As the value of digital currencies plummeted, many crypto firms faced insolvency, causing the services of legal experts to specialize in bankruptcy. These firms had to navigate a labyrinth of legal procedures to file for crypto bankruptcies, often in uncharted territory, because of the novelty and complexity of crypto assets. This need for specialized guidance has seen lawyers and legal firms become the architects of the survival strategy for these crumbling companies. The expertise required in these cases is vast and niche, encompassing not only traditional bankruptcy law but also an understanding of the digital asset landscape.
The bankrupt firms, fighting to manage their remaining assets and mitigate their losses, have thus incurred massive bills from their hired legal counsel. These expenses include lawyers’ fees for court representations, asset management, creditor negotiations, and restructuring advice. For the lawyers and the firms they represent, this dire phase for crypto has translated into an era of unprecedented demand and profit, marking a golden period in their practice.
In tandem with lawyers, bankers, and financial advisors have also found their services in high demand. They are the ones who assess the damaged portfolios, advise on the liquidation of assets, and seek the best possible outcomes for their clients amid financial turmoil. These services come at a premium, considering the volatility and unpredictability associated with crypto assets’ value.
The paradox of this situation is that while bankruptcy signifies failure and loss for many businesses and investors, for the financial custodians managing these bankruptcies, it is a lucrative era. The considerable influx of funds to legal and financial firms from the beleaguered crypto industry is perhaps one of the more overt illustrations of how disaster capitalism operates, with some sectors thriving on the misfortunes of others.
Legal Industry Wins During Crypto’s Downturn
Since the onset of the “crypto winter” in 2022, the plummeting market has led to the bankruptcy of several companies, necessitating extensive legal and financial services. The collective payment to professional firms for services rendered to at least nine such companies has amounted to approximately $770 million in fees and expenses, with these cases stretching over prolonged Chapter 11 proceedings, according to court documents.
Among these, the defunct crypto exchange FTX, approaching a year into its bankruptcy, has incurred the highest costs, paying its advisors a staggering $317 million. Other firms contributing to these substantial payouts include Voyager Digital, with $100.6 million in advisory fees; BlockFi, paying $71.8 million; Genesis Global Capital, at $43.5 million; Coin Cloud, with a comparatively modest $3.9 million; Celsius, which spent $176.2 million; Bittrex, at $4.6 million; Compute North, with $21.9 million; and Core Scientific, which has paid out $28.8 million to date. These figures reflect the immense legal and financial complexities associated with navigating through the tumultuous phase of the cryptocurrency market’s downturn.
A Boon For Lawyers
The upheaval within the cryptocurrency sector has not only destabilized prominent exchanges and decreased the worth of crypto assets but has also inadvertently benefited a particular sector: those specializing in bankruptcy law.
The downfall of significant players such as FTX exchange, Three Arrows Capital hedge fund, and crypto lending institutions like BlockFi, Celsius Network, and Voyager Digital Ltd. has carved out a lucrative niche for legal firms adept at guiding companies through financial distress. The complexity and extended duration of these bankruptcy cases can lead to law firms earning in excess of $100 million for their legal expertise, as industry experts have noted.
Adam Levitin, a Georgetown University law professor with expertise in bankruptcy, encapsulated the sentiment by saying, “You’ve got to pay the gravedigger.” He pointed out that the intricacies of these cases, peppered with unprecedented legal questions, make it inevitable that they demand substantial attorney engagement.
The figures indicate that the legal professionals handling the FTX bankruptcy are reaping the most financial rewards from the fallout in the cryptocurrency sector, with charges amounting to $326 million. Leading the charge, Sullivan & Cromwell, the law firm overseeing FTX’s bankruptcy process, has billed for legal services surpassing $110 million, along with expenses tallying up to $500,000.
Reportedly, Andrew Dietderich has highlighted that the ambiguity of cryptocurrency regulations has compounded the complexity and extended the duration of these cases, thereby escalating costs.
According to analysts from The New York Times, Kirkland & Ellis, the law firm representing Celsius, Genesis, and Voyager in their bankruptcy proceedings, has invoiced $101 million in legal fees and an additional $2.5 million for related expenses. Furthermore, the restructuring company Alvarez & Marsal has billed more than $125 million for its advisory roles in the FTX, Celsius, and Genesis cases.
Early indicators that Sullivan & Cromwell could amass significant earnings from their involvement in crypto-related bankruptcies emerged as of January 2023. At that point, it was reported that the firm had assigned over 150 personnel to the FTX case, with the inclusion of 30 partners whose billing rates topped $2,000 per hour.
In light of growing scrutiny regarding the sizable legal fees, a fee examiner, Katherine Stadler, was appointed by the U.S. bankruptcy court to oversee the FTX case. By June, Stadler had reviewed the costs and reported that the legal team’s request for over $200 million in fees since the November filing of bankruptcy was justified, considering the scope of the work involved.
Last week, Sam Bankman-Fried, the creator of FTX, was convicted of misappropriating funds from clients of his defunct cryptocurrency exchange, marking one of history’s most significant financial deceptions. The verdict sealed the downfall of the once-billionaire 31-year-old.
After a trial that lasted for a month in a federal court in Manhattan, a jury of twelve found Bankman-Fried guilty on all seven charges presented against him. Prosecutors argued that his actions, driven by pure greed, resulted in the embezzlement of $8 billion from users of the exchange.
Ways For Lawyers To Earn
The cryptocurrency market’s downturn has led to a surge in legal activities, particularly around bankruptcy proceedings, creating a lucrative environment for lawyers specializing in this area. Here’s an overview of how lawyers are capitalizing on this trend:
- Bankruptcy Proceedings: Many crypto firms facing financial distress are resorting to bankruptcy proceedings. Lawyers with expertise in bankruptcy law are in high demand to navigate these complex processes. These lawyers help in restructuring debt, liquidating assets, and negotiating with creditors, which are critical steps in bankruptcy.
- Litigation and Disputes: The downturn has also led to an increase in litigation. Investors and stakeholders are seeking legal recourse for lost funds, mismanagement, or fraud. This situation necessitates skilled litigation attorneys who can represent clients in these disputes, often involving significant sums of money.
- Regulatory Compliance and Advisory Services: The volatile nature of the crypto market and the evolving regulatory landscape require legal expertise to ensure compliance. Lawyers provide advisory services to crypto businesses on regulatory matters, helping them navigate the complex web of local and international regulations.
- Mergers and Acquisitions: Some financially stable firms are looking to acquire distressed crypto companies. Lawyers play a crucial role in these transactions, handling due diligence, negotiating terms, and ensuring the legality of these deals.
- Legal Fees and Billing Structures: The complexity and high stakes involved in these cases allow lawyers to charge substantial fees. Typically, they work on hourly rates, but in some cases, especially in high-profile bankruptcies or litigations, they might negotiate different billing structures like flat fees or contingency fees.
- Interdisciplinary Expertise: The crypto market’s uniqueness requires lawyers to have not only legal expertise but also a deep understanding of blockchain technology and financial markets. This interdisciplinary knowledge further enhances their value and billing potential.
- International Scope: The global nature of the crypto market means that legal issues often cross borders, requiring lawyers to understand and work within multiple legal jurisdictions, adding to the complexity and, consequently, the legal fees.
In summary, the downturn in the crypto market has created a significant demand for legal services in areas like bankruptcy, litigation, regulatory compliance, and M&A activities. Lawyers with the right expertise are capitalizing on this demand, leading to substantial earnings in the process.
It All Started With FTX
The rapid collapse of the cryptocurrency exchange FTX in 2022 has caused a ripple effect throughout the cryptocurrency sector, leading to a significant loss of trust among consumers and the downfall of various crypto services that had dealings with it. At its peak, FTX was the third-largest crypto exchange globally.
This incident is likely to have long-lasting repercussions. Investors, legal entities, and regulatory bodies are now engaged in efforts to recover lost funds from these companies and implement measures to avoid such a crisis in the future. Explore further to understand the breakdown at FTX, including an examination of the involvement of its founder and ex-CEO, Sam Bankman-Fried.
What Happened to FTX?
The downfall of FTX transpired swiftly over 10 days in November 2022. The turning point was an investigative report on November 2 by the cryptocurrency news platform CoinDesk. This report disclosed that a significant portion of the assets held by Alameda Research, a trading company also managed by Bankman-Fried and affiliated with FTX, comprised FTT and other tokens created and managed by FTX and its executives. These assets were not backed by fiat currency or established cryptocurrencies with market-tested values.
This revelation triggered a mass withdrawal of funds by numerous investors and customers from FTX, pushing the exchange into insolvency and leading to its bankruptcy filing. The disclosure raised alarms throughout the crypto industry about FTX’s excessive financial entanglement with Alameda Research, reliance on unstable financial accounting practices, and exposure to significant financial management risks.
Here’s a concise summary of the key events:
- Binance Sells FTT Tokens: On November 6, Binance announced it would sell its entire FTT holdings (about 23 million tokens valued at $529 million) for risk management reasons following the Terra stablecoin collapse earlier in 2022.
- FTX Liquidity Crisis and Binance’s Initial Bailout Offer: Facing a liquidity crisis by November 7, FTX saw a customer withdrawal demand of $6 billion after the CoinDesk report. CEO Sam Bankman-Fried sought funds from venture capitalists and then Binance, which agreed to a non-binding deal to buy FTX’s non-U.S. operations.
- Binance Withdraws from Deal: Binance retracted its offer on November 8 due to concerns over FTX’s financial mismanagement.
- Regulatory Actions and FTX’s Troubles Deepen: The Bahamas froze FTX Digital Markets’ assets on November 10, with California initiating an investigation. FTX admitted to a lack of funds to meet customer withdrawals and announced Alameda Research would wind down.
- Bankman-Fried Steps Down, FTX Files for Bankruptcy: On November 11, Bankman-Fried resigned, and FTX filed for Chapter 11 bankruptcy. John J. Ray III took over as CEO.
- Suspected Hack and Lawsuit: Shortly after bankruptcy filing, FTX reported unauthorized transactions. A class-action lawsuit was filed on November 16 against FTX and its celebrity promoters.
- Bahamas Seizes FTX Assets, Bankman-Fried’s Arrest and Charges: The Bahamas seized FTX assets on November 12. Bankman-Fried was arrested on December 12 and faced multiple charges, including fraud and money laundering.
- Bankman-Fried’s Bail and Additional Charges: Released on a record $250 million bail on December 22, Bankman-Fried faced additional charges in early 2023, including unlicensed money transmission and foreign bribery.
- Bankman-Fried’s Incarceration and Witness Tampering Allegations: Accused of witness tampering in July 2023, he was placed under a gag order and later remanded to prison. Several FTX and Alameda executives, including Caroline Ellison, faced charges and agreed to cooperate with authorities.
- Bankman-Fried Convicted on First Set of Charges: His trial for seven of the eight pre-extradition criminal charges began on October 2, 2023, and concluded with guilty verdicts on all seven charges on November 2. The trial featured testimonies about Bankman-Fried’s misuse of customer deposits and false statements regarding FTX’s financial health. An eighth charge was dropped due to extradition treaty rules. He awaits trial for five post-extradition criminal charges set for March 11, 2024. The U.S. District Attorney described his actions as “one of the biggest financial frauds in American history.”
Future of FTX and Continuous Bankruptcy Filings
Following the collapse of FTX, other cryptocurrency exchanges, including Crypto.com, experienced a significant increase in customer withdrawals, leading to downsizing. Additionally, cryptocurrency lenders and banks such as BlockFi, Genesis Global, Celsius, and Voyager Digital faced their own bankruptcy liquidations and legal challenges. These entities faced issues for issuing highly undercollateralized loans to FTX and Alameda Research, neglecting the risks associated with repayment. In a notable case, Genesis and its parent company, Digital Currency Group, were sued by the Winklevoss twins’ crypto exchange, Gemini, over defaults on lending agreements related to Gemini’s Earn product.
Regulatory Response
Regulators are advocating for increased government oversight of cryptocurrencies. Law enforcement has intensified its scrutiny of crypto activities, both domestically and internationally, to reduce their impact on conventional markets. This has prompted some members of Congress to consider enacting new regulations for digital tokens and exchanges.
Asset Recovery Efforts
Investors and customers of FTX may not fully recuperate their assets. Claims by creditors are entangled in a protracted bankruptcy process and might be valued much lower than their original amount, depending on the bankruptcy trustee’s success in asset recovery. Efforts include tracking cryptocurrency flows, requesting politicians to return campaign donations, and legal actions to recover assets, including those given to Bankman-Fried’s parents.
Potential Revival of FTX
Though currently inactive, there’s a discussion about reviving FTX under new management. At least three parties have shown interest in acquiring and relaunching the exchange, with FTX exploring buyer options since June 2023.
Conclusion
The surge in legal issues within the cryptocurrency market has highlighted the crucial role of lawyers in navigating this complex and rapidly evolving field. As crypto companies face challenges like bankruptcies, regulatory scrutiny, and litigation, lawyers specializing in these areas have become indispensable.
They not only guide companies through legal mazes but also help in shaping the future of cryptocurrency regulation and compliance. While the crypto market may be unpredictable, the demand for legal expertise in this sector is consistently strong, offering lawyers both challenges and opportunities in a landscape where traditional finance meets digital innovation.
