the most interesting because there's so much unsettled law. I guess I've sort of gotten fully sucked into the crypto rabbit hole, but there's

still a lot to come. I mean with the bankruptcies we've seen in sort of the c FI institution, and so you have like Celsius and Voyager, and then you see Compute North recently filing, there's likely to be a whole wave of minors that file, and the same probably with other areas, uh, the whatever you want to call it, the I don't know, picks and shovels, whatever, like crypto, A t M companies, you name it. There's likely to be more insolvencies. Even if they're not in court, they'll

be out of court. Can we take a step back, Can you tell us just run us through how you started with Mount Cox and what what you actually did there, because many of our listeners might not really know what you what you actually do. They might know distress investor or what's that? Yeah, what is that? The cryptocurrency community is watching the drama unraveled with mount Cox, as the

once dominant bitcoin exchange files for bankruptcy in Japan. Mount Cox is now being sued in the United States by one of its tin I'd run across mount Cox literally read an article in the FT about the insolvency and it's said in there that you know, some hedge funds are you know, punting on the on these claims. And I was like, I know a lot of the guys that do this stuff. It's not rocket science, and how

cool would that be Japanese cryptocurrency bankruptcy claim? I mean, that's like the highest inversion of buying a bankruptcy claim. So that I got sucked into it, I guess the sort of the the academic view of like, hey, this will be interesting or fun to do. And then as I did that, I just started accumulating more claims, you know, for my clients. And from there I just got sucked into the crypto rabbit hole. And then the legal questions started coming up, you know, like how is this going

to be interpreted? In Malcox? So we just basically bought claims, you bought customer account claims, so you have to go actually find people who were either yeah, and also so sourcing is just like we were doing a journalist. How do you find a good story, how do you find a good lead? How do you find someone that knows

about whatever you're working on. It's the art, you know, it's like, oh, you find this guy who told you about this person that told you about that person, and this is like whatever the tin signal or gay that's going to take you to the mountain top of your story or whatever. So originally just started reaching out trying to find people that were in the crypto and Mike

likely had to claim. So there was a leaked list of creditors and it just had names, didn't have anything really had amounts and names, and so you know literally googling around like this guy's name is decently obscure and he's into crypto or he's a computer science person. So yeah, the early malc Cox you had sort of two profiles.

If you're going to profile there would be kind of like crypto anarchists, like people that were very into like alternative cultures, sometimes maybe illicit activity, and then you had the other camp or just like people that were just

like computer nerds. The mot coxing is coming to a close, right, So what are your expectations, and we had some crazy eye catching percentage of returns in the in the headline of the story, I think, so, what is your estimation of when when are you expecting it to sort of aiming to get paid back for the claims and then maybe just see I can give us the the number of the returns. Yeah, sure, sure, okay, So so early investors, you know, our early investors did the sort of put

the trade on with us extremely well. And um, I would say, mal Cox, there's gonna be like two or three waves of distributions. One is like an early payout option, and the second is a final payout option. So if you did an early pay out option, you're capped a little bit on the return you'll get. You're giving up like a few percentage points to get your money early. That will be probably early, and then the final payments

could be at the end of or maybe under. And the other thing you think about distributions are some of the distributions are going to go to I don't want to call him captive sellers, but like Big Corner of which is the biggest state going on in New Zealand, they had all their coins on mac Cox and there there a number of people like that that are big whales that likely won't sell, So I don't know the

distribution is gonna be totally. I keep hearing this idea that, oh, people always call me and say, oh, when is it happening, Give me the breakdown of like how it's going to affect the price of bitcoin, And I'm always like, I really don't think it'll have as much effects people think, because so much of the coins anybody that wanted to sell sold over the years, not just ourselves but but Fortress. So the two big buyers have claims ourselves and Fortress

over the years. So Thomas probably doesn't want to give the percentage himself, but like, at least I think in terms of the first sort of slate of claims that he bought, I mean, he is kind of slated to make like one tho seven on those and I guess that's because in the nature of distress investing, you're buying those claims at a discount to begin with, and it so happens after the winding path that that case has taken that at the end of the day, the users

will end up getting some upside from all that bit Court appreciation over the years. Some of the issues or questions that people had with Montox. One of the biggest ones is will people get their money back UM or will they get their crypto back? Right? So, Justina, can you sort of walk us through and how that I guess applies now to with Celsius and Voyager and some of them you are, yeah. So, in most cases UM, the value of the user's claim is fixed in dollar

terms at the moment of their petition. But it's kind of controversial to just directly apply this to crypto because crypto, as we all know, is a lot more volatile than most assets that the law typically applies to. And one interesting thing is, at least when I was speaking to some of the Celsius users UM, it might seem surprising, but many of them are still crypto believers, and in their ideal world, they actually want their coins back, and so this is really a huge unknown in these cases UM.

And one lawyer has told me that if the users are able to make the claim that crypto is in fact more like securities or commodities, there's a chance that they could actually get their claims kind of valued at the time of UM liquidation. But of course, as we all know, that's sort of the big unknown, even beyond bankrupt see law when it comes to crypto. We'll be right back with more from Bloomberg reporter Justina Lee and bankruptcy investor Thomas Brazil. What's different between working on a

crypto bankruptcy and another one? Uh? Gosh, is it more fun or no? It's more interesting. It's more interesting. That's it interesting because it is again a ton of unsettled case law how crypto is treated. We talked about petition date, value versus uplift. Who gets the uplift and value? You know, what's unregistered security? Are these securities? Which one? Are securities which one or not? You know, all kind of things like even areas of traditional bankruptcy law which is called

their avoidance actions. One section is preferences, another's fraudulent conveyances or transfers. I'll do the quick idea of a prefer and says, if you've got a payment within ninety days of prepetition, just before the bankruptcy petition, uh, they can basically call that back. And the idea is like you got a hundred cents in the dollar and in the bankruptcy it's only fifty cents in the dollar recovery, so

it's not fair to everybody. So we call that back, we give you a claim, and you get the fifty cents that everybody else got, and that increases predator recoveries. In a traditional bankruptcy, it's not boring, but it's quite straightforward the way you'd handle it. But in crypto even think of the idea like, well, when the transfer happened, you know, I'm I'm making it up, but ethereum was a sev now in set of thousand, so my preference is much higher dollar amount than what I even have

today to pay back. So it's a very interesting question, like is that equitable, Like that's kind of what the code says. It says at the time of the transfer, so you should be going after like the hundred you know, ethereum times the price at the time of the transfer. So these are all interesting bankruptcy questions that need to be wrestled with, and I'm hopeful that the US Bankruptcy Code can also push a lot of case law in

at least of the federal court system. I mean, the opinion is they're not gonna use for everything, but federal bankruptcy judges are extremely usually the top of their fields or lawyers in their in their regions, and so do you interesting to see how they wrestle some of these so something as simple as their preference and crypto has never been dealt with. How do you actually, you know, deal with the amounts and how do you deal with offsets?

Because you do normally get offsets on those, So if you have money you're still owed versus money you took off, they can offset that claim. Well, in this instance, you can potentially do offsets, but it's indebtedness, but it's it's your customer, it's an account claim. And also like in terms of crypto, like these Sea Fine institutions are great example.

These are kind of like unregulated banks, which would usually be like a sipahi just simple liquidation that would be and they have insurance and things, and so these are very interesting questions we haven't really grappled with, and so they're they're super interesting from a legal standpoint. If you're let's start like a legal nerd, you're like, wow, this is like, you know, super interesting, and um, have you

have you come across and f T s yet? In in liquidations or bankruptcy because I think, you know, not one big fund is being a really good well yeah, three a C right, so they owned n f T s. I think that there was some news recently about some of the n f T s day and I wonder if the issues will be the same, like how to value of those that will be interesting. I mean, honestly, this is there's a lot of stuff that has been grappled with. There's always interesting stuff going on in the

bankruptcy and stressed. Uh, this is no different. This is just on steroids like every single traditional bankruptcy thing you think, you think, oh well, actually there's a new wrinkle. And I don't know in three season. I mean, I just gotta call the other day about a very large three C claim. So I'm probably learning more about it soon. But it's it's funny to watch the domino's drop. There's so much liquidity that came out of the system so fast.

I don't know what that means for like the price of anything, but it is kind of interesting to think about. There will be definitely more dominoes to fall in the crypto space and filings. Questions like how these firms will deal with it. I think in a lot of spaces that will be even some pre packs and things like that, prepack bankruptcies because they have a lot of secure lenders

in there. They're basically underwater on their loans and they're not you know, they don't want to tell the street they're underwater, and you know they'll be some out of court, but they'll definitely have to be some more filings. It in a weird way. Every filing there's automatic stay and it's sort of like pulls supply offline. I mean, think about it like Selsie's Voyager. When they file, they can

automatic day. So instead of the crypto basically like you know, flooding out into the market and lots of sales, is actually locks up the crypto for the time of case. I mean, not entirely. They can petition the court to sell certain cryptos, but it's kind of interesting. An impact on price too, Yeah, that's what I mean. The impact on price could be interesting. Thank you, just Tina and

Thomas for joining me today. You can find more of just Tina Lee's reporting on the Bloomberg Terminal on Bloomberg dot com and on Twitter at j U S t I n A k n O p e. On the next episode of Bloomberg Crypto, there's an old joke about billionaires and politics, but this isn't that kind of podcast. This is a podcast about crypto though, so we're gonna be talking about all of the ways that crypto billions are pouring into US elections. This is Bloomberg Crypto, a

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