In 2017, Thomas Braziel didn’t have much of an interest in Bitcoin. But as an investor in obscure distressed assets, his sport, as he called it, was bankruptcies — and there was nothing quite as enticing as the collapse of crypto exchange Mt. Gox.
(Bloomberg) — In 2017, Thomas Braziel didn’t have much of an interest in Bitcoin. But as an investor in obscure distressed assets, his sport, as he called it, was bankruptcies — and there was nothing quite as enticing as the collapse of crypto exchange Mt. Gox.
“The first instance was: boy, wouldn’t it be cool to buy a Japanese cryptocurrency bankruptcy claim?” said the founder of 507 Capital, a two-man shop named after a section of the U.S. bankruptcy code.
Braziel, the son of two insolvency lawyers, bought nearly 4,000 Bitcoins worth of claims from Mt. Gox customers, using $1 million raised from a family office. Former users of the exchange were waiting to get their money back after a hack of about 850,000 Bitcoins drove the Tokyo-based exchange into bankruptcy in 2014.
With payouts expected to finally begin, Braziel’s investment is set to return nearly 18 times, thanks to Bitcoin’s surge since he bought the claims. Now, after a $2 trillion rout in digital assets brought down some of crypto’s most prominent players, Braziel is again on the prowl for deals.
Crypto is about as niche as it gets in the world of distressed assets, but some of the investment opportunities and thorny questions raised by Mt. Gox’s collapse have started resurfacing as bankruptcies from Celsius Network to Voyager Digital Ltd. hit US courts for the first time. One of the biggest conundrums for judges: Should customers get their money back in fixed dollar values or in tokens?
“Nothing in the bankruptcy code talks about crypto assets,” said Elie Worenklein, a restructuring lawyer at Debevoise & Plimpton. “So the parties and bankruptcy courts will likely be analogizing various novel crypto issues to existing legal principles.”
‘I’ll Just be Let Down’
Crypto remains a novelty in US courts. When a regulated brokerage fails, customer assets are segregated and insured. But under the terms of Celsius’s high-yield Earn account, which held about $4.2 billion as of early July, customers were effectively turning their tokens over to the firm and giving it full control to lend them out. That means those depositors could now be unsecured creditors jostling for a share of a firm with a $1.19 billion hole in its balance sheet.
Bankrupt Celsius Seeks to Return $50 Million of Locked Crypto
They include Katie, a 27-year-old speech pathologist in Sydney who asked for her surname to be withheld as she hasn’t told her friends and family about losing money when Celsius failed. She was counting on the $138,000 she and her husband put on Celsius to help buy a house and start a family.
“I don’t want to put in my head that we’re going to get any back because then I’ll just be let down once again,” she said.
Like many other users, Katie would like her Bitcoin and Ether, rather than dollars, back. After Celsius officially filed for bankruptcy, Bitcoin initially rebounded as much as 30% and is now roughly flat. Ether is 60% higher.
More Like Commodities?
Whether she will pocket any of those gains remains unsettled, though the firm has said it intends to see customers capture any upside. Normally, if the assets are determined to be Celsius’s, such claim amounts are fixed in dollar terms. Customers can, however, argue that cryptocurrencies are more like commodities or securities, which are valued at the time they are sold, said Vincent Indelicato, a partner at Proskauer Rose LLP who specializes in restructurings.
Fear of missing out on a crypto recovery is driving some users to sell their claims. Oliver, an IT professional in his 40s who lives near Nantes in France, said he’s looking for a buyer for his $1 million Earn account for as little as 30% of the nominal value so he can free up cash to buy more crypto — and store it in his own wallet this time.
“Say in five years the crypto market goes up 10x, even if I get back 100% of the value as of July 13, I’m still losing a lot,” he said, referring to the date of Celsius’s bankruptcy.
The same debate loomed over the Mt. Gox case after Bitcoin started rallying in 2016, which meant the tokens that remained after the hack were enough to pay out the initial yen-denominated claims. The value of Mt. Gox’s estate also rose further when a free Bitcoin Cash — a token now worth $124 apiece — was given to every Bitcoin holder in 2017.
Braziel’s Windfall
The rest of the windfall could then have flowed into the pockets of equity owners including convicted founder Mark Karpeles. To avoid that, the case was shifted in 2018 from bankruptcy proceedings to a civil procedure that let users re-value their claims and get their money back in a combination of fiat and digital coins.
That payout is now going to mean hefty profits for those who started snapping up the claims at sharp discounts, like Braziel and his clients. He bought his first claim for $106,333 at 38% of the face value. It’s now worth more than $2 million. Fortress Investment Group LLC, an asset manager owned by Softbank, also bought Mt. Gox claims.
With the rehabilitation trustee making final administrative preparations based on a plan passed last year, Braziel said he expects the disbursement to begin in early 2023.
Still, that case won’t have much bearing on this new wave of insolvencies in US courts, and some potential investors are holding off from making any moves for now. At distressed investing firm Argo Partners, which owns claims on Mt. Gox and collapsed Canadian crypto exchange Quadriga, Jonathan Maruri says the current cases are still early in the process. The head of trading has spoken to a few Celsius users but hasn’t bought anything yet.
“These are some of the first interactions the crypto space has with the bankruptcy space,” he said.
Braziel said he’s talking to the holders of a few multimillion-dollar claims, but hasn’t struck any deals so far. Compared to Mt. Gox, whose users tended to be early crypto enthusiasts with cash to spare, he said he’s now hearing more from customers who have lost their life savings after being lured by the high yields Celsius and other crypto lenders marketed.
“For us, it’s exciting to see stuff,” Braziel said. “But at the same time you feel bad.”
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