“Everyone is learning about the crypto crash right now.” The FTX accident will be a “gold rush” for lawyers


The spectacular collapse of cryptocurrency exchange FTX has been compared to the collapse of Lehman, Enron and the Bernie Madoff scandal.

And as in these cases, lawyers immersed in cryptocurrency know that “it’s going to be a lot of work.”

These are the words of Anthony Casey, a University of Chicago law professor and former bankruptcy practitioner. He said Luck The cryptocurrency crash is years away.

FTX filed for Chapter 11 bankruptcy, and Sam Bankman-Fried announced his resignation as CEO on Nov. 11 after the exchange was accused of mishandling client funds and financing the operations of another company, Alameda Research, a trading company. established.

Bankman-Fried could face jail time if convicted of fraud and placed under “supervision” by local authorities in the Bahamas, where the FTX is based. But the results of FTX are expected to be more widespread compared to the former leader of the company. In an updated bankruptcy filing this week, FTX said the bankruptcy could affect more than a million people and businesses owed to the stock exchange, and it is currently missing between $1 billion and $2 billion in customer funds, according to Reuters.

With numbers like this, legal experts say Luck An FTX bankruptcy alone could drag on for years and cause a major collapse of the industry. And while this is bad news for countless people and businesses investing in cryptocurrencies, the legal profession is about to have a day.

“Everybody is learning about the crypto crash right now, and I think there’s going to be a lot of work out there on how to deal with the crypto crash,” Casey said.

“Unprecedented” failure

According to Casey, the sheer scale of FTX’s bankruptcy could result in enough lawsuits to rival some of the largest bankruptcies in history.

“A lot of law firms will be doing this,” he said. “If it’s bigger and more messed up than Enron, it’s going to be one of the most complex fraud bankruptcies of all time.”

Bankman-Fried was replaced in 2002 by John J. Ray III, a lawyer who had presided over a series of high-profile bankruptcies, including Enron, after the energy company’s acting chief executive was charged with fraud and fraudulent accounting. Ray was involved in the liquidation of Enron’s assets and distributions to defrauded creditors, but he says even that scandal did not compare to his role at the FTX.

“Never in my career have I seen such a complete failure of corporate oversight and the total absence of reliable financial information that occurred here,” Ray said of FTX’s accounts in a Nov. 17 bankruptcy filing, calling the situation “unprecedented.”

Among the most concerning aspects of the company’s finances, Ray cited the lack of a functioning corporate governance structure, missing or nonexistent bank account information, and the misuse of corporate funds to pay for FTX employees’ homes and other belongings. He also criticized the company’s lack of proper management, with most decisions being made by a group of “inexperienced, unsophisticated and potentially compromised individuals”.

“Other crypto companies will have to pay attention to their corporate structure and governance, or there will be a lot of problems. I think this will be an example for other cryptocurrency companies,” said Jiaying Jiang, a law professor at the University of Florida Levin College of Law who specializes in blockchain and cryptocurrency. Luck.

The liquidators found evidence of “serious fraud and mismanagement” at FTX that could lead to several lawsuits against the company, multiple law professors, former prosecutors and in-house legal counsel said. Luck.

But while most of the legal attention is likely to focus on FTX in the near future, the opening of Pandora’s box for the crypto sector is almost certain. The collapse of FTX led to widespread fears of contagion in the industry, with more companies at risk of collapse.

Other crashes this year before FTX include Celsius, BlockFi and Voyager Digital. Since the latter two are both secured by FTX, their potential bankruptcy is a big possibility going forward.

Even Changpeng Zhao, the CEO of FTX rival Binance, which led to the downfall of its rival by launching a run on FTX assets, warned that the FTX crash could have “cascading effects” on the industry as a whole.

Fears of infection

Law firms of all sizes have been steadily expanding their digital asset, cryptocurrency, and blockchain practices for years, but the magnitude of the FTX explosion could bring more bankruptcy and litigation lawyers to the crypto sector.

Yuliya Guseva, law professor and head of Rutgers Law School’s Blockchain and Fintech Program, says legal practices often operate on a supply-and-demand basis. Luck. Ahead of the crypto winter of 2022 — when virtually all cryptocurrencies will fall in value — Guseva said demand for “transactional lawyers,” or lawyers who can facilitate cryptocurrency-related business projects and investments, is more active.

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

“This ‘winter’ may see more litigation against crypto firms as more firms fail,” he said, adding that more bankruptcies and litigation will enter the cryptocurrency space in the coming months.

“The FTX failure is simply a signal to these groups to pay more attention to cryptocurrency. I think that we can expect this in the current conditions,” said Guseva.

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

“In the next few months, more cryptocurrency companies will go bankrupt. It’s likely,” Jiang said. “And of course the lawyers will do their jobs and deal with all that stuff.”

A paradigm shift

After the FTX collapse, longtime advocates of blockchain technology, including Binance’s CZ, Microstrategy founder Michael Saylor, and Crypto.com exchange CEO Chris Marszalek, stepped forward to say it’s time for stricter regulations to protect the industry from threats. Accidents like FTX.

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

With an event as big as the FTX collapse, experts say regulation and heightened government oversight of the industry is likely to follow.

“It’s still early, but this is going to be one of the biggest fraud bankruptcies we’ve seen,” said Harvard law professor and corporate bankruptcy expert Jared Ellias. Luck. “When you have major fraud or major corporate misconduct, history teaches us that you have regulatory responses.”

Critics have accused the main US regulator, the Securities and Exchange Commission, of failing to protect users from the many cryptocurrency-related meltdowns that have occurred throughout the year. A Washington insider recently said Luck SEC Chairman Gary Gensler has been “in a corner” with Congress, where lawmakers are demanding answers about how his agency could have missed the fraud perpetrated by the FTX.

Treasury Secretary Janet Yellen emphasized the need for more cryptocurrency regulation in a recent statement, saying that the collapse of FTX and its widespread use demonstrated “the need for more effective oversight of cryptocurrency markets.”

Critics, however, argue that cryptocurrency should not be regulated because it would spread contagion from cryptocurrency to the mainstream economy. Nobel Prize-winning economist Paul Krugman recently wrote that cryptocurrency has so far “made almost no inroads into the traditional role of money,” suggesting that cryptocurrencies would be practically indistinguishable from traditional banks under a more regulated regime. Similarly, economists Stephen Cecchetti and Kim Schoenholtz recently wrote Financial Times “It’s better to do nothing and just let the crypto burn.”

Regardless of the future of regulation, the number of bankruptcies will increase. During this year’s crypto winter alone, more than 12,000 cryptocurrencies effectively ceased trading and remained active, becoming “zombie” coins.

Either way, the lawyers will succeed. “If there’s going to be regulation, there’s work for lawyers,” said the University of Chicago’s Casey. Harvard’s Ellias said the next few months could amount to a “gold rush” for cryptocurrency lawyers.

Regulation could mean that demand for lawyers in the blockchain and crypto space will shift away from bankruptcy and litigation as the focus returns to compliance and business projects, said Paul Strickland, of counsel at federal defense firm Oberheiden PC, who advises clients on blockchain and government-related matters. said he was investigating Luck.

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

However, as the extent of the damage caused by the FTX crash becomes clearer in the coming months and zombie crypto companies are eliminated, there will be a greater demand for specialized bankruptcy lawyers.

“I think by the end of the year, many bankruptcy attorneys will know more about cryptocurrencies than they do today,” Harvard’s Ellias said.

This story was originally featured on Fortune.com

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