Crypto Bankruptcies

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In their latest episode of the VALUE: After Hours Podcast, Braziel, Taylor, and Carlisle discuss Crypto Bankruptcies. Here’s an excerpt from the episode:

Thomas: But NFTs, I think they’re interesting. Who’s paying the crazy prices for some of the stuff? Maybe some of the early projects are very, very interesting. But I don’t know. I’m not an expert on the area. I think it’s super interesting, but a lot of things are interesting. So, I might, I don’t know, partake in some very, very small way. But that doesn’t mean I’m going to part huge amounts of my savings. Yeah, so Voyager and Celsius, both of them filed through US bankruptcy– [crosstalk]

Tobias: What are they?

Thomas: Basically– Ah, yeah, that’s a good question. What are they? Are they unregulated banks? Are they basically like brokers, like E-Trade or something like that or are they something different? Are they exchanges?

Tobias: What do they say they are? What do the tax authorities say they are or the SEC? What’s the point of contention? They prefer to be regarded as unregulated exchanges. And the SEC, the government says, “Maybe you’re a bank or maybe you’re a broker, and you need a license for that.”

Jake: And you need to know your customers.

Thomas: Show’s over. You got it. No, that’s how you are going to do it.

Jake: [laughs]

Thomas: They started talking past each other about what they are. I suppose the biggest crux is like, what is crypto? Is crypto a commodity? Is it a security? Are certain crypto securities and certain cryptos commodities? Are they nothing? Are they just digital assets in some weird non-security way or something? So, there’s lots of legal questions here and Toby, you are a lawyer– [crosstalk]

Tobias: It says literally non-fungible. Because that’s what they’re describing themselves. The NF is non-fungible. If you’re non-fungible, it’s hard to argue that you’re a commodity, aren’t you? Because you can point out that’s my NFT.

Thomas: Well, not NFTs–

Tobias: Or it’s not.

Thomas: I just mean in general. These guys own some NFT portfolios, but mainly on their platforms is Bitcoin, Ethereum, Cardano. Basically, the top 10 cryptos that you’ve really– [crosstalk]

Tobias: But don’t we always know at every point in time who owns what? Isn’t that the entire point of it? Doesn’t that argue against it being a commodity?

Thomas: Well, yes. That’s a very good point. No, it’s not fungible.

Tobias: It’s more like a security.

Jake: The prosecution– [crosstalk]

Thomas: Yeah.

Jake: [laughs]

Thomas: Toby is just slicing– [crosstalk]

Tobias: I don’t know. I’m just like, “This is first principles.”

Thomas: Oh, I’m dead.

Tobias: This is more than 20 years ago.

Thomas: I think you’re probably right. But I think so far, it looks like Bitcoin and Ethereum are likely to be considered a commodity and everything else is like big security. And the big differentiator seems to be the decentralized nature of their origins versus the way they originally did like an ICO, which is probably a security offering.

Jake: Security.

Tobias: Right.

Jake: Yeah, it seems like it.

Thomas: Yeah. It just squarely fits within the Howey Test. So, it’s pretty hard for guys to argue against it. But the question with these bankruptcies, of course, isn’t that. The question is, so what are these, exchanges or brokers? They look a lot like brokerage. They look like E-Trade or maybe more even like a bank. Because did you own the crypto or did you own this underlying account that owned crypto? Therefore, you don’t have a title to it. You’re just a general secured creditor. So, lots of questions.

And then, there’s a bunch of securities laws that is pumped into the bankruptcy code, or I shouldn’t say, pumped in, but behind the bankruptcy code, so like this thing called 5469(e), which is a safe harbor financial transaction through financial intermediaries. Boy, that’s a mouthful. It applies to commodity brokers and security brokers and banks really. And so, the question is, does it apply in this bankruptcy?

And then, you have custody accounting issues as well. Custody, how do you–? And then, there’s perfection of security interest. How do you do that with crypto? The Uniform Commercial Code doesn’t speak to that or does kind of, but it’s not totally clear and they did an update to the UCC. Boy, this is really going to get boring. Everyone’s going to be falling asleep. Anyway, there are lots of interesting novel legal questions that these bankruptcies are going to be looking into.

And they are the biggest crypto bankruptcies basically, of all time. I find that fascinating. There’s also a lot of people, unfortunately, they’ve gotten sucked into crypto through these vehicles. Some of their stories are tough to swallow and you think like, “Gosh, really needs to be a lot more regulation on some of this stuff.” It’s one thing for someone to punt around and lose some money in an NFT and it’s all funny, ha ha ha. But when you have some Australian person who has literally their life savings, are 58 years old, and they just lost their entire life savings in bankruptcy, and it’s going to materially affect their retirement, that’s not good. So, there’s also that side to the story. That’s what’s going on in my world.

Jake: How distressed are we talking for this stuff?

Thomas: The recovery is depending upon– Voyager’s probably somewhere in the call for 50 to 70 range. These are real ranges here, because we don’t know what the auction process is going to bring in. These are the holes in their balance sheet. And Celsius is a little far behind, probably somewhere in the 40 to 50 range in terms of recoveries.

Jake: Because that just seemed like puking as the price of all this stuff goes down too, is that how it’s working?

Thomas: Yeah, kind of.

Jake: You’re trying to get at the front of it.

Thomas: It depends on the how you think about it. Yeah, some crypto people think of things in terms of only crypto, but the bankruptcy code does look at things in terms of dollars at the petition date. And then, you have assets, but you’re basically long crypto and it’s moving around a bunch. So, it’s an issue. But just to back up for a second, financial institutions blowing up on a loan book is as old as time.

Jake: Yeah, Mesopotamian–

Thomas: So, it’s not new. Yeah, that’s the thing, people are like, “Oh, this is this.” Unfortunately, people are like, “Oh, this is–” Some people say, “Oh, this might be a Ponzi scheme, because of the way they were doing it.” All the financial institutions and banks have circularity– They have deposits and they’re propagating them out, and then it’s circling back to pay you interest. So, it all works until it doesn’t.

Jake: Yeah.

Thomas: So, there are a lot of upset people, but yeah.

Jake: All banks are insolvent. It’s just a matter of timing.

Thomas: There you go.

Tobias: Backstopped by fed.

Thomas: Yeah. Crypto guys don’t get the backstop.

Jake: So, 50– [crosstalk]

Thomas: They want it. They want it.

Tobias: [laughs]

Jake: You’re paying 50 to 70 cents on the dollar right now roughly for–

Thomas: Us? No, no. Those are recoveries. The market is probably somewhere in the 20 to 30 cent range for both dockets.

Jake: Okay.

Thomas: Yeah.

Tobias: You might be buying a proverbial-

Tobias: 50-cent dollar.

Jake: -50-cent Bitcoin.

Thomas: 50-cent dollar. Yeah. I think the cases are interesting legally. I’ve been helping a lot of claimants just because people started reaching out. It all started on Twitter. It’s on Twitter Space, and there was someone on there who’s a securities lawyer talking about bankruptcy, and I was just like, “Ah, that’s not really how it works.” So, I started just helping out a little bit- [crosstalk]

Jake: Educating.

Thomas: -as well. Yeah. Look, honestly, I already know all this stuff. So, it was quite easy. Because a lot of the questions here, you can imagine there’s just someone asked me very simple thing. They’re like, “What is an IRA?” You’re like, “Oh, well, it’s this.” You are like, “Here’s a here’s a link.” I don’t know. It’s just stuff that you think like, “This is so easy to give very straightforward answers to it.” So, I started to get involved in that way. But there are tons of interesting legal questions. Just unbelievable amounts.

Tobias: Are you doing anything outside crypto? Is there anything else going on?

Thomas: Yeah. Looking at a few things.

Tobias: [crosstalk] you want to talk about it?

Thomas: No. Net call project, let’s see what else. Got some real estate stuff we’re looking at recently, some fitness industry stuff. We have a fitness and investment chain of gyms. I say we, but one of my clients does. And so, we’ve been looking at fitness assets. Some of them are still on their back. They haven’t really totally come back post pandemic.

And then, there’s some companies that they were doing D2C and the math they thought penciled out and now that the pandemic fervor of, I don’t know– I don’t want to say, cheap money, but people staying at home and ordering a bunch of stuff online has slowed, they peel back the onion and they’re like, “Oh, maybe our lifetime direct customer isn’t what we thought.”

Tobias: [laughs] Who knows?

Jake: And our CAC is way too much.

Thomas: Yeah.

Tobias: The CAC is solid.

Jake: Yeah. The CAC is real. [crosstalk]

Thomas: This is great. I get to do my Jim Grant quote. Do you know this Jim Grant quote? He says, “The assets– ahh, we don’t know what if [unintelligible 00:16:16] is when you look at the balance sheets. The assets. I’m not sure what those are worth. The liabilities, oh, yeah, those are $100,000.”

Tobias: Solid.

Jake: Yeah, money [crosstalk]

Tobias: He stole that from Benjamin.

Thomas: Oh, did he?

Tobias: I think so. That’s Graham. Oh, that’s Buffett quoting Graham, anyway.

Thomas: Oh, I thought it was Jim Grant. Okay.

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