The bankruptcy of FTX Trading and other cryptocurrency companies will give the legal system — like Dorothy Gale in “The Wizard of Oz” — a peek behind the curtain into a private, opaque and largely unregulated world. Dorothy found the man behind the wizard. What the courts will find, according to court observers, is anyone’s guess.
In their quest to understand what took place behind the scenes at FTX, judges and lawyers will confront emerging technologies and unregulated issues, offering the opportunity to set fresh precedents or create new case law.
“There’s going to be very, very difficult forensic accounting questions and some really important questions about concepts, like, how do we understand what cryptocurrency is and is FTX more like a bank or more like a stockbroker?” said Jonathan Lipson, the Harold E. Kohn chair and professor of law at Temple University Beasley School of Law.
FTX’S SAM BANKMAN-FRIED COLLAPSE COMPARED TO ENRON, MADOFF
Is the legal system up to the task?
“Bankruptcy courts are not strangers to crises with systemic effects or to businesses using complicated technology. They have the tools and the experience to stabilize the situation and bring some order to chaos,” Melissa Jacoby told FOX Business. Jacoby is the Graham Kenan professor of law at the University of North Carolina at Chapel Hill.
It won’t be easy.
“It will be a challenge for the lawyers to explain to the judges what these things are in analogies that make sense,” Lipson told FOX Business.
Walking into spiderwebs
WILL FTX’S BANKRUPTCY SPILL INTO THE GENERAL ECONOMY LIKE LEHMAN BROTHERS?
Lipson compared the situation to Lehman Brothers. The former Wall Street bank went bankrupt in 2008, taking down exotic financial products such as collateralized debt obligations, synthetic credit transactions and variable interest entities.
It took 14 years to complete the firm’s liquidation.
FTX judges and lawyers will have to understand concepts such as initial coin offerings, hard forks, staking rewards and cold wallets.
Lehman’s bankruptcy rippled worldwide, affecting everyone who had a financial instrument tied to the firm, from Wall Street investors, to state and local governments, and to homeowners with subprime mortgages.
For example, San Mateo County, California, filed claims totaling $155 million. Officials invested in Lehman notes to expand its community college, improve roads and build a rail system, Reuters reported at the time.
HERE ARE THE DEMS WHO BENEFITED FROM THE LEFT-WING PAC THAT FTX FUNNELED $27M THROUGH
Funds with FTX Exposure
- Paradigm — $278 million
- Sequoia Capital — $213 million
- Galaxy Digital — $76.8 million
- Genesis — $175 million
- Galois Capital — $40 million
- CoinShares — $30.3 million
The list doesn’t include FTX customer claims, which may number more than a million.
Show me the money
US MAY EXTRADITE SAM BANKMAN-FRIED AMID FTX COLLAPSE INVESTIGATION: REPORT
Temple’s Lipson says the length and breadth of FTX’s bankruptcy will depend on how much money is available to creditors and how hard people will try to recover their assets.
“How much time, money and energy lawyers and the bankruptcy system put into recovering those things is going to be a function of the cash on hand and the cash available to finance it.”
The issue is further complicated by allegations of financial fraud.
FTX FOUNDER SAM BANKMAN-FRIED HIT WITH CLASS-ACTION LAWSUIT THAT ALSO NAMES BRADY, BÜNDCHEN, SHAQ, CURRY
Law firm Entwistle & Cappucci said its early investigation confirms that “billions of dollars of customer funds were wrongly diverted from FTX to Alameda [Research] and elsewhere leaving an enormous shortfall in customer accounts.” The firm specializes in complex fraud and bankruptcy litigation.
UNC’s Jacoby says, “Bankruptcy can be a forum to investigate wrongdoing and potentially to claw back resources into the hands of the rightful parties, but there’s a big caveat: based on the way Congress structured the system, investigations are dependent on someone being willing to fund such investigations.”
Earlier this year, the founding family of Purdue Pharma agreed to a $6 billion settlement over its role in the opioid epidemic.
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How much can be recovered from FTX and possibly former CEO Sam Bankman-Fried and others will hinge on finding the money, if it exists.
“Lots of real money went in, and untangling where that money went is not going to be easy, but it’s not going to be impossible,” Lipson said.