And like these cases, crypto-savvy lawyers know that “a lot of work is going to be required.”
Those are the words of Anthony Casey, a University of Chicago law professor and former practitioner who specializes in bankruptcy law.He said luck Its years of crypto bankruptcy await.
Filed by FTX Chapter 11 Bankruptcy Bankman-Fried announced his resignation as CEO on November 11. Mishandling of client funds At the exchange, he used them to finance the business of Alameda Research, another company he founded.
Bankman-Fried is reportedly currently in custody, facing a possible prison sentence if found guilty of fraud.under supervisionby the local government of the Bahamas, home of FTX. But FTX’s influence is expected to be much wider than the company’s former leader.and Updated bankruptcy filing This week, FTX revealed that a bankruptcy could affect more than 1 million people and businesses. They are currently borrowing money from exchanges. According to Reuters.
With numbers like that, legal experts say luck FTX bankruptcy alone could last for years, start a massive industry meltdownWhile this is bad news for the myriad of people and companies that have invested in cryptocurrencies, the legal community is about to be put to the test.
“Everybody is learning about cryptocurrency bankruptcy right now, and I think there will be a lot of work to be done on how to deal with cryptocurrency bankruptcy,” Casey said.
According to Casey, the scale of FTX’s bankruptcy could generate enough lawsuits to compare it to some of the largest bankruptcies in history.
“Many law firms will be involved in this case,” he said. “If bigger and more troublesome than Enron, he would be one of the most complicated fraudulent bankruptcies ever.”
Bankman-Fried is exchanged John J. Ray III is an attorney who has presided over several high-profile bankruptcies, including Enron in 2002. energy the company was sued Fraud and false accountingRay was responsible for liquidating Enron’s assets and distributing them to fraudulent creditors, but even that scandal doesn’t compare to his previous job at FTX.
“Never in my career have I seen such a complete failure of corporate management and complete lack of reliable financial information as what happened here,” Ray said. Said FTX’s accounts filed for bankruptcy on November 17, calling the situation “unprecedented.”
Among the most concerning aspects of the company’s finances, Ray said there was a lack of a functioning corporate governance structure, missing or non-existent bank account information, and the company’s lack of funds to pay for FTX employees’ homes and other items. You mentioned that the is being used incorrectly. He also criticized the company for not having a proper board of directors. There, most decisions were made by a group of “inexperienced, unsophisticated, and potentially at-risk individuals.”
“Other cryptocurrency companies need to pay attention to corporate structure and governance, otherwise there will be a lot of problems. said Jiaying Jiang, a law professor at the University of Florida Levin College of Law who specializes in cryptocurrencies. luck.
The liquidator isSerious fraud and mismanagementMultiple law professors, former prosecutors and in-house legal counsel said at FTX likely to spark several lawsuits against the company luck.
But while most of the legal interest will likely be focused on FTX in the near future, Pandora’s is almost certain to open. box For the crypto sector. The collapse of FTX caused widespread fear contagion More companies in the industry are at risk of collapse.
Before FTX included other collapses of the year Celsius, block phi When voyager digital. as did the latter two both bailed out According to FTX, their potential bankruptcy is a big possibility going forward.
fear of contagion
Law firms of all sizes are steadily expanding their digital assets, cryptocurrency and blockchain practices many yearsbut the scale of the FTX implosion could accelerate it, leading to more bankruptcy and litigation lawyers entering the crypto sector.
Legal practice is often based on supply and demand, said Yuliya Guseva, a law professor and director of the blockchain and fintech program at Rutgers Law School. luckBefore 2022 crypto winter— When the value of virtually all cryptocurrencies fell — Guseva said there was a much more active demand for “trading-side lawyers,” or legal practitioners who can facilitate crypto-related business projects and investments .
But with the cryptocurrency fortunes steadily declining this year, Guseva said lawyers’ interest in deals and corporate projects has waned.
“As more companies go bankrupt this ‘winter,’ we may see more lawsuits against cryptocurrency companies,” she said, noting that more bankruptcy and litigation professionals will enter the crypto space in the coming months. He added that he plans to enter.
“FTX’s failure will only signal these groups to pay more attention to cryptocurrencies, which I think is what we can expect in the current climate,” Guseva said.
Three law firms contacted by Fortune declined to comment, citing potential business benefits following the FTX bankruptcy.
“There will be more crypto companies going out of business in the coming months, which is very likely,” Jiang said. “And of course the attorneys are going to do their job and deal with all these cases.”
In the wake of FTX’s demise, many long-time proponents of blockchain technology, including Binance’s CZ, Microstrategy founder Michael Saylor, and Crypto.com exchange CEO Kris Marszalek, have stepped forward and said the time has come. rice field. stricter regulations To protect the industry from crashes of the likes of FTX.
“Right now, regulators will be scrutinizing the industry more intensely, which is probably a good thing, to be honest,” said CZ. Said The day FTX filed for bankruptcy.
In a case as big as the FTX bankruptcy, experts say regulation and higher government scrutiny on the industry are likely to follow.
“It’s still early days, but this will be one of the biggest fraud bankruptcies we’ve seen,” said Jared Elias, a Harvard law professor and corporate bankruptcy expert. rice field. luck“When there is massive fraud or big corporate misdeeds, what history teaches us is that there is a regulatory response.”
Critics have accused the Securities and Exchange Commission, a major US regulator, of failing to protect users from a number of crypto-related meltdowns this year.A Washington insider recently said luck SEC Chairman Gary Gensler said:in the cornerIn Congress, lawmakers are said to be demanding answers on how his agency may have overlooked the fraud committed by FTX.
The need for more crypto regulation was recently highlighted by Treasury Secretary Janet Yellen statementsaid that the collapse of FTX and its far-reaching impact showed “the need for more effective oversight of the cryptocurrency market.”
Critics, however, argue that cryptocurrencies should not be regulated.Nobel Prize-winning economist Paul Krugman recently wrote Cryptocurrencies have so far “rarely encroached on the traditional role of money,” he said, adding that under a more regulated regime, cryptocurrency exchanges would become virtually indistinguishable from traditional banks. pointed out. Similarly, economists Stephen Cecchetti and Kim Schoenholz write in a recent paper. financial times editorial “It’s much better to do nothing and just burn cryptocurrencies.”
The number of bankruptcies could pile up regardless of the regulatory future. This year’s Crypto Winter alone 12,000+ cryptocurrencies While still active, it effectively stopped trading and became a so-called “zombie” coin.
Either way, lawyers thrive. “If there’s regulation, there’s lawyer work,” said Casey of the University of Chicago. Harvard’s Elias said the next few months could amount to a “gold rush” for cryptocurrency lawyers.
Regulations could mean demand for lawyers in the blockchain and crypto space will persist beyond bankruptcy and litigation as the focus returns to compliance and business projects, says Blockchain and Government Related Issues. said Paul Strickland, general counsel for Oberheiden PC, a federal defense firm that advises clients oninvestigated, told luck.
“I hear a lot of clients say, ‘I want to follow the rules, but I don’t know exactly what the rules are,'” Strickland said, noting that a more regulated environment would Growth and industry legitimacy.”
However, as the extent of the damage caused by the FTX crash becomes clearer in the coming months and zombie crypto companies are weeded out, lawyers who specialize in bankruptcy are likely to be in much higher demand.
“By the end of this year, many bankruptcy lawyers will be doing more with crypto than they are now,” said Elias of Harvard University.