The FTX crash will propel bankruptcy attorneys into crypto for years to come

And just like in these cases, attorneys steeped in crypto know “there’s going to be a lot of work.”

Those are the words of Anthony Casey, a law professor at the University of Chicago and a former practitioner specializing in bankruptcy law. He said wealth that years of crypto bankruptcy await.

FTX filed for Chapter 11 bankruptcy and announced Bankman-Fried’s resignation as CEO on Nov. 11 after allegations he mishandled client funds on the exchange and used them to fund trading firm Alameda Research, another company he founded to have .

Bankman-Fried could face jail time if found guilty of fraud and is reportedly being kept “under surveillance” by local authorities in the Bahamas, where FTX is based. But the impact of FTX’s aftermath will spread far beyond the company’s former boss. In an updated bankruptcy filing this week, FTX revealed the bankruptcy could affect more than a million people and companies now owed money from the exchange, which Reuters says is currently short of between $1 billion and $2 billion in customer funds.

With such numbers say legal experts wealth FTX’s bankruptcy alone could drag on for years and trigger a major collapse in the industry. And while that’s bad news for countless people and companies that have invested in cryptocurrencies, the legal profession is about to have a big day.

“Everyone is learning crypto bankruptcy right now, and I think there’s going to be a lot of work on how to handle crypto bankruptcy,” Casey said.

An “unprecedented” failure

The sheer scale of FTX’s collapse could trigger enough lawsuits to compare it to some of the biggest bankruptcies in history, according to Casey.

“A lot of law firms will look into this case,” he said. “If it’s bigger than Enron and messier, it’s going to be one of the most complicated scam bankruptcies ever.”

Bankman-Fried was replaced as acting CEO by John J. Ray III, an attorney who has led several high-profile bankruptcies, including Enron in 2002 after the energy company was accused of fraud and misaccounting. Ray was responsible for liquidating Enron’s assets and distributing them to betrayed creditors, but he says even that scandal doesn’t compare to the task he faces at FTX.

“Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information as here,” Ray said of FTX’s accounts in a Nov. 17 bankruptcy filing, calling the situation “unprecedented.”

Among the most troubling aspects of the company’s finances, Ray cited the lack of a functioning corporate governance structure, missing or non-existent bank account information, and the misuse of company funds to pay for homes and other items for FTX employees. He also criticized the lack of a proper board for the company, where most decisions would be made by a group of “inexperienced, inexperienced and potentially vulnerable people”.

“Other crypto companies need to pay attention to their corporate structures and governance, otherwise there will be many problems. I think this will be an example for other crypto companies,” said Jiaying Jiang, a law professor at the University of Florida’s Levin College of Law who specializes in blockchain and cryptocurrency wealth.

Liquidators have found evidence of “gross fraud and mismanagement” at FTX, which is likely to fuel multiple lawsuits against the company, several law professors, former prosecutors and in-house counsel have said wealth.

But while most of the legal attention in the near future will likely focus on FTX, it is almost certain that it will open a Pandora’s box for the crypto sector. FTX’s collapse has sparked widespread fears of contagion in the industry, with many more companies at risk of collapse.

Other collapses ahead of FTX this year included Celsius, BlockFi, and Voyager Digital. Since the latter two were both bailed out by FTX, their potential bankruptcy is a big possibility going forward.

Even Changpeng Zhao, the CEO of FTX competitor Binance, which arguably sparked its competitor’s demise when it triggered a run on FTX assets, has warned that the FTX crash could have a “cascading impact” on the entire industry .

fear of contagion

Law firms of all sizes have been steadily expanding their digital asset, cryptocurrency and blockchain practices for years, but the scale of the FTX implosion could accelerate this and bring many more bankruptcy and litigators into the crypto space.

Law firms often operate on a supply and demand basis, said Yuliya Guseva, law professor and director of Rutgers Law School’s blockchain and fintech program wealth. Prior to the crypto winter of 2022 — when values ​​for virtually all cryptocurrencies fell — according to Guseva, demand for “transaction-side attorneys,” or attorneys who could facilitate crypto-related business projects and investments, was much more active.

But the steady decline in cryptocurrency assets this year has dampened lawyers’ interest in transactions and corporate projects, Guseva said.

“As more firms fail this ‘winter,’ there could be more lawsuits against crypto firms,” ​​she said, adding that more bankruptcy and litigation experts will be entering the crypto space in the coming months.

“The failure of FTX is simply becoming a signal for these groups to pay more attention to crypto. I think that’s what we can expect in this current climate,” Guseva said.

Three law firms contacted by Fortune declined to comment, citing their own potential business interests following the FTX collapse.

“There will be more crypto companies going bankrupt in the next few months. It’s very likely,” Jiang said. “And of course lawyers will go about their business and deal with all these cases.”

paradigm shift

After the collapse of FTX, many longtime proponents of blockchain technology – including Binance’s CZ, Microstrategy founder Michael Saylor and Crypto.com exchange CEO Kris Marszalek – came forward and said it was time for stricter regulations to protect the cryptocurrency Branch provide for crashes as with FTX.

“Now regulators are rightfully going to be looking at this industry much, much harder, which is probably a good thing, to be honest,” CZ said on the day FTX filed for bankruptcy.

In the face of a case as big as FTX’s collapse, experts say regulation and tighter government scrutiny of the industry are likely to follow.

“It’s early days, but this is going to be one of the largest fraud-related bankruptcies we’ve seen,” said Jared Ellias, a Harvard law professor and corporate bankruptcy expert wealth. “If you have big fraud or bad behavior by big companies, history teaches us that you have regulatory reactions.”

Critics have accused the Securities and Exchange Commission, the main regulator in the US, of failing to protect users from the year’s numerous crypto-related crashes. This was recently reported by an insider from Washington wealth that SEC Chairman Gary Gensler was “in a corner” with Congress, where lawmakers allegedly wanted answers about how his agency could have overlooked the fraud committed by FTX.

The need for stronger crypto regulation was highlighted by Treasury Secretary Janet Yellen in a recent statement, in which she said the FTX collapse and its far-reaching implications demonstrated “the need for more effective oversight of cryptocurrency markets.”

However, critics argue that crypto should not be regulated as this would spread crypto contagion into the mainstream economy. Nobel Prize-winning economist Paul Krugman recently wrote that crypto has “almost never made inroads into the traditional role of money,” noting that crypto exchanges would be virtually indistinguishable from traditional banks under a more regulated regime. Similarly, economists Stephen Cecchetti and Kim Schoenholtz wrote in a recent article financial times Comment: “It’s far better to do nothing and just let crypto burn.”

Regardless of the regulatory future, the number of insolvencies is likely to increase. During this year’s crypto winter alone, over 12,000 cryptocurrencies virtually ceased trading but remained active, becoming so-called “zombie” coins.

In any case, the lawyers will be successful. “If there’s going to be regulation, there’s work for lawyers,” said Casey of the University of Chicago. Harvard’s Ellias said the next few months could spell a “gold rush” for crypto advocates.

Regulation could mean demand for blockchain and crypto lawyers continues beyond bankruptcies and litigation as the focus returns to compliance and business projects, Paul Strickland, legal counsel at federal defense firm Oberheiden PC, advises clients on matters related to Blockchain and government advises investigation, tells wealth.

“I hear that from a lot of my clients when they say, ‘We want to follow the rules, we just don’t know exactly what they are,'” Strickland said, adding that a more regulated environment “could spur overall growth and legitimacy.” the industry.”

But as the extent of the damage caused by the FTX crash becomes more apparent in the coming months and zombie crypto companies are weeded out, bankruptcy attorneys are likely to be in much greater demand.

“I think by the end of the year, a lot of bankruptcy attorneys will be doing a lot more with crypto than they are now,” Harvard’s Ellias said.