1
00:00:00,000 --> 00:00:08,960
Good morning, everyone. This is Judge Kaplan, and I'll start this morning's hearing on

2
00:00:08,960 --> 00:00:17,040
Block by Inc. et al. We have a limited number of attorneys in the courtroom, as well as

3
00:00:17,040 --> 00:00:27,400
counsel and parties appearing remotely. To the extent parties who are appearing remotely

4
00:00:27,400 --> 00:00:43,880
wish to be heard or to use the raise hand function. Let me turn to debtors counsel.

5
00:00:43,880 --> 00:00:48,080
Good morning. Good morning, Your Honor. Mike Slade from Kirkland-Elst for the debtors.

6
00:00:48,080 --> 00:00:53,320
All right. I think we are ready to proceed this morning on the wallet withdrawal motion.

7
00:00:53,320 --> 00:01:01,400
We're finally there. Yes. I have some slides that I intend to use to guide the presentation

8
00:01:01,400 --> 00:01:05,720
and my approach on it. Absolutely. There wouldn't be oral argument

9
00:01:05,720 --> 00:01:21,360
these days without a PowerPoint. Mr. Jacobson, do we have those on?

10
00:01:21,360 --> 00:01:27,240
They're also available on the Crowell Block by website for folks that are participating

11
00:01:27,240 --> 00:01:31,840
in the hearing over Zoom and would like to follow along.

12
00:01:31,840 --> 00:01:38,040
For the benefit of all, my intention is to hear from the debtor first, let them prosecute

13
00:01:38,040 --> 00:01:45,080
their emotion, hear from those who are supporting the debtor, and then to the objectors. And

14
00:01:45,080 --> 00:01:47,800
then of course, I'm sure there's always a reply.

15
00:01:47,800 --> 00:01:51,920
Yes. Thank you, Your Honor. And Ms. Kofsky, my opposing counsel, I just want to thank

16
00:01:51,920 --> 00:01:57,320
her. We were able to work out a set of agreed stipulated facts that are on the docket at

17
00:01:57,320 --> 00:02:06,120
docket number 842. Those facts, along with the amended declaration of Amit Chila, which

18
00:02:06,120 --> 00:02:12,520
is on the docket at 822 plus the exhibits, those constitute the factual record for this

19
00:02:12,520 --> 00:02:19,360
particular hearing by agreement. And we have agreed there won't be any witness cross-examination

20
00:02:19,360 --> 00:02:22,040
at this hearing. We're ready to proceed to argument.

21
00:02:22,040 --> 00:02:24,080
Makes sense. Thank you.

22
00:02:24,080 --> 00:02:28,440
So thank you, Your Honor. And as you noted, we are here at log last for the wallet withdrawal

23
00:02:28,440 --> 00:02:36,240
motion. And the particular issue being addressed today is whether post platform pause actions

24
00:02:36,240 --> 00:02:45,240
were effective to give those clients rights against assets in the custodial omnibus wallets.

25
00:02:45,240 --> 00:02:51,040
We believe that they are not. And the relief that the debtors are requesting today is supported

26
00:02:51,040 --> 00:02:57,440
by the official committee of unsecured creditors and also what we believe to be the aptly named

27
00:02:57,440 --> 00:03:04,400
ad hoc committee of actual wallet holders, which is represented by the Reed Smith firm.

28
00:03:04,400 --> 00:03:10,120
And during our argument today, I refer to them as the Reed Smith ad hoc group. And Your

29
00:03:10,120 --> 00:03:20,600
Honor, the motion follows a familiar pattern in the Block 5 bankruptcy case.

30
00:03:20,600 --> 00:03:30,560
Trying to advance the slides. I can click through it.

31
00:03:30,560 --> 00:03:45,000
Okay. Next slide. The relief that we're seeking is pretty simple. Block 5 wants to give people

32
00:03:45,000 --> 00:03:49,960
their assets back. And we want to give them back their assets as quickly as possible.

33
00:03:49,960 --> 00:03:54,280
But the process for effectuating this pretty simple goal has become very complicated and

34
00:03:54,280 --> 00:04:00,160
challenging. And today we are going to debate the consequences of very small details about

35
00:04:00,160 --> 00:04:06,680
Block 5's infrastructure, the terms of service, and how they work together. Next slide. Block

36
00:04:06,680 --> 00:04:14,080
5 filed this motion because there are specific tokens that are worth about $297 million that

37
00:04:14,080 --> 00:04:20,820
are sitting in the custodial omnibus wallets at BitGo and Fireblocks. And those tokens

38
00:04:20,820 --> 00:04:28,040
were deposited or moved to the custodial omnibus wallets at the direction of specific clients

39
00:04:28,040 --> 00:04:35,520
for requests before the platform pause time stamp on November 10th at 8.15 p.m. Eastern

40
00:04:35,520 --> 00:04:41,600
time. Under Block 5's terms of service, Block 5 did not have the right to use or rehypothecate

41
00:04:41,600 --> 00:04:48,360
those assets because they were in those particular custodial omnibus wallets. And Block 5 did

42
00:04:48,360 --> 00:04:54,640
not do so. The tokens in those particular omnibus wallets are the property of the clients

43
00:04:54,640 --> 00:05:01,020
that directed them into those particular wallets before the platform pause. And we want those

44
00:05:01,020 --> 00:05:07,800
assets to go back to those clients because they are not property of the estate. And it

45
00:05:07,800 --> 00:05:14,240
is undisputed that the actual tokens that are in those custodial omnibus wallets were

46
00:05:14,240 --> 00:05:21,960
all deposited or moved there by Block 5 clients as a result of transactions before the platform

47
00:05:21,960 --> 00:05:28,080
pause time stamp. My opposing counsel, which I'm going to call the Troutman Ad Hoc Group,

48
00:05:28,080 --> 00:05:32,960
it is their position that they have an equal right to the coins that were moved to those

49
00:05:32,960 --> 00:05:40,240
custodial omnibus wallets at the direction of other clients before the platform pause.

50
00:05:40,240 --> 00:05:47,120
Their clients sought to remove assets from Block 5's estate after the platform pause.

51
00:05:47,120 --> 00:05:55,680
If you could flip to slide four. Between the platform pause time stamp, your

52
00:05:55,680 --> 00:06:03,280
honor, on November 10th at 8.15 p.m. and the petition date, about 48,000 clients clicked

53
00:06:03,280 --> 00:06:11,040
buttons on the Block 5 user interface. 48,000 clients in an effort to transfer about $375

54
00:06:11,040 --> 00:06:16,400
million of cryptocurrency from their Block 5 interest accounts, which I'll call the

55
00:06:16,400 --> 00:06:22,360
BIA accounts, into the custodial omnibus wallets. And the members of the Troutman Ad Hoc Group

56
00:06:22,360 --> 00:06:29,240
are among the 48,000 clients that did that. It is not disputed that no cryptocurrency

57
00:06:29,240 --> 00:06:36,080
ever moved as a result of the buttons pushed after November 10th at 8.15 Eastern time,

58
00:06:36,080 --> 00:06:41,920
period. Nothing moved. And even though the only tokens that are in the custodial omnibus

59
00:06:41,920 --> 00:06:47,400
wallets reflect other clients' activities, the Troutman Ad Hoc Group thinks that they

60
00:06:47,400 --> 00:06:53,120
have rights to those assets, too. And we respectfully disagree with their position. And to articulate

61
00:06:53,120 --> 00:07:00,600
why, I want to step back, way back, and talk specifically about the two products at issue.

62
00:07:00,600 --> 00:07:06,860
And Rob, if you could turn to slide five. So Block 5 offered several different products.

63
00:07:06,860 --> 00:07:12,040
But the two that are at issue here, Your Honor, are the Block 5 wallet product and the Block

64
00:07:12,040 --> 00:07:17,920
5 interest account. Cryptocurrency assets that are on the Block 5 platform have to be

65
00:07:17,920 --> 00:07:23,120
in one or the other. They cannot be in both. And just by the nature of the way the products

66
00:07:23,120 --> 00:07:28,220
work, it is not possible for assets to be moved from one of the accounts to the other

67
00:07:28,220 --> 00:07:36,000
at just the push of a button. Slide six. Block 5 maintains the omnibus wallet accounts at

68
00:07:36,000 --> 00:07:41,080
Bitco and Fireblocks for the wallet product. And Your Honor, I think you can think of the

69
00:07:41,080 --> 00:07:47,440
Bitco and Fireblocks accounts. They're like safes that are held by Block 5. Block 5 has

70
00:07:47,440 --> 00:07:54,360
the private keys, and Block 5 has the ability to access these particular coins through the

71
00:07:54,360 --> 00:08:02,100
Bitco or the Fireblocks software. And they're omnibus accounts by coin. So the Bitcoin that's

72
00:08:02,100 --> 00:08:11,320
placed in the Block 5 wallet product by customers is put into the omnibus wallet account. And

73
00:08:11,320 --> 00:08:19,320
the same with Ethereum put into the Block 5 custodial wallet product by customers. Cryptocurrency

74
00:08:19,320 --> 00:08:25,520
that's housed in the Block 5 wallet product, it does not move outside the custodial omnibus

75
00:08:25,520 --> 00:08:31,040
wallets until and unless directed by the customer. And the terms of service are very explicit

76
00:08:31,040 --> 00:08:36,400
about this. The terms of service say that the title to the cryptocurrency in the Block

77
00:08:36,400 --> 00:08:42,200
5 wallet shall at all times remain with you and shall not transfer to Block 5, and that

78
00:08:42,200 --> 00:08:49,920
Block 5 shall not sell, transfer, load, hypothecate, or otherwise alienate cryptocurrency held

79
00:08:49,920 --> 00:08:57,840
in the Block 5 wallet unless specifically instructed. So let me just clarify. All cryptocurrency

80
00:08:57,840 --> 00:09:07,440
held by Block 5 that was deposited by customers went through Bitco. Initially. Initially.

81
00:09:07,440 --> 00:09:15,160
Yes. Then placed in the various omnibus wallets. So it went into Bitco. And then if a customer

82
00:09:15,160 --> 00:09:20,200
said, I want this to be in the interest bearing account, then it was moved to the rehypothecatable

83
00:09:20,200 --> 00:09:25,720
wallets. If they did not, it stayed in the custodial account. Now there are two sets

84
00:09:25,720 --> 00:09:31,960
of those on it. One is at Bitco and one is at Fireblocks. But those are custodial wallets

85
00:09:31,960 --> 00:09:37,640
that have to, the coins have to sit in those accounts. They do not go to the B account.

86
00:09:37,640 --> 00:09:42,160
They do not earn interest. And they cannot be used for Block 5's revenue generating

87
00:09:42,160 --> 00:09:48,640
activities. And that's actually the opposite of the coins that go into the B or Block 5

88
00:09:48,640 --> 00:09:54,220
interest accounts. And that's on slide seven. They are the opposite of the custodial accounts.

89
00:09:54,220 --> 00:09:59,640
The point of the interest product is that by directing the deposit of cryptocurrency

90
00:09:59,640 --> 00:10:06,640
into the B account, you're giving title and control over the tokens to Block 5 for use

91
00:10:06,640 --> 00:10:11,980
in Block 5's revenue generating activities. And cryptocurrency that's placed into the

92
00:10:11,980 --> 00:10:18,560
B accounts earns interest. So of course Block 5 has to do something with those coins. Otherwise

93
00:10:18,560 --> 00:10:23,120
it would have no way to generate the money to pay the interest. And the terms of service

94
00:10:23,120 --> 00:10:28,760
again are very explicit about this. They say that Block 5 has the right if you direct your

95
00:10:28,760 --> 00:10:35,480
coins into the B product without further notice to pledge, re-pledge, hypothecate, re-hypothecate,

96
00:10:35,480 --> 00:10:42,600
sell, lend, otherwise transfer with all attendant rights of ownership for any period of time

97
00:10:42,600 --> 00:10:49,220
and without Block 5 retaining possession and control, a like amount of cryptocurrency.

98
00:10:49,220 --> 00:10:54,160
Those are very clear in the Block 5 BIA terms of service. And my colleagues on the other

99
00:10:54,160 --> 00:10:59,360
side admit this in their reply brief that when you put, when you direct assets into

100
00:10:59,360 --> 00:11:07,920
the B product, you are giving title to those assets away from yourself and to Block 5.

101
00:11:07,920 --> 00:11:14,680
And you acknowledge in the BIA terms that with respect to assets used by Block 5 pursuant

102
00:11:14,680 --> 00:11:20,760
to the BIA terms, you will not be able to exercise rights of ownership. So your honor,

103
00:11:20,760 --> 00:11:27,160
as Block 5 told everyone it was going to do, Block 5 did in fact re-hypothecate and lend

104
00:11:27,160 --> 00:11:32,960
currency placed by customers into the B accounts over to third parties to earn yield. Now Block

105
00:11:32,960 --> 00:11:39,240
5 did keep a buffer on hand at any one time to try to have liquidity available to meet

106
00:11:39,240 --> 00:11:44,760
customer withdrawals. But the whole business model was to lend cryptocurrency that was

107
00:11:44,760 --> 00:11:50,320
deposited into the BIA accounts to third parties to earn yield. Block 5 was a crypto lending

108
00:11:50,320 --> 00:11:56,920
business and it did exactly what it told customers it was going to do. Now those loans in large

109
00:11:56,920 --> 00:12:02,720
part were freely callable and they were callable far in advance of Block 5's obligations to

110
00:12:02,720 --> 00:12:09,240
its clients. And the system that Block 5 had in place worked for years because Block 5

111
00:12:09,240 --> 00:12:14,640
could call back loans to customers quicker than it would need to in order to satisfy

112
00:12:14,640 --> 00:12:20,840
withdrawal requests. And that's why Block 5 was in fact able to satisfy customer requests

113
00:12:20,840 --> 00:12:28,000
prior to November 9th of 2022 at all times. It was able to satisfy those faster than it

114
00:12:28,000 --> 00:12:32,800
was required to in terms of service. But in our view, based on the nature of the Block

115
00:12:32,800 --> 00:12:39,240
5 interest account, it does not make sense to assert that if customer A pushed a button

116
00:12:39,240 --> 00:12:44,760
seeking to transfer assets in the interest account to the wallet account to assert that

117
00:12:44,760 --> 00:12:50,500
it happened immediately and therefore there were coins in the omnibus custody audio accounts

118
00:12:50,500 --> 00:12:56,240
reflecting customer A's direction. That's not how the system worked. By definition,

119
00:12:56,240 --> 00:13:02,000
the movement of assets could not happen immediately because the asset transfers were manual. They

120
00:13:02,000 --> 00:13:07,440
were manual for a number of reasons. One is that the company deliberately divorced the

121
00:13:07,440 --> 00:13:14,040
user interface from the external actual assets in order to reduce opportunities for security

122
00:13:14,040 --> 00:13:20,580
breaches. But more practically, there might not have been assets available for immediate

123
00:13:20,580 --> 00:13:26,520
movement from BIA to wallet precisely because of the nature of the product. Customers had

124
00:13:26,520 --> 00:13:32,760
allowed the assets in BIA to be lent to third parties, rehypothecated, and large portions

125
00:13:32,760 --> 00:13:37,840
of them were. So Block 5 might not even have possession of the assets to be able to move

126
00:13:37,840 --> 00:13:46,040
them from BIA to wallet. So if you move slide to slide 8, the reality is that the assets

127
00:13:46,040 --> 00:13:52,840
held for the Block 5 wallet product were in segregated wallets at BitGo and FireBlock.

128
00:13:52,840 --> 00:13:58,600
So Block 5 did not use to generate revenue. The assets in the interest accounts were in

129
00:13:58,600 --> 00:14:04,720
fact rehypothecated for revenue generated activities. They were not commingled. And

130
00:14:04,720 --> 00:14:08,480
for one to be moved from one to the other, you actually have to move them from one to

131
00:14:08,480 --> 00:14:15,480
the other. So now I want to move to the November situation and talk about exactly what happened

132
00:14:15,480 --> 00:14:23,320
in January. Let's turn to slide 9. So as I talked about previously, throughout Block

133
00:14:23,320 --> 00:14:27,880
5's history, it had been able to process customer withdrawal requests in the ordinary

134
00:14:27,880 --> 00:14:35,360
course. Just an example, in June when Celsius shut its doors, Block 5 was able to process

135
00:14:35,360 --> 00:14:41,560
all customer withdrawal requests. And Voyager, when it shut down its doors in July of 2022,

136
00:14:41,560 --> 00:14:47,000
Block 5 kept right on trucking. As prices reduced and the crypto market struggled a

137
00:14:47,000 --> 00:14:53,760
little bit between June and November of 2022, some clients decided that crypto was too risky.

138
00:14:53,760 --> 00:14:58,880
They wanted to pull their assets out of Block 5 and it processed billions of dollars in

139
00:14:58,880 --> 00:15:05,600
customer withdrawals. But that said, as the market has shown in the summer, the cryptocurrency

140
00:15:05,600 --> 00:15:12,400
market is very sensitive to market feedback. A single news article can have a huge impact

141
00:15:12,400 --> 00:15:19,720
on customer behavior. Tweets can kill or spike value at any moment. You go to the next slide,

142
00:15:19,720 --> 00:15:25,000
Rob. Crypto Twitter, your honor, is nonstop, as I know you have experienced. I'm sure people

143
00:15:25,000 --> 00:15:29,960
are listening right now. And what I'm saying, for some reason I probably can't figure out,

144
00:15:29,960 --> 00:15:35,500
is probably moving the price of some cryptocurrency. But what happened in November of 2022 is pretty

145
00:15:35,500 --> 00:15:40,760
straightforward. Negative news caused a run on the bank at FTX. That's what happened.

146
00:15:40,760 --> 00:15:46,800
Now if the FTX's disclosures to the world had been accurate, if it had been a real company

147
00:15:46,800 --> 00:15:51,080
and maintained assets one to one, that wouldn't have mattered. Because customers would have

148
00:15:51,080 --> 00:15:55,400
been able to withdraw their cryptocurrency as FTX had represented they would have been

149
00:15:55,400 --> 00:16:01,200
able to. Unfortunately, it was a massive fraud and it failed. And Block 5 was collateral

150
00:16:01,200 --> 00:16:08,960
damage. And all of this played out over a week in November of 2022. Next slide. On November

151
00:16:08,960 --> 00:16:16,560
6th, the CEO of Binance, which is one of the largest players, tweeted that he was going

152
00:16:16,560 --> 00:16:24,520
to sell all of his position in FTT when a major player with a large position in a cryptocurrency

153
00:16:24,520 --> 00:16:31,160
says it's going to liquidate its entire position. Obviously, the price moves materially. And

154
00:16:31,160 --> 00:16:37,360
Binance continued to tweet about FTX. And you can go to the next slide. Customers continued

155
00:16:37,360 --> 00:16:44,960
to react and there were huge customer withdrawals. $6 billion in just a couple of days. And on

156
00:16:44,960 --> 00:16:54,240
November 8th, FTX ceased customer withdrawals. But the situation was still unclear. Okay?

157
00:16:54,240 --> 00:16:58,520
Block 5 didn't exactly know what was going to happen. Because Binance announced the next

158
00:16:58,520 --> 00:17:05,440
day that it was going to acquire FTX and stop the slide. Nobody knew what was going to happen.

159
00:17:05,440 --> 00:17:11,320
But the situation calmed down for at least a short amount of time. Then the situation

160
00:17:11,320 --> 00:17:17,320
flipped again. Next slide. The next day, on November 9th, the CEO of Binance changed his

161
00:17:17,320 --> 00:17:24,520
mind and he tweeted out as a result of corporate due diligence as the result of latest news

162
00:17:24,520 --> 00:17:30,600
reports regarding mishandled customer funds and alleged U.S. agency investigations. We

163
00:17:30,600 --> 00:17:36,800
have decided that we will not pursue the potential acquisition of FTX.com. Now, that caused a

164
00:17:36,800 --> 00:17:43,160
massive run on the bank at FTX and they had to shut down their platform. Block 5 had to

165
00:17:43,160 --> 00:17:48,720
figure out what to do. It tried to get capital elsewhere. FTX had an obligation to provide

166
00:17:48,720 --> 00:17:55,680
capital. It refused to do so. FTX's Alameda had posted additional collateral as your honor

167
00:17:55,680 --> 00:18:00,040
knows from the adversary that was pending in front of the court. Block 5 tried to access

168
00:18:00,040 --> 00:18:05,920
that but was unable to immediately do so. And Block 5 began experiencing its own high

169
00:18:05,920 --> 00:18:11,520
levels of customer withdrawals. And then it had to decide what to do under its own terms

170
00:18:11,520 --> 00:18:16,960
of service. And so the board thought hard about this and Block 5 held out as long as

171
00:18:16,960 --> 00:18:23,280
it could. Go to the next slide. It had two meetings of the board on November 10th of

172
00:18:23,280 --> 00:18:29,880
2022 at 9.30 in the morning. They thought about whether or not they should stop customer

173
00:18:29,880 --> 00:18:34,720
withdrawals and freeze the platform. They decided to wait and see until what happened

174
00:18:34,720 --> 00:18:41,400
later in the day. Next slide. At 3.45 p.m. they had a second board meeting and held that

175
00:18:41,400 --> 00:18:46,680
they really didn't have any alternative because of the level of customer withdrawals and the

176
00:18:46,680 --> 00:18:51,600
liquidity issues that they were facing. It was in the company's best interest to pause

177
00:18:51,600 --> 00:18:59,920
platform activity. So at 8.15 p.m. next slide. Block 5 implemented the platform pause. Block

178
00:18:59,920 --> 00:19:07,360
5 drew a line in the sand. November 10th at 8.15 p.m. to protect and ensure equal treatment

179
00:19:07,360 --> 00:19:14,360
of similarly situated clients. Block 5 took the steps via the true up and batching processes

180
00:19:14,360 --> 00:19:20,560
to honor all trading and withdrawal requests that had been initiated before that time stamp,

181
00:19:20,560 --> 00:19:28,560
8.15 p.m. on November 10th, including requests for transfer, requests for withdrawal, and

182
00:19:28,560 --> 00:19:35,040
requests for trades. If it was if you requested before April 8.15 on April on November 10th,

183
00:19:35,040 --> 00:19:41,360
Block 5 fulfilled that request. But Block 5 stopped all other processing or transaction

184
00:19:41,360 --> 00:19:45,680
requests. And so if you pushed a button on the user interface to request a withdrawal

185
00:19:45,680 --> 00:19:53,980
from the platform, a transfer to the wallet account, or a trade after that time period,

186
00:19:53,980 --> 00:19:59,520
it was not fulfilled. If a client tried to make a loan payment after the platform pause

187
00:19:59,520 --> 00:20:06,280
time stamp, that request was never recognized. And your honor authorized us via your scratch

188
00:20:06,280 --> 00:20:12,000
order, which is a docket 754, to send that money and any future loan payments that the

189
00:20:12,000 --> 00:20:17,480
clients might make back to the clients immediately because those transactions were never processed

190
00:20:17,480 --> 00:20:23,920
and effectuated. No transactions initiated after the platform pause time stamp were completed.

191
00:20:23,920 --> 00:20:28,800
And Block 5 had the right to do this. In fact, this possibility was expressly contemplated

192
00:20:28,800 --> 00:20:34,720
by the terms of service as it had to be. Block 5 had to have put in place processes to protect

193
00:20:34,720 --> 00:20:40,320
clients in a downside scenario. And that's what it did. So let's move to some of those.

194
00:20:40,320 --> 00:20:47,040
Slide 19 shows the general acknowledgment by all users of the platform that they have

195
00:20:47,040 --> 00:20:53,000
to read, agreed and understood the Block 5 terms of service, which were written to protect

196
00:20:53,000 --> 00:21:00,480
the company and clients. The next slide. This is a key term of service, your honor. And

197
00:21:00,480 --> 00:21:06,320
in fact, it's written in not just the general terms of service, it's part of each product,

198
00:21:06,320 --> 00:21:11,600
the wallet product, the BIA product, the BIA product for international client, the private

199
00:21:11,600 --> 00:21:18,320
client terms of service. Every client agrees. So there are since two sets of terms of service.

200
00:21:18,320 --> 00:21:24,840
There's the general and then account specific. There are several sets of terms of service

201
00:21:24,840 --> 00:21:30,800
and basically they apply depending on what you're doing. The general terms apply at all

202
00:21:30,800 --> 00:21:37,560
times. The wallet terms apply when you're to wallet related transactions. The BIA term

203
00:21:37,560 --> 00:21:43,300
applies to BIA term related transactions. And multiple sets of terms might apply depending

204
00:21:43,300 --> 00:21:49,040
on what specifically you are doing. It is more often the case than multiple sets of

205
00:21:49,040 --> 00:21:53,880
terms would apply. And in fact, this specific term was listed multiple places because it

206
00:21:53,880 --> 00:22:02,240
had to be applicable in many different circumstances. And people had to agree that Block 5 might

207
00:22:02,240 --> 00:22:07,680
experience among other things, extreme market conditions or other operational and technical

208
00:22:07,680 --> 00:22:13,980
difficulties which could result in the immediate halt of transfers and withdrawals of cryptocurrency

209
00:22:13,980 --> 00:22:19,400
either temporarily or permanently. And this is a warning and it appears in the terms of

210
00:22:19,400 --> 00:22:24,680
service for all products. And the reason it's there is because Block 5 must take action

211
00:22:24,680 --> 00:22:30,600
in some circumstances to protect customers. I mean, Block 5 was not in a position to satisfy

212
00:22:30,600 --> 00:22:36,000
all demands for withdrawal off the platform. It was not in a position to satisfy the demands

213
00:22:36,000 --> 00:22:41,580
for people to put names in the client property in the client's name in the wallet accounts

214
00:22:41,580 --> 00:22:48,360
because it didn't have control of specific certain enough assets to do so. So the next

215
00:22:48,360 --> 00:22:53,320
slide shows one of the other key terms of service which is in the wallet, the BIA, the

216
00:22:53,320 --> 00:22:59,080
international BIA and others. You know, Block 5 had the right to limit access which can

217
00:22:59,080 --> 00:23:04,840
include temporarily or permanently removing your online assets, restricting your accounts

218
00:23:04,840 --> 00:23:10,360
and or closing your accounts without prior notice to you unless prior notice is required

219
00:23:10,360 --> 00:23:15,560
by law. And there's also a set of terms of service. The next slide in the general terms

220
00:23:15,560 --> 00:23:22,720
of service which generally give Block 5 the right in its sole discretion to suspend use

221
00:23:22,720 --> 00:23:31,160
at any time and without notice to you and to cancel orders or transactions in its discretion.

222
00:23:31,160 --> 00:23:37,680
That's in the general terms of service applicable to every client and every transaction. And

223
00:23:37,680 --> 00:23:44,120
so Block 5's platform pause was announced to clients via Twitter and via Reddit which

224
00:23:44,120 --> 00:23:48,960
are the sources that are most likely to be used by Block 5 clients. And it definitely

225
00:23:48,960 --> 00:23:55,080
was not a secret. In fact, it was publicly reported shortly thereafter. The next slide

226
00:23:55,080 --> 00:24:02,440
shows just some of the public reports. The Bloomberg reported 15 minutes after it happened.

227
00:24:02,440 --> 00:24:08,560
Wall Street Journal reported an hour or two later. Even the leading report in Singapore,

228
00:24:08,560 --> 00:24:14,120
the leading paper in Singapore reported it before anybody woke up the next morning in

229
00:24:14,120 --> 00:24:19,800
Singapore. And it's not disputed what Block 5 actually did as a result of the platform

230
00:24:19,800 --> 00:24:26,240
pause and that's shown in the next slide, slide 24. Block 5 shut down all substantive

231
00:24:26,240 --> 00:24:32,080
transactions as of the platform pause. Users could go onto the platform, they could view

232
00:24:32,080 --> 00:24:38,920
balances and they could click buttons, but no transactions were actually consummated. No substantive

233
00:24:38,920 --> 00:24:48,280
action requested after the platform pause was processed. Now, your honor, FTX's demise

234
00:24:48,280 --> 00:24:55,040
and Block 5's platform pause all happened very fast. And Block 5 could not immediately

235
00:24:55,040 --> 00:25:01,000
turn off a number of the internal and external functions that were part of its system. And

236
00:25:01,000 --> 00:25:05,480
that is what caused some of the communications and some of the objectives to our motion have

237
00:25:05,480 --> 00:25:11,560
cited to the court. The user interface was not able to be turned off immediately. It

238
00:25:11,560 --> 00:25:18,520
was extremely complicated to get that process complete. The user interface remained on and

239
00:25:18,520 --> 00:25:24,680
clients could push buttons to request a transfer. The user interface would change to request

240
00:25:24,680 --> 00:25:30,960
reflected transactions even though they never happened. And users continued to receive automated

241
00:25:30,960 --> 00:25:39,400
emails as they had pre-pause. And all of this happened because of the technical issues involved

242
00:25:39,400 --> 00:25:46,080
in changing the user interface and the related internal functionality, which took a significant

243
00:25:46,080 --> 00:25:55,920
amount of time. Next slide. So Block 5 right after November 10th at 8.15 started working

244
00:25:55,920 --> 00:26:00,860
on disabling the functionality of the platform. And nobody knew right at the beginning how

245
00:26:00,860 --> 00:26:08,120
hard it would be or how long it would take. Along the way Block 5 did take actions to

246
00:26:08,120 --> 00:26:13,800
try to tell people that platform activity was paused. And so let's go to the next slide

247
00:26:13,800 --> 00:26:19,880
and start with this timeline. So November 10th at 8.15 p.m. is when Block 5 implemented

248
00:26:19,880 --> 00:26:25,880
the platform cause and communicated that to the world on the places most likely to be

249
00:26:25,880 --> 00:26:33,320
seen by Block 5 clients. Next slide. The Block 5 engineers immediately started working on

250
00:26:33,320 --> 00:26:39,760
the problem. In years of operations no one had tried to disable functionality. The system

251
00:26:39,760 --> 00:26:45,360
had worked well for years. And at first they didn't know what would be required or how

252
00:26:45,360 --> 00:26:50,880
long it would take. Within about 10 hours they knew it was going to be more complicated

253
00:26:50,880 --> 00:26:56,720
than they feared. So click next slide, Rob. The engineering team, what they did was they

254
00:26:56,720 --> 00:27:00,960
posted what's called an in-app message. Your Honor might have seen these sort of messages

255
00:27:00,960 --> 00:27:06,080
on your phone. You open up an app and it's the first thing that pops up. And these are

256
00:27:06,080 --> 00:27:14,680
warnings. Starting at 12.14 on November 11th any user who accessed Block 5 had to click

257
00:27:14,680 --> 00:27:19,240
on this pop-up message before they clicked on anything else on the platform. This is

258
00:27:19,240 --> 00:27:25,400
the first thing that popped up. And I want to focus on this message a bit. Next slide.

259
00:27:25,400 --> 00:27:32,840
It's a dismissable message. So it was reasonably straightforward to add it to the app. And

260
00:27:32,840 --> 00:27:39,560
it's the first thing that anybody saw. And they explicitly said that given the FTX situation,

261
00:27:39,560 --> 00:27:45,760
Block 5 was not able to operate business as usual and was limiting platform activity immediately

262
00:27:45,760 --> 00:27:52,840
as permitted by its terms. Block 5 did not know how long the pause would last. And after

263
00:27:52,840 --> 00:27:59,200
this time, next slide, to access your Block 5 account at any time after this was posted,

264
00:27:59,200 --> 00:28:05,560
you had to click a button that said got it. Okay, got it. Affirmatively dismissing the

265
00:28:05,560 --> 00:28:12,440
message that platform activity was suspended. And even after this was posted, as I mentioned

266
00:28:12,440 --> 00:28:19,120
earlier, tens of thousands of Block 5 clients still clicked got it and then went and hit

267
00:28:19,120 --> 00:28:22,360
transfer and tried to do transactions on their phone.

268
00:28:22,360 --> 00:28:29,120
Let me just stop you there if I may. The notice, and this is referenced in the pleadings, references

269
00:28:29,120 --> 00:28:37,400
we are limiting platform activity including pausing, client withdrawals. It doesn't reference

270
00:28:37,400 --> 00:28:42,680
transfers. Those are separate activities. It requires, and you may be going into it,

271
00:28:42,680 --> 00:28:49,920
separate functions on the customer interface. So if you're moving from the interest account

272
00:28:49,920 --> 00:28:58,160
to the custodial account, okay, the funds have to be withdrawn from the interest account

273
00:28:58,160 --> 00:29:04,720
and then transferred to the custodial account. So a withdrawal could include a transfer,

274
00:29:04,720 --> 00:29:08,560
a transfer could include a withdrawal. It depends specifically on what you are trying

275
00:29:08,560 --> 00:29:13,360
to do. So a number of the clients, actually the overwhelming majority of the people that

276
00:29:13,360 --> 00:29:19,880
are at issue here, they didn't just say I want to withdraw from the BIA account and

277
00:29:19,880 --> 00:29:26,680
move it to the custodial account. They said I wanted to withdraw altogether. And to do

278
00:29:26,680 --> 00:29:33,560
that, it requires the activities to go from the BIA account through the wallet to the

279
00:29:33,560 --> 00:29:40,400
client's external wallet. So block five position is you cannot initiate a transfer without

280
00:29:40,400 --> 00:29:46,800
actually including a withdrawal. That's right. That's what happens. It physically moves from

281
00:29:46,800 --> 00:29:53,000
the BIA account to somewhere and you can either transfer it to, just transfer it to the interest

282
00:29:53,000 --> 00:29:59,040
account or you can withdraw altogether from the platform. The vast majority of people,

283
00:29:59,040 --> 00:30:05,680
I think we have the number somewhere, we're trying to get off the platform entirely, which

284
00:30:05,680 --> 00:30:13,960
required going through the custodial interest accounts. So where are we? Okay. Next slide.

285
00:30:13,960 --> 00:30:20,960
A few minutes later after this, Block 5 posted a message on its website and it finalized

286
00:30:20,960 --> 00:30:27,760
the ability to send an email to the 650,000 plus clients that were potentially affected

287
00:30:27,760 --> 00:30:32,120
and it sent the same message out to email to every client, whether they're clients that

288
00:30:32,120 --> 00:30:38,440
have assets in wallet, clients that have assets in the BIA account or both. Now disabling

289
00:30:38,440 --> 00:30:45,400
the user functionality was a challenge and Block 5 was still seeing clients click through

290
00:30:45,400 --> 00:30:52,120
the dismissable message and click more buttons trying to withdraw assets off the platform.

291
00:30:52,120 --> 00:30:57,040
And the dismissing, disabling the functionality was taking longer than expected. So then on

292
00:30:57,040 --> 00:31:03,840
November 15th, Block 5 added another message to iPhones and iOS phones notifying people

293
00:31:03,840 --> 00:31:11,420
the transfer was paused. This went up again after you click through the dismissable message.

294
00:31:11,420 --> 00:31:18,040
And then on November 17th, it said did the same thing for the Android phones because

295
00:31:18,040 --> 00:31:24,200
this was taking longer than Block 5 expected it to take. On November 18th, Block 5 was

296
00:31:24,200 --> 00:31:29,880
finally able to disable the user functionality and users were no longer able to click on

297
00:31:29,880 --> 00:31:36,440
the transfer button. But again, in the interim between the platform pause timestamp and November

298
00:31:36,440 --> 00:31:43,720
18th, 48,000 clients had clicked buttons saying transfer, next slide, and they had received

299
00:31:43,720 --> 00:31:50,960
automated emails saying transfers valued at $375 million had been completed where they

300
00:31:50,960 --> 00:31:56,480
had not been. And that's why we're here. The people that made those transfers after the

301
00:31:56,480 --> 00:32:02,680
platform pause are saying that they should be treated the same as the clients who physically

302
00:32:02,680 --> 00:32:09,960
had cryptocurrency in the custodial accounts as of the platform pause. And so now I want

303
00:32:09,960 --> 00:32:15,680
to go into a little more detail about the way the business worked before and after the

304
00:32:15,680 --> 00:32:21,360
pause because that shows why these transactions did not happen. And then I try to walk the

305
00:32:21,360 --> 00:32:27,280
court and people watching this hearing through this in a few slides. The back end of Block

306
00:32:27,280 --> 00:32:36,920
5 system is very complex. So go to slide 36. So the direct transactions between Block

307
00:32:36,920 --> 00:32:43,320
5 clients come through the wallet custodial omnibus wallets. Okay, those are the ones

308
00:32:43,320 --> 00:32:48,560
on the left-hand side of the slide. Deposits come into those. When clients choose to move

309
00:32:48,560 --> 00:32:55,460
assets into the rehypothecatable wallets to earn interest, cryptocurrency is in fact moved

310
00:32:55,460 --> 00:33:02,200
from the custodial wallet to the rehypothecatable wallets. And Block 5 then sends that cryptocurrency

311
00:33:02,200 --> 00:33:07,280
to borrowers as indicated at the right-hand side of this slide. And again, this is the

312
00:33:07,280 --> 00:33:13,240
core of the business. We were a cryptocurrency lender and we told the world and all of our

313
00:33:13,240 --> 00:33:20,280
clients that the business was to earn yield on loans to third parties. That was the business.

314
00:33:20,280 --> 00:33:26,080
Next slide. So when customers clicked transfer on their user interface before the platform

315
00:33:26,080 --> 00:33:32,120
pause because they wanted to move assets out of the BIA rehypothecatable wallets, either

316
00:33:32,120 --> 00:33:40,040
to withdraw from Block 5 altogether or to trade them or to just move the coins to the

317
00:33:40,040 --> 00:33:46,540
custodial wallets, nothing immediately happened to any actual assets, nothing. And actually

318
00:33:46,540 --> 00:33:52,240
it was impossible for anything to happen physically until and unless Block 5 employees actually

319
00:33:52,240 --> 00:33:58,280
moved assets. And actually it's not technically feasible to do that anyway given the constraints

320
00:33:58,280 --> 00:34:03,800
and capacity of the blockchain itself. It can't be that you push a button and the assets

321
00:34:03,800 --> 00:34:09,520
immediately move. That's not how it works. Next slide. What happened automatically when

322
00:34:09,520 --> 00:34:16,120
clients hit the buttons was that the user interface changed. If you had five Bitcoin

323
00:34:16,120 --> 00:34:22,600
in your BIA account and you hit transfer two of them to the external wallet, the user interface

324
00:34:22,600 --> 00:34:28,200
would immediately reflect three Bitcoin in the BIA account and two Bitcoin to an external

325
00:34:28,200 --> 00:34:34,040
wallet and you as the clients would get an automated email saying the transaction had

326
00:34:34,040 --> 00:34:41,580
been completed, but it had not been. It was not until after the Block 5 batching and or

327
00:34:41,580 --> 00:34:48,040
true up processes were complete that the client transfer requests are or actually could be

328
00:34:48,040 --> 00:34:54,680
actually effectuated. And in the interim in between these two things, why CLI always had

329
00:34:54,680 --> 00:35:01,600
the rights under its terms of service to pause withdrawals or transfers and or to cancel

330
00:35:01,600 --> 00:35:08,320
transactions. Those are clear parts of the Block 5 terms of service. So let's walk through

331
00:35:08,320 --> 00:35:18,000
this with an illustrative pre-pause transaction. Next slide. So assume that as shown here,

332
00:35:18,000 --> 00:35:26,120
client A hits the button on the Block 5 platform to move 10 Bitcoin from the BIA account to

333
00:35:26,120 --> 00:35:33,320
the wallet, hits transfer and confirm. Go ahead, Rob. Next slide. Client A's user interface

334
00:35:33,320 --> 00:35:40,680
immediately displays 10 less Bitcoin in their BIA account and 10 more Bitcoin in their custodial

335
00:35:40,680 --> 00:35:48,680
wallets. And next slide, client A would immediately receive a fully automated email saying the

336
00:35:48,680 --> 00:35:55,220
transaction had been completed. Next slide. But nothing actually happened until later

337
00:35:55,220 --> 00:36:02,020
steps on the back end. And those steps began when the company's interface collected the

338
00:36:02,020 --> 00:36:07,400
transaction and began consolidating them for review by Block 5's operations and finance

339
00:36:07,400 --> 00:36:17,040
teams. Next slide. So Block 5 had two processes that its employees in finance and operations

340
00:36:17,040 --> 00:36:23,400
performed, one called batching, one called true up. And no physical transactions occur,

341
00:36:23,400 --> 00:36:29,780
no cryptocurrency is moved until one or both of these processes on the back end occur.

342
00:36:29,780 --> 00:36:36,040
What Block 5 does on the back end depends on the nature of all clients' collective requests

343
00:36:36,040 --> 00:36:42,440
on the front end within a specific time period. If all a client is doing is trying to move

344
00:36:42,440 --> 00:36:48,600
assets out of the BIA account and into the custodial wallets without trading them or

345
00:36:48,600 --> 00:36:54,560
moving them off the platform, then that action did not occur until the next day following

346
00:36:54,560 --> 00:37:00,480
the true up. Bless you. But if a client is trying to do something further than that,

347
00:37:00,480 --> 00:37:06,200
if a client is trying to move the assets from their BIA account, ultimately off the platform

348
00:37:06,200 --> 00:37:13,080
entirely to an external wallet, that could happen sooner. But only if the assets went

349
00:37:13,080 --> 00:37:19,120
through what Block 5 calls the batching process in the interim. So I'm going to walk through

350
00:37:19,120 --> 00:37:27,560
those two processes separately. Go to slide 44 in the true up process. The true up process

351
00:37:27,560 --> 00:37:34,720
is critical because Block 5 had an obligation to match what was physically in the custodial

352
00:37:34,720 --> 00:37:39,960
wallets with what was owed to clients who had directed their assets to the custodial

353
00:37:39,960 --> 00:37:46,080
wallets. Block 5 had promised people it was not going to rehypothicate these particular

354
00:37:46,080 --> 00:37:52,640
assets. These assets are in the account and they are yours, not ours. So each day after

355
00:37:52,640 --> 00:37:58,920
clients, one business day after the transfer request, the treasury team looked at the assets

356
00:37:58,920 --> 00:38:04,360
in the accounts and compared those accounts to where clients wanted their assets to be.

357
00:38:04,360 --> 00:38:10,360
And if there was an insufficient amount in the custodial wallets, coins were physically

358
00:38:10,360 --> 00:38:16,880
moved from the BIA to wallets. And if there were not sufficient assets in the BIA and

359
00:38:16,880 --> 00:38:22,560
you needed to go further to clients to call back those assets, Block 5 did that. That

360
00:38:22,560 --> 00:38:28,080
is the true up process. So is it fair to say that the true up process involved a look at

361
00:38:28,080 --> 00:38:37,960
the transaction as an aggregate for the day? Not customer specific, but collectively to

362
00:38:37,960 --> 00:38:43,760
see if there is enough money in one to transfer what was transferred individually into the

363
00:38:43,760 --> 00:38:48,880
other. It is both. You look at individuals and the group as a whole. But a true up was

364
00:38:48,880 --> 00:38:56,400
necessary only if the group as a whole required additional movement of assets from the BIA

365
00:38:56,400 --> 00:39:01,440
accounts to the wallet accounts. And if obviously there is a significant amount of assets that

366
00:39:01,440 --> 00:39:06,640
are moving at any given day, by definition it is going to be required because the purpose

367
00:39:06,640 --> 00:39:14,960
of the process is for the assets in the custodial accounts to match one to one at all times.

368
00:39:14,960 --> 00:39:21,760
So slide 45, assuming the clients have asked to move assets in the hypothetical that I

369
00:39:21,760 --> 00:39:28,080
mentioned earlier from BIA to the wallet, Block 5 actually has to get the assets from

370
00:39:28,080 --> 00:39:33,760
somewhere. So its treasury team takes physical assets from the rehypothecatable wallets and

371
00:39:33,760 --> 00:39:39,040
move them to the custodial wallets so you can match your obligations to clients. Now

372
00:39:39,040 --> 00:39:45,560
depending on the day, as I said, Block 5 may or may not physically possess the coins to

373
00:39:45,560 --> 00:39:49,560
be able to do that in the rehypothecatable wallets. It might have lent those assets to

374
00:39:49,560 --> 00:39:54,880
a third party. That was its business. It lent many, many assets to third parties consistent

375
00:39:54,880 --> 00:40:00,640
with what he told clients. And Block 5 may be able to move existing assets from those

376
00:40:00,640 --> 00:40:06,560
wallets over to the custodial wallets or might have to get those from the borrowers. In the

377
00:40:06,560 --> 00:40:12,280
event, in any event, the process of physically moving assets from BIA to the rehypothecatable

378
00:40:12,280 --> 00:40:19,720
wallets, it's not automatic. It's definitely not immediate. That's not how it works. And

379
00:40:19,720 --> 00:40:24,720
the BIA terms of service, your honor, are completely consistent with this process, but

380
00:40:24,720 --> 00:40:31,280
you have to read the terms of service altogether. Let's go to the next slide, slide 46. So this

381
00:40:31,280 --> 00:40:38,080
is the terms of service, your honor, and these are under the BIA terms of service. It's the

382
00:40:38,080 --> 00:40:44,040
same under the BIA US and non-US terms. Okay? This is under the category of withdrawals,

383
00:40:44,040 --> 00:40:52,000
like 1, 2, and 3. Number 1, you may make a request for a complete withdrawal of principal

384
00:40:52,000 --> 00:40:57,960
from your crypto interest account. That's the BIA account at any time. Any withdrawal

385
00:40:57,960 --> 00:41:03,800
of principal will be transferred instantly to your Block 5 wallet. And any withdrawal

386
00:41:03,800 --> 00:41:11,840
from the wallet is subject to the wallet terms. And then Block 5, number 3, right below it,

387
00:41:11,840 --> 00:41:16,080
Block 5 and our third party partners, as I described before, may experience extreme market

388
00:41:16,080 --> 00:41:21,720
conditions that could result in the immediate halt of transfers and withdrawals of crypto

389
00:41:21,720 --> 00:41:27,280
currency temporarily or permanently. So my colleagues on the other side are trying to

390
00:41:27,280 --> 00:41:34,720
make a meal out of these two words. These two words will be transferred instantly, but

391
00:41:34,720 --> 00:41:39,320
you have to read those words in the context of the full sentence, definitely in the context

392
00:41:39,320 --> 00:41:44,920
of the full paragraph, and in the context of all the terms of service. The first sentence

393
00:41:44,920 --> 00:41:50,760
says that you can make a request for a complete or partial withdrawal of principal from your

394
00:41:50,760 --> 00:41:57,600
BIA account at any time. And the second says that the actual withdrawal of principal, once

395
00:41:57,600 --> 00:42:03,880
that withdrawal happens, will be transferred to your wallet immediately. And then further

396
00:42:03,880 --> 00:42:10,240
wallet transfers out of the system are subject to the wallet terms. But the actual withdrawal

397
00:42:10,240 --> 00:42:16,040
of principal from BIA does not occur immediately, and it could not. And that's because of what

398
00:42:16,040 --> 00:42:22,080
I described before about how Block 5's business actually works. Block 5 has to go physically

399
00:42:22,080 --> 00:42:27,560
to get principal assets from the BIA and move them to wallet, and that does not happen instantly

400
00:42:27,560 --> 00:42:33,840
ever. And so the argument that's being advanced to the other side takes these two words transferred

401
00:42:33,840 --> 00:42:40,520
instantly out of context, and it ignores the rest of the sentence, and it definitely ignores

402
00:42:40,520 --> 00:42:46,480
paragraph number three, BIA term C3, which couldn't be any clearer, in identifying the

403
00:42:46,480 --> 00:42:52,400
situation that Block 5 found itself in on November 10th at 8.15 p.m. There were extreme

404
00:42:52,400 --> 00:42:59,880
market conditions. That's indisputable. And Block 5 decided to immediately halt all withdrawals

405
00:42:59,880 --> 00:43:05,520
and all transfers of cryptocurrency. And so our view is that my friend's argument on the

406
00:43:05,520 --> 00:43:10,560
other side is inconsistent not only with the way Block 5's business worked, but also with

407
00:43:10,560 --> 00:43:17,840
the terms of service. Now, the argument gets even more complicated, your Honor, because

408
00:43:17,840 --> 00:43:26,120
there's a conflation between requests to move assets from BIA to wallet with requests to

409
00:43:26,120 --> 00:43:32,880
move assets from BIA to an external wallet through the custodial wallets. That makes

410
00:43:32,880 --> 00:43:38,360
things even more complicated, and that's what brings into play the so-called batching process.

411
00:43:38,360 --> 00:43:44,320
Okay? And so let's go to the next slide, 47. The batching process reflects what I mentioned

412
00:43:44,320 --> 00:43:50,480
earlier, your Honor. Block 5 set up its system to try to be responsive to clients' requests.

413
00:43:50,480 --> 00:43:55,720
When a client wanted to withdraw assets, Block 5 wanted to be responsive and wanted to be

414
00:43:55,720 --> 00:44:01,720
in a position to do that as quickly as possible, but it certainly, it was not instant. So let's

415
00:44:01,720 --> 00:44:08,800
walk through that process. So when a client wants to take assets off the Block 5 platform

416
00:44:08,800 --> 00:44:15,360
entirely, the process looks a lot like the true-up process that I mentioned earlier with

417
00:44:15,360 --> 00:44:22,400
respect to just withdrawals from BIA and deposits into the custodial accounts. Clients initiate

418
00:44:22,400 --> 00:44:26,640
transfer requests and the interface, in the user interface, those are collected by the

419
00:44:26,640 --> 00:44:31,800
company and the financial operations group, and the user interface immediately reflects

420
00:44:31,800 --> 00:44:37,140
the book entries that assets in the BIA are reduced in the amount requested, but it takes

421
00:44:37,140 --> 00:44:43,200
time to process the transactions. Next slide. Now here, your Honor, because assets are leaving

422
00:44:43,200 --> 00:44:50,240
the platform entirely, the fraud and security team takes the first crack at these particular

423
00:44:50,240 --> 00:44:55,160
requests, and they're done in groups, and that's why they call it batching. Batches

424
00:44:55,160 --> 00:45:00,120
of proposed transactions are sent to the fraud and security team, and they look at them,

425
00:45:00,120 --> 00:45:05,640
and that's the first line of defense. And oftentimes, security issues are flagged, and

426
00:45:05,640 --> 00:45:10,900
those issues actually may require interaction with the clients, but you actually might need

427
00:45:10,900 --> 00:45:16,760
additional information from the clients before you're able to process the particular request.

428
00:45:16,760 --> 00:45:24,040
And so it definitely cannot be the case that when you ask for a withdrawal from your BIA

429
00:45:24,040 --> 00:45:28,440
account that it happened instantly because it has to go through the fraud and security

430
00:45:28,440 --> 00:45:34,360
checks and may require further interaction with the client. But depending on the nature

431
00:45:34,360 --> 00:45:40,280
of the individual batch, what is requested specifically and what is overall requested,

432
00:45:40,280 --> 00:45:46,660
the process can go slow, but it can go fast. Twice a day, the finance team would review

433
00:45:46,660 --> 00:45:52,700
the batches and it would try to process the fraud checks, which depended both on who was

434
00:45:52,700 --> 00:45:57,320
trying to withdraw and what they were trying to get. It might be different if you were

435
00:45:57,320 --> 00:46:01,800
asking for a withdrawal of cryptocurrency or if you were asking for a withdrawal of

436
00:46:01,800 --> 00:46:08,000
cash through a wire or through an ACH. The debtor's systems had in place an 18-hour fraud

437
00:46:08,000 --> 00:46:13,800
check for any crypto withdrawal. It was actually quicker if you wanted to get a cash withdrawal

438
00:46:13,800 --> 00:46:20,500
because of the back end systems. So what happened was that valid requests were sent to the BitGo

439
00:46:20,500 --> 00:46:26,480
account. That was the smaller account that directly interacted with the clients. Those

440
00:46:26,480 --> 00:46:32,480
were where the crypto asset requests were sent once they were validated. The cash requests

441
00:46:32,480 --> 00:46:39,760
were sent to Silvergate for wires or ACH. If Silvergate had enough cash, the cash would

442
00:46:39,760 --> 00:46:45,440
go out the door. If it did not, it had to get the cash either by liquidating the crypto

443
00:46:45,440 --> 00:46:52,040
or getting cash somewhere else. If BitGo had enough crypto in the form of the specific

444
00:46:52,040 --> 00:46:59,180
coin requested to meet the withdrawal request, the whole batch, then once the request passed

445
00:46:59,180 --> 00:47:06,960
the fraud check, it would batch out the crypto to clients. And again, that was only if the

446
00:47:06,960 --> 00:47:13,960
BitGo account had enough, it didn't have to itself go to the other account at Fireblocks

447
00:47:13,960 --> 00:47:20,760
to get crypto to send out the door. So depending on the day, cryptocurrency withdrawal requests

448
00:47:20,760 --> 00:47:27,280
could either be consummated during the batching process if there was a limited number of requests,

449
00:47:27,280 --> 00:47:31,360
depending on what was in the BitGo account to begin with, or it would have to go through

450
00:47:31,360 --> 00:47:38,600
a separate mini true up process where cryptocurrency was physically moved to effectuate the transaction.

451
00:47:38,600 --> 00:47:43,640
It just depended on the day. Like for example, my colleagues on the other side found one

452
00:47:43,640 --> 00:47:48,520
time that this had happened where there was a same day withdrawal request that actually

453
00:47:48,520 --> 00:47:54,960
was processed. And it was processed because this was in July of 2022, I believe. And it

454
00:47:54,960 --> 00:48:01,580
was processed because there was an intraday batching system that BlockFi was able to effectuate.

455
00:48:01,580 --> 00:48:06,900
The process was certainly not instant and the process was done exactly consistently

456
00:48:06,900 --> 00:48:13,520
with the BlockFi terms. So if you go to slide 50, Rob, the bottom line is that no withdrawal

457
00:48:13,520 --> 00:48:20,080
request, whether it was a withdrawal from BIA to the custodial wallet or withdrawal

458
00:48:20,080 --> 00:48:27,360
from BIA to the external wallet through the custodial product, none of them were instant.

459
00:48:27,360 --> 00:48:31,680
Every single one of them had to go through BlockFi's back end systems. And that was

460
00:48:31,680 --> 00:48:37,920
not, that was true for every transaction before the program pause period. Now let's talk about

461
00:48:37,920 --> 00:48:44,200
the attempted post pause transactions. Let's go to slide 51. So my friends on the other

462
00:48:44,200 --> 00:48:49,740
side are arguing that because they clicked transfer and confirm on the user interface

463
00:48:49,740 --> 00:48:57,440
during the eight day period between November 10th at 8.15 p.m. Eastern and November 18th

464
00:48:57,440 --> 00:49:03,720
when we shut down the system, as did 48,000 people trying to move $375 million dollars

465
00:49:03,720 --> 00:49:08,040
for cryptocurrency, their argument is that they click the buttons as they could have

466
00:49:08,040 --> 00:49:15,920
done pre-pause. Next slide. The user interface as it had done pre-pause displayed the transaction

467
00:49:15,920 --> 00:49:22,160
had been completed. Next slide. And as had occurred pre-pause, they received an automated

468
00:49:22,160 --> 00:49:30,440
email saying the transaction had been completed. And in fact, as had happened pre-pause, next

469
00:49:30,440 --> 00:49:38,600
slide, BlockFi's system had internally collected the transfer requests for review by the team.

470
00:49:38,600 --> 00:49:45,720
But BlockFi did not and could not conduct any of the back end processes after the platform

471
00:49:45,720 --> 00:49:51,160
pause. Doing so would not have treated clients fairly and would certainly have not treated

472
00:49:51,160 --> 00:49:57,040
them equally given that other clients had assets in the custodial omnibus accounts that

473
00:49:57,040 --> 00:50:03,720
were attributable to that. And actually moving more cryptocurrency from BIA to the custodial

474
00:50:03,720 --> 00:50:09,760
wallets would be unfair to the remaining clients that were at BIA. The argument being made

475
00:50:09,760 --> 00:50:15,720
by my opponents is that clicking the button saying transfer creates an ownership interest

476
00:50:15,720 --> 00:50:21,960
in assets that were already in the custodial omnibus accounts because other clients had

477
00:50:21,960 --> 00:50:27,760
directed those assets to be there. But that can't be right in our view. The assets that

478
00:50:27,760 --> 00:50:33,680
are in those custodial accounts, they belong to those other clients. And I want to end

479
00:50:33,680 --> 00:50:38,200
by kind of just level setting on the current state of affairs. And you can go to slide

480
00:50:38,200 --> 00:50:49,840
58, Rob. So sitting here today, we have about 297 million, when you round up, of cryptocurrency

481
00:50:49,840 --> 00:50:54,200
that is sitting in the omnibus custodial wallet accounts at Bitgo and Fireblocks. And that

482
00:50:54,200 --> 00:51:00,400
matches almost to the dollar. The wallet claims that are attributable to those clients who

483
00:51:00,400 --> 00:51:06,520
had assets in the product as of the platform pause. And separately, we have about $1, $2

484
00:51:06,520 --> 00:51:13,280
billion in claims for clients who as of the pause had directed clients to the BIA product

485
00:51:13,280 --> 00:51:18,200
and permitted BlockFi through the terms that we went through to rehypothicate and lend

486
00:51:18,200 --> 00:51:24,080
those assets out to a third party in order to earn yield. Those are assets that BlockFi

487
00:51:24,080 --> 00:51:29,720
had title to, not the individual clients. Now, when we read the initial objection, we

488
00:51:29,720 --> 00:51:35,740
actually weren't clear. And we thought that what they were asking was for assets to actually

489
00:51:35,740 --> 00:51:43,080
be physically moved from the rehypothicatable wallets over to the custodial wallets to address

490
00:51:43,080 --> 00:51:48,840
the post-pause requests. And the supplemental objection, in my view, clarifies what they

491
00:51:48,840 --> 00:51:54,160
originally requested when I read them to be saying now. Next slide. Is that because they

492
00:51:54,160 --> 00:52:00,440
clicked the transfer and confirm buttons between November 10th at 8.15 and November 18th, they

493
00:52:00,440 --> 00:52:05,800
have an equal claim to the assets that are in the custodial wallet accounts, even though

494
00:52:05,800 --> 00:52:10,680
no assets were actually moved to the custodial wallet accounts on account of their button

495
00:52:10,680 --> 00:52:16,120
clicking? We don't agree with their theory, but the effect would be, of course, to just

496
00:52:16,120 --> 00:52:21,360
more than double amount of the wallet claims against the same pool of assets sitting in

497
00:52:21,360 --> 00:52:27,800
the custodial wallet accounts. Next slide. That result would materially reduce the recovery

498
00:52:27,800 --> 00:52:32,760
to wallet holders, but more practically for purposes of the motion that we filed. It would

499
00:52:32,760 --> 00:52:38,360
make it impossible for us to do what we want to do, which is to give wallet customers whose

500
00:52:38,360 --> 00:52:44,760
assets BlockFi held in trust without the right to rehypothic those assets, we want to give

501
00:52:44,760 --> 00:52:50,560
those people their money back. And so, next slide. What we're asking the court to do is

502
00:52:50,560 --> 00:52:55,080
overrule the objections and allow the debtors to do what we've been trying to do since the

503
00:52:55,080 --> 00:53:01,720
motion was filed. There is a pool of cryptocurrency in the custodial wallet accounts that was

504
00:53:01,720 --> 00:53:08,000
directed there by specific customers and placed there by BlockFi employees on the premise

505
00:53:08,000 --> 00:53:13,680
that those specific assets belong to those specific customers. BlockFi promised to give

506
00:53:13,680 --> 00:53:19,560
those coins back to the clients, and that's what we want to do. And as your honor knows,

507
00:53:19,560 --> 00:53:23,680
time is often the enemy of a creditor and bankruptcy, and we've been trying to get these

508
00:53:23,680 --> 00:53:29,120
assets out the door to these people for some time. Funds on hand at the company, they're

509
00:53:29,120 --> 00:53:33,560
sitting in accounts. Obviously, they're targets for all sorts of potential creditors, so I

510
00:53:33,560 --> 00:53:38,720
don't blame anybody for trying to get at those assets. They are sitting there, and we are

511
00:53:38,720 --> 00:53:42,960
taking the position that that is not property of the state. We want that assets to go out

512
00:53:42,960 --> 00:53:49,400
the door. Largely, this is an inter-creditor fight about who gets those particular assets,

513
00:53:49,400 --> 00:53:54,040
your honor. Our position is that it's pretty clear. It's the people who put those assets

514
00:53:54,040 --> 00:53:58,360
there in the first place on the premise that the debtors wouldn't have a right to move

515
00:53:58,360 --> 00:54:04,080
them. The Creditor's Committee is reserving their right to pursue preferences depending

516
00:54:04,080 --> 00:54:09,400
on when those assets were moved to the custodial accounts. They're suggesting there might be

517
00:54:09,400 --> 00:54:15,320
clawbacks from the wallet, and there's a suggestion in the other side that the wallet account

518
00:54:15,320 --> 00:54:19,720
isn't big enough. Maybe there should be more assets in the wallet account. But what that

519
00:54:19,720 --> 00:54:25,320
highlights, your honor, is the fundamental reality. A line in the sand had to be drawn

520
00:54:25,320 --> 00:54:32,200
by the debtors' pre-petition, and it has to be drawn here by the court. And the publicly

521
00:54:32,200 --> 00:54:38,880
announced platform pause is clearly the most logical and rational route to an expedient

522
00:54:38,880 --> 00:54:43,960
process that enables client recoveries, and it is the only one that's consistent with

523
00:54:43,960 --> 00:54:51,160
both the way BlockFi actually conducted its business and BlockFi's terms of service. So

524
00:54:51,160 --> 00:54:54,320
unless your honor has any questions, that all I have for now, subject to rebuttal.

525
00:54:54,320 --> 00:54:56,200
No, not at this time. Thank you.

526
00:54:56,200 --> 00:54:58,080
Thank you, your honor.

527
00:54:58,080 --> 00:55:09,840
I'll hear from the committee.

528
00:55:09,840 --> 00:55:15,800
Good morning, your honor. Kenneth Allett of Brown-Rudnick for the official committee.

529
00:55:15,800 --> 00:55:19,920
We agree with the relief that the debtors are seeking here, but we come at it from a

530
00:55:19,920 --> 00:55:27,360
little bit of a different perspective. Every single one of BlockFi's customers was promised

531
00:55:27,360 --> 00:55:33,640
their money back and is entitled to their money back. The issue is it's just not there.

532
00:55:33,640 --> 00:55:39,720
And that's why we're here today, because BlockFi does not have the money to meet all

533
00:55:39,720 --> 00:55:46,920
of its promises to return money to its customers. And so the role of this bankruptcy is to resolve

534
00:55:46,920 --> 00:55:52,440
those competing entitlements to funds in the fairest and most equitable way, consistent

535
00:55:52,440 --> 00:56:02,800
with the bankruptcy code. And so we view this less as a question of contractual interpretation

536
00:56:02,800 --> 00:56:11,080
as what actually happened and what was BlockFi actually able to do. So it's undisputed that

537
00:56:11,080 --> 00:56:19,600
there are sufficient funds segregated for the pre-pause wallet holders. If no additional

538
00:56:19,600 --> 00:56:26,360
funds come into the wallet, those people can be paid in full, they can recover their property,

539
00:56:26,360 --> 00:56:29,120
and they don't have to further deal with this bankruptcy.

540
00:56:29,120 --> 00:56:30,640
Subject to potential clawback.

541
00:56:30,640 --> 00:56:36,360
Correct, your honor. And as we note, it's not them being in the wallet that's the issue

542
00:56:36,360 --> 00:56:45,960
with potential clawbacks, it's it coming out of the VIA accounts. So from our perspective,

543
00:56:45,960 --> 00:56:52,440
like I said, the debtors have talked about the contractual and notice issues, but we

544
00:56:52,440 --> 00:56:57,040
don't actually see that as relevant, because I think the debtors have the better of that

545
00:56:57,040 --> 00:57:03,280
argument. But even if they don't, what that means is the debtors breached their contracts,

546
00:57:03,280 --> 00:57:08,360
and they've breached a lot of contracts, unfortunately. Every VIA account holder was

547
00:57:08,360 --> 00:57:13,880
entitled to withdraw all of their funds in full, and they're not going to be able to

548
00:57:13,880 --> 00:57:20,960
get that. And that's, as a result, the question is, do you have an unsecured claim, or do

549
00:57:20,960 --> 00:57:30,440
you have something else? And we analogize this in our response to a bank check. Block,

550
00:57:30,440 --> 00:57:38,240
even if BlockFi sent a message saying, we're going to pay you, they sent a check. But BlockFi

551
00:57:38,240 --> 00:57:44,120
didn't actually move any money on the back end. And that, in our view, is what's determinative.

552
00:57:44,120 --> 00:57:55,240
Because even if BlockFi was obligated, as the paragraph on 46 of debtors, slide deck

553
00:57:55,240 --> 00:58:02,680
said, even if BlockFi was obligated to immediately transfer funds, it didn't. That's a promise,

554
00:58:02,680 --> 00:58:09,320
and it breached its promise. But that is nothing more than an unsecured claim. Companies headed

555
00:58:09,320 --> 00:58:15,200
into bankruptcy all the time write checks, trying to pay people that aren't honored.

556
00:58:15,200 --> 00:58:20,880
And as we note in our papers, when the funds actually transfer with a check is when the

557
00:58:20,880 --> 00:58:30,760
check is honored. And here, these transfer requests were never honored. So BlockFi may

558
00:58:30,760 --> 00:58:37,160
have breached its contracts, but the remedy is a breach of contract claim. The funds that

559
00:58:37,160 --> 00:58:46,400
were segregated pre-petition are not BlockFi's property. Those were owned by the pre-pause

560
00:58:46,400 --> 00:58:55,600
wallet holders. And so it cannot be the case that BlockFi's breach of its contractual obligations

561
00:58:55,600 --> 00:59:02,520
made it so that pre-pause wallet holders lost their entitlement to property that they had.

562
00:59:02,520 --> 00:59:08,560
BlockFi wasn't entitled to take that property pre-pause. If BlockFi had taken property from

563
00:59:08,560 --> 00:59:15,760
the wallets to use as it saw fit, there might be much more significant claims in this case.

564
00:59:15,760 --> 00:59:27,200
But there's no indication that it did that. And we don't challenge anybody's for trying

565
00:59:27,200 --> 00:59:33,160
to get their money back. Like we said, everybody was owed their money back. At the time of

566
00:59:33,160 --> 00:59:38,320
the pause, the automatic stay had not come into effect, and everybody was entitled to

567
00:59:38,320 --> 00:59:44,880
do their best to try and get paid. And we don't challenge anybody for doing that. Tens

568
00:59:44,880 --> 00:59:54,040
of thousands of people did. Mr. Slade noted some aspects of what was happening, but the

569
00:59:54,040 --> 01:00:00,480
story with FTX and Al-Maeda research began even earlier on November 2nd when, as the

570
01:00:00,480 --> 01:00:05,760
debtors noted in their first day declaration, certain balance sheets leaked of Al-Maeda

571
01:00:05,760 --> 01:00:12,200
research, which was the debtor's counterparty there. Ultimately today, we're here because

572
01:00:12,200 --> 01:00:17,600
BlockFi just doesn't have the money that it needs to have to be able to pay everybody

573
01:00:17,600 --> 01:00:26,720
in full. It made a number of contractual promises, and every day in a bankruptcy court, contractual

574
01:00:26,720 --> 01:00:32,880
promises are not honored. It's why you're in bankruptcy. It's not that anybody wasn't

575
01:00:32,880 --> 01:00:41,880
owed their money. The money just isn't there today. And so as of the pause date, BlockFi

576
01:00:41,880 --> 01:00:50,200
did announce it was halting withdrawals. I think that it's a fair reading of how the

577
01:00:50,200 --> 01:00:56,200
BIA accounts work, that if you're taking money out and putting it into a wallet, or you're

578
01:00:56,200 --> 01:01:01,720
taking it off the platform entirely, you're getting paid on an unsecured claim. That sounds

579
01:01:01,720 --> 01:01:06,280
like a withdrawal to me, but in our view, you don't need to dance in the head of the

580
01:01:06,280 --> 01:01:11,080
pin of all these contractual arguments. You don't need to look at what notice was actually

581
01:01:11,080 --> 01:01:17,680
provided because at the end of the day, even if BlockFi was not entitled to an actual platform

582
01:01:17,680 --> 01:01:24,200
pause, it did. But BlockFi stopped honoring withdrawals, stopped honoring transfers, stopped

583
01:01:24,200 --> 01:01:29,280
honoring everything because it knew that at that moment, it didn't have the funds it

584
01:01:29,280 --> 01:01:35,160
needed to satisfy debts in the ordinary course. And so that's why we're here today, Your

585
01:01:35,160 --> 01:01:41,400
Honor. That's why we've been here since November. And unfortunately, that means that certain

586
01:01:41,400 --> 01:01:47,440
BIA account holders are not going to get paid in full. But unfortunately, absent some fairly

587
01:01:47,440 --> 01:01:53,520
substantial recoveries, none of them are going to get paid in full. And what we have to do

588
01:01:53,520 --> 01:02:03,320
here is to do what's fairest and equitable for all BIA account holders, both those who

589
01:02:03,320 --> 01:02:11,080
opted to withdraw their funds after platform pause date and those who didn't. And so, Your

590
01:02:11,080 --> 01:02:19,440
Honor, we'd request that you find that the platform pause transfers did not give customers

591
01:02:19,440 --> 01:02:24,760
a right to wallet funds that had not been segregated for their benefit.

592
01:02:24,760 --> 01:02:31,240
All right. Thank you, Council. Anyone else on behalf of the debtor in support of the

593
01:02:31,240 --> 01:02:43,280
debtor's motion? Mr. Gwyn, I see your hand raised. I think you need to, you're on mute.

594
01:02:43,280 --> 01:02:44,280
Can you hear me?

595
01:02:44,280 --> 01:02:45,280
Oh, we can.

596
01:02:45,280 --> 01:02:50,160
Thank you, Your Honor. Good morning. Kirk Gwyn from Reed Smith on behalf of the ad hoc

597
01:02:50,160 --> 01:02:57,440
group of actual wallet holders who are identified by name in footnote two of our response in

598
01:02:57,440 --> 01:03:04,240
support of the motion to stock at item number 826. Our clients had assets in the wallet

599
01:03:04,240 --> 01:03:10,160
accounts prior to the platform pause. Neither the debtors nor the Troutman ad hoc group

600
01:03:10,160 --> 01:03:17,320
deny that our clients own their assets in the wallet accounts. The Troutman ad hoc group,

601
01:03:17,320 --> 01:03:23,200
however, seeks to share in the assets of the actual wallet holders. As a matter of law,

602
01:03:23,200 --> 01:03:28,320
Your Honor, there's no basis for the Troutman ad hoc group to request or for the court to

603
01:03:28,320 --> 01:03:35,040
grant the Troutman group an interest in assets that belong to someone else, here, the actual

604
01:03:35,040 --> 01:03:41,760
wallet holders. The Troutman group's assertion of a right to someone else's property is itself

605
01:03:41,760 --> 01:03:49,360
based on a fiction. There's no factual dispute that the Troutman group's BIA assets remained

606
01:03:49,360 --> 01:03:54,720
in the BIA. That is all the court needs to know to determine that the Troutman group

607
01:03:54,720 --> 01:04:01,280
has no interest in other clients' assets in the wallet account. What does not matter,

608
01:04:01,280 --> 01:04:05,680
and I see this largely the way committee council does, Your Honor, what does not matter is

609
01:04:05,680 --> 01:04:11,040
the notice, whether any notice was given or what it in fact said. What also does not matter

610
01:04:11,040 --> 01:04:18,160
here are the terms of conditions with respect to the Troutman group or the terms of service.

611
01:04:18,160 --> 01:04:23,200
Why are those, the notice and the terms and conditions of service, irrelevant as applicable

612
01:04:23,200 --> 01:04:29,200
to the Troutman group? Because at bottom, at the end of the day, none of their assets

613
01:04:29,200 --> 01:04:34,780
were transferred to the wallet accounts. So even assuming that the Troutman group is right

614
01:04:34,780 --> 01:04:39,600
about the notice or the terms of service, or both, and I'm not saying they are, but

615
01:04:39,600 --> 01:04:43,720
even if they were right about both of those things, the bottom line is their assets were

616
01:04:43,720 --> 01:04:50,360
never moved to the wallet account. So as committee council said, at most, the Troutman group has

617
01:04:50,360 --> 01:04:56,000
a breach of contract claim against the debtor because their assets were not transferred

618
01:04:56,000 --> 01:05:01,360
to the wallet account. But what the Troutman group does not have is the right to share

619
01:05:01,360 --> 01:05:07,640
in the assets of clients that were transferred to the wallet account and are indisputably

620
01:05:07,640 --> 01:05:13,440
property of clients like the ad hoc group of actual wallet holders. As the Supreme Court

621
01:05:13,440 --> 01:05:20,760
recognized in 1962 in the Pearlman case, quote, the Bankruptcy Act does not authorize a trustee

622
01:05:20,760 --> 01:05:27,680
to distribute other people's property among the bankrupt's creditors, close quote. The

623
01:05:27,680 --> 01:05:32,280
same is true under the Bankruptcy Code. So for those reasons, Your Honor, the ad hoc

624
01:05:32,280 --> 01:05:37,720
group of actual wallet holders respectfully requested the court grant the motion, which

625
01:05:37,720 --> 01:05:44,840
was filed on December 19th of 2022, and permit the debtors to do what the Bankruptcy Code

626
01:05:44,840 --> 01:05:51,840
already permits, to return the actual wallet holder's property to those actual wallet holders.

627
01:05:51,840 --> 01:05:55,120
And that's all I have, Your Honor, unless you have questions for me.

628
01:05:55,120 --> 01:05:57,240
No, thank you, Mr. Gwynne.

629
01:05:57,240 --> 01:05:58,400
Thank you, Your Honor.

630
01:05:58,400 --> 01:06:05,200
Is there anyone else in support of the motion? All right, let me turn to Miskowski. Good

631
01:06:05,200 --> 01:06:06,200
morning, Miskowski.

632
01:06:06,200 --> 01:06:08,200
Good morning, Your Honor.

633
01:06:08,200 --> 01:06:26,520
Sorry, I've got a lot of paper here.

634
01:06:26,520 --> 01:06:30,880
Good morning, Your Honor. Deb Kovsky, Troutman Pepper for the Ad Hoc Committee of Wallet

635
01:06:30,880 --> 01:06:37,760
Account Holders. I don't have a fancy PowerPoint presentation like the debtors, and unlike

636
01:06:37,760 --> 01:06:43,480
the estate, I don't have nine lawyers present here. My clients don't have a virtually unlimited

637
01:06:43,480 --> 01:06:48,440
war chest, they've just got me. The members of the Ad Hoc Committee are just ordinary

638
01:06:48,440 --> 01:06:53,480
customers of BlockFi. They're not wealthy, they're not well-financed, they're just trying

639
01:06:53,480 --> 01:07:00,040
to get fair treatment by the debtors to whom they entrusted their digital assets.

640
01:07:00,040 --> 01:07:06,360
As Mr. Slate alluded to at bottom, this is really a dispute over the allocation of non-estate

641
01:07:06,360 --> 01:07:13,080
assets. The question before the court is, at what point did a BlockFi customer who clicked

642
01:07:13,080 --> 01:07:19,520
the button to transfer out of BIA, who instantly stopped accruing interest on those assets

643
01:07:19,520 --> 01:07:25,320
in the BlockFi system, who received an automated email set up by BlockFi confirming that in

644
01:07:25,320 --> 01:07:32,200
fact the transfer had occurred, at what point did they legally leave BIA and acquire the

645
01:07:32,200 --> 01:07:37,920
right to look instead to whatever digital assets are sitting in the commingled omnibus

646
01:07:37,920 --> 01:07:44,460
custodial wallet reserves? And I think it's important to note here that the debtors really

647
01:07:44,460 --> 01:07:50,840
have no skin in the game. The official committee definitely has no skin in the game. This is

648
01:07:50,840 --> 01:07:57,120
about assets that are not property of the estate. If the debtor's motion is granted,

649
01:07:57,120 --> 01:08:02,960
no digital assets return to the estate. If the ad hoc committee's objection is sustained

650
01:08:02,960 --> 01:08:08,680
and the ad hoc members' valid transfers are recognized, there's no increase in claims

651
01:08:08,680 --> 01:08:13,480
against the estate. And let's walk through the math. The debtors have said there's about

652
01:08:13,480 --> 01:08:17,840
three, and I'm going to use round numbers because I can do math in my head that way,

653
01:08:17,840 --> 01:08:22,960
there's about $300 million worth of digital assets in the custodial wallet reserves. There's

654
01:08:22,960 --> 01:08:32,680
about $300 million of, about $300 million reflected in the pre-November 10, 8.15 p.m.

655
01:08:32,680 --> 01:08:39,480
wallet accounts. About $375 million reflected in the post-November 10, 8.15 p.m. wallet

656
01:08:39,480 --> 01:08:46,800
accounts. So if the debtor's motion is granted, there's about $375 million in claims against

657
01:08:46,800 --> 01:08:52,040
the estate. If the ad hoc committee's objection is sustained, there would be some kind of

658
01:08:52,040 --> 01:08:59,440
allocation of wallet assets, and then there would be a $375 million deficiency that could

659
01:08:59,440 --> 01:09:03,680
be asserted as claims against the estate. So from the perspective of the estates, this

660
01:09:03,680 --> 01:09:09,760
is a complete wash. It's really especially perplexing to the ad hoc committee that the

661
01:09:09,760 --> 01:09:14,680
official committee has spent so much time and energy opposing the ad hoc committee on

662
01:09:14,680 --> 01:09:22,000
this matter when it has zero impact whatsoever on the official committee's actual constituents.

663
01:09:22,000 --> 01:09:26,920
The official committee doesn't have a roving commission to do what it perceives as equity.

664
01:09:26,920 --> 01:09:31,160
It has a mandate to represent the interests of unsecured creditors, and importantly, those

665
01:09:31,160 --> 01:09:37,040
interests are completely unaffected here. It was also kind of surprising and disappointing

666
01:09:37,040 --> 01:09:41,080
that the committee chose to argue preference issues in its reply briefs since the parties

667
01:09:41,080 --> 01:09:46,600
had decided and agreed that those issues, if they come up, would be deferred for another

668
01:09:46,600 --> 01:09:52,520
day and that the only issue before the court today is whether the transfers out of BIA

669
01:09:52,520 --> 01:10:00,560
and into wallet actually happened. And with respect to that issue, as Mr. Slade indicated,

670
01:10:00,560 --> 01:10:07,080
there's really no dispute as to the key facts. The transfer button remained live in the user

671
01:10:07,080 --> 01:10:14,560
interface well after November 10th at 8.15 p.m. The debtors did not shut it down. BlockFi

672
01:10:14,560 --> 01:10:21,000
did not pause those transfers in the user interface, did not pause the cessation of interest, did

673
01:10:21,000 --> 01:10:27,160
not pause all of the things that the customer could do and all of the immediate impacts

674
01:10:27,160 --> 01:10:32,440
that those actions had. All that BlockFi did was make the back end decision to stop truing

675
01:10:32,440 --> 01:10:39,080
up the wallet reserves. So when the customer clicked transfer, their BIA account balance

676
01:10:39,080 --> 01:10:44,560
was immediately debited and their wallet account balance was immediately credited. Interest

677
01:10:44,560 --> 01:10:49,760
immediately stopped accruing in the debtor's storm system, which is described in Mr. Chilla's

678
01:10:49,760 --> 01:10:56,320
declaration. An automated email confirming the transfer was sent by the debtor's system,

679
01:10:56,320 --> 01:11:00,520
and then the debtors failed to add any digital assets to the wallet reserves on account of

680
01:11:00,520 --> 01:11:06,920
those actions. But here's the important part. When a customer transferred out of the BIA

681
01:11:06,920 --> 01:11:14,200
program and into the wallet program, his right to tap the existing assets in the custodial

682
01:11:14,200 --> 01:11:20,360
wallet reserves wasn't dependent on the debtors first putting more assets into the reserves

683
01:11:20,360 --> 01:11:25,600
on account of that transfer. And that is crystal clear from all of the facts that Mr. Slade

684
01:11:25,600 --> 01:11:31,680
just ran us through. First of all, the debtors chose to design their system so that all that

685
01:11:31,680 --> 01:11:36,800
a customer had to do to exit BIA and stop earning interest was click the transfer button.

686
01:11:36,800 --> 01:11:41,640
They didn't have to design it that way. They could have built in a delay. They could have

687
01:11:41,640 --> 01:11:47,120
tied the cessation of interest, the consideration for the grant of title to those digital assets

688
01:11:47,120 --> 01:11:53,360
to some other event. The debtors could have had the automated email say transfer pending.

689
01:11:53,360 --> 01:11:59,300
They didn't do those things. They chose to make it instantaneous. BlockFi chose to agree

690
01:11:59,300 --> 01:12:05,000
with its customers in terms of service that BlockFi drafted that the transfer of principal

691
01:12:05,000 --> 01:12:10,340
out of BIA would happen instantly. In fact, customers' ability to make those transfers

692
01:12:10,340 --> 01:12:14,380
out of BIA instantly was part of what the official committee described in one of its

693
01:12:14,380 --> 01:12:18,840
briefs as BlockFi's best in class customer protections.

694
01:12:18,840 --> 01:12:28,080
But notwithstanding that the app reflects instantaneous movement, the terms of service

695
01:12:28,080 --> 01:12:32,000
provided that it would not necessarily be instantaneous. Isn't that correct?

696
01:12:32,000 --> 01:12:36,840
No, that's not correct, Your Honor. The terms of service say that it absolutely...

697
01:12:36,840 --> 01:12:37,840
Let's say...

698
01:12:37,840 --> 01:12:43,160
Well, I mean, portions of it say that there can be up to a seven-day delay in certain

699
01:12:43,160 --> 01:12:44,160
situations.

700
01:12:44,160 --> 01:12:48,920
Well, Your Honor, actually, let me clarify that because you asked Mr. Slate a question

701
01:12:48,920 --> 01:12:55,320
and I think his answer may have been a little bit confusing. I think you said, can you have

702
01:12:55,320 --> 01:13:01,920
a transfer... I think you said you can't initiate a transfer without a withdrawal. Is that correct?

703
01:13:01,920 --> 01:13:06,240
And I believe my colleague on the other side said, yes, that's correct. But actually, that's

704
01:13:06,240 --> 01:13:13,280
exactly wrong. If you look at paragraph 50 of the stipulated facts that were filed on

705
01:13:13,280 --> 01:13:19,920
the docket, it says that following the launch of BlockFi's wallet product, customers could

706
01:13:19,920 --> 01:13:26,000
no longer withdraw eligible digital assets directly from BIA to an external wallet. Instead,

707
01:13:26,000 --> 01:13:31,920
as set forth in the BlockFi US BIA terms of service and BlockFi non-US BIA terms of service,

708
01:13:31,920 --> 01:13:37,360
digital assets had to first be transferred from BIAs to customer wallet accounts. Now,

709
01:13:37,360 --> 01:13:44,520
that first step, the transfer from BIA to a customer wallet account, that's instant.

710
01:13:44,520 --> 01:13:49,440
That's discussed right there in the BIA terms of service. Then if you go to the wallet terms

711
01:13:49,440 --> 01:13:53,800
of service, if you want to actually withdraw off the platform altogether, there could be

712
01:13:53,800 --> 01:13:58,400
up to a seven-day delay. That's in a separate set of terms of service. And that's once you're

713
01:13:58,400 --> 01:14:06,640
already in wallet, then you can request your transfer off the platform. And that can be...

714
01:14:06,640 --> 01:14:10,480
It depends on how quickly the debtors were able to process it. It could be same day,

715
01:14:10,480 --> 01:14:12,360
it could be a couple of days, it could be up to seven days.

716
01:14:12,360 --> 01:14:15,360
So you're saying withdrawals are not necessarily instantaneous?

717
01:14:15,360 --> 01:14:21,080
Correct. Absolutely. Yes. A withdrawal off of the platform by the terms of service, and

718
01:14:21,080 --> 01:14:26,120
everybody agrees that was not instantaneous. Not even... It was not necessarily... It was

719
01:14:26,120 --> 01:14:33,440
not instantaneous. But the inter-account transfer from BIA to wallet, the terms of service are

720
01:14:33,440 --> 01:14:38,000
very clear. It happened instantly. And the debtors would like the court to believe that

721
01:14:38,000 --> 01:14:43,280
instantly in that context actually means, well, after we perform all of our backend

722
01:14:43,280 --> 01:14:48,720
true-up processes or batching processes, then we'll instantly transfer you out of BIA and

723
01:14:48,720 --> 01:14:57,280
into wallet. That completely negates any possible sensible understanding of the word instantly.

724
01:14:57,280 --> 01:15:02,600
That word instantly doesn't belong there if in fact the transfer out of BIA and into wallet

725
01:15:02,600 --> 01:15:07,520
was something that could take a day, two days, even three days if it was a holiday weekend

726
01:15:07,520 --> 01:15:10,160
and the true-up process wasn't run until the next Monday.

727
01:15:10,160 --> 01:15:15,720
Now, I didn't question too much your adversaries. I don't want to be fair to you, but I do have

728
01:15:15,720 --> 01:15:17,720
a question. Sure.

729
01:15:17,720 --> 01:15:26,600
Overall, let me say I accept your views of what instantaneous should mean and the impact

730
01:15:26,600 --> 01:15:31,880
and the difference and the distinction between transfer and withdrawal. The Black-5 general

731
01:15:31,880 --> 01:15:36,440
terms, at least what's been presented to me as part of the record, provides that Black-5

732
01:15:36,440 --> 01:15:42,360
reserves the right to refuse service, terminate relationships, and cancel orders or transactions

733
01:15:42,360 --> 01:15:49,440
in its discretion. If at the end of the day, it retained the ability to cancel what may

734
01:15:49,440 --> 01:15:55,880
have been an instantaneous transaction, what difference does it make?

735
01:15:55,880 --> 01:16:01,600
Couldn't they, when they initiated the pause and even after the fact, go back and say,

736
01:16:01,600 --> 01:16:06,480
we are canceling in order to level the playing field? It may give rise to claims. Maybe they're

737
01:16:06,480 --> 01:16:13,040
doing so improperly, which would create a general unsecured claim. It's a breach of

738
01:16:13,040 --> 01:16:21,320
contract if they cancel without a basis, but they reserve the right to cancel. So how does

739
01:16:21,320 --> 01:16:25,200
that comport with what you're saying as far as your entitlement?

740
01:16:25,200 --> 01:16:32,720
Well, Your Honor, first of all, they didn't cancel the transfers. That didn't happen.

741
01:16:32,720 --> 01:16:41,200
All they did was fail to put enough assets into the reserves to cover everybody's transfers

742
01:16:41,200 --> 01:16:45,720
in full. That's not a cancellation of the transfer. It is a breach of contract, but

743
01:16:45,720 --> 01:16:49,320
it's not a cancellation of the transfer. It just means that people are going to have

744
01:16:49,320 --> 01:16:50,320
to take a haircut.

745
01:16:50,320 --> 01:16:55,440
Well, they're saying they're not honoring any activity that took place post pause. So

746
01:16:55,440 --> 01:17:03,640
if we accept that the customer's initiation through the app was a transaction and their

747
01:17:03,640 --> 01:17:13,680
refusal to honor it in light of their pause, isn't that's not a cancel? That's not a cancellation?

748
01:17:13,680 --> 01:17:19,760
Your Honor, it's hard to see how it is because they didn't reverse. I mean, they came to

749
01:17:19,760 --> 01:17:25,720
this court to ask to be able to cancel those transfers, to ask to be able to reverse them.

750
01:17:25,720 --> 01:17:31,680
Clearly, they haven't done it yet. If my clients go into their apps and they pull up, what

751
01:17:31,680 --> 01:17:37,040
assets do I have? It shows right there in wallet, in the wallet account that they have

752
01:17:37,040 --> 01:17:39,720
their assets in the wallet program.

753
01:17:39,720 --> 01:17:45,920
So is my granting approval authorization the last step necessary for them to cancel consistent

754
01:17:45,920 --> 01:17:51,600
with the terms of the general terms of agreement?

755
01:17:51,600 --> 01:17:55,240
I don't know that I don't actually know whether it is or not, but clearly the debtors felt

756
01:17:55,240 --> 01:18:00,400
that they needed the court's permission to do it since they asked for it. And in addition,

757
01:18:00,400 --> 01:18:06,240
although this wasn't briefed or argued, I would suggest that the debtors should not

758
01:18:06,240 --> 01:18:12,540
be able as a contractual matter to exercise their discretion in an entirely arbitrary

759
01:18:12,540 --> 01:18:19,360
and inequitable way, which would be the case if they decided to choose winners and losers

760
01:18:19,360 --> 01:18:26,480
between similarly situated customers. That the customer who transferred, who all they

761
01:18:26,480 --> 01:18:34,480
did was click the button to say transfer at 814 PM to make that customer the winner who

762
01:18:34,480 --> 01:18:39,680
gets 100% recovery out of the wallet reserves. And the person who transferred two minutes

763
01:18:39,680 --> 01:18:42,280
later at 816 PM gets nothing.

764
01:18:42,280 --> 01:18:45,440
I think there are going to be winners and losers, unfortunately, when there's not enough

765
01:18:45,440 --> 01:18:46,440
funds.

766
01:18:46,440 --> 01:18:51,040
Your Honor, there are going to be winners and losers because there are not enough funds

767
01:18:51,040 --> 01:18:55,280
because the debtors do not have enough assets to pay everyone in full. But that doesn't

768
01:18:55,280 --> 01:19:00,600
mean treating similarly situated customers differently. The debtors did not halt the

769
01:19:00,600 --> 01:19:10,160
transfers from be it's a wallet until days after November 10th. They did not revert.

770
01:19:10,160 --> 01:19:15,560
They didn't change anything about the system. They deliberately set up their system so that

771
01:19:15,560 --> 01:19:21,640
the architecture essentially pushed people out of BIA the minute they clicked transfer.

772
01:19:21,640 --> 01:19:25,820
The whole consideration, and this was discussed a lot in the Celsius case, the consideration

773
01:19:25,820 --> 01:19:30,920
for customers' grant of right and title to their digital assets to BlockFi, the whole

774
01:19:30,920 --> 01:19:35,600
thing that gave BlockFi the right to rehypothecate was the earning of rewards, the earning of

775
01:19:35,600 --> 01:19:44,040
interest. And BlockFi designed its system so you hit transfer, interest ceases immediately.

776
01:19:44,040 --> 01:19:49,600
You are now no longer in that interest earning relationship. So I started to think about

777
01:19:49,600 --> 01:19:55,480
it like sitting in a swivel chair. So if you're swiveled this way and you're looking at BIA,

778
01:19:55,480 --> 01:20:00,480
your account's pointing at BIA, you've got risk. You've granted title to BlockFi. And

779
01:20:00,480 --> 01:20:05,580
in return, you're getting interest. You're getting rewards. You click transfer immediately

780
01:20:05,580 --> 01:20:11,040
you swivel this way. You no longer get interest. You no longer get those benefits. But instead

781
01:20:11,040 --> 01:20:15,880
you have the right to tap the assets over here that are in the reserve.

782
01:20:15,880 --> 01:20:22,680
But what if you swivel and you're transferring more than you have and the app is letting

783
01:20:22,680 --> 01:20:29,480
you do so? The user interface doesn't stop you. You've transferred more coins than what

784
01:20:29,480 --> 01:20:34,520
you have. There's some error. We know there are bank errors. We know there are lots of

785
01:20:34,520 --> 01:20:41,520
errors in using apps. But it allowed you to do so. Your position on behalf of the ad hoc

786
01:20:41,520 --> 01:20:48,840
committee is that, wait, it's still a valid transfer. And we have, actually what I think

787
01:20:48,840 --> 01:20:56,400
you're saying is you have a title interest in those coins, in what, a legal interest

788
01:20:56,400 --> 01:21:02,320
in what's in that account. But it could be a mistake. It doesn't, the general terms of

789
01:21:02,320 --> 01:21:10,800
agreement allow for, and all it is, essentially a look at that transaction before it becomes

790
01:21:10,800 --> 01:21:17,400
unreversible. Not necessarily, Your Honor. Well, first,

791
01:21:17,400 --> 01:21:22,080
there's been no suggestion that there were any errors or that even the errors of that

792
01:21:22,080 --> 01:21:32,920
type could occur. But there really wasn't the necessity to check and make sure that

793
01:21:32,920 --> 01:21:37,680
the amount that you had in BIA was the actual amount that you transferred to wallet. That

794
01:21:37,680 --> 01:21:41,520
doesn't seem to have been part of either the batching process or the truett process. There

795
01:21:41,520 --> 01:21:47,300
were fraud checks. But it goes to whether the transaction itself

796
01:21:47,300 --> 01:21:54,440
could ever be reversible, cancelable, or termitable by BlockFi. And you're saying they can't once

797
01:21:54,440 --> 01:22:01,960
the swivel took place. Once the customer used the user interface and completed it on the

798
01:22:01,960 --> 01:22:04,720
app. I think that's right, Your Honor. Once the

799
01:22:04,720 --> 01:22:09,960
customer said, I no longer want to be in this risky relationship with BlockFi. I no longer

800
01:22:09,960 --> 01:22:14,360
want to be in this unregistered security. I want to do what the terms of service say

801
01:22:14,360 --> 01:22:19,400
I can do and push the button and be out instantly. Now, that doesn't mean that I'm going to recover

802
01:22:19,400 --> 01:22:23,820
in full. Because you know what? The debtors could screw up. The debtors might not have

803
01:22:23,820 --> 01:22:30,440
reserved enough in that customer wallet reserve. And in fact, that happened multiple times.

804
01:22:30,440 --> 01:22:35,540
Even just in the 90 days leading up to November 10th. On at least five different occasions,

805
01:22:35,540 --> 01:22:40,140
even after running their truett process where they were trying to have a one-to-one match

806
01:22:40,140 --> 01:22:47,640
plus a one-to-five percent buffer, the debtors still fell short. One day by almost $4 million.

807
01:22:47,640 --> 01:22:51,600
So yeah, if I can swivel this way, it doesn't mean I'm necessarily going to get paid in

808
01:22:51,600 --> 01:23:00,960
full. And if I transfer out immediately off of the platform, that may leave even greater

809
01:23:00,960 --> 01:23:04,420
of a deficiency. But all that's necessary to transfer off the platform is there have

810
01:23:04,420 --> 01:23:09,160
to be enough assets there for me to take. Not that there had to have been assets that

811
01:23:09,160 --> 01:23:14,460
were transferred in specifically for me. The true up process, the process of moving assets

812
01:23:14,460 --> 01:23:21,260
from BIA to the customer wallet reserves was completely decoupled from the legal transfers

813
01:23:21,260 --> 01:23:25,860
from BIA to wallet and in many cases from wallet to an external account. And that's

814
01:23:25,860 --> 01:23:32,620
exactly what Mr. Slade was describing. These were decoupled and independent processes.

815
01:23:32,620 --> 01:23:36,380
And there was a true up process afterwards. The debtors tried to make sure that there

816
01:23:36,380 --> 01:23:41,060
was enough assets, that there were enough assets in the custody reserves. Often they

817
01:23:41,060 --> 01:23:47,020
failed. But what would have happened on a day that there was a $4 million shortfall

818
01:23:47,020 --> 01:23:51,500
in the custody reserve wallets? And let's say that was the day the block by fall for

819
01:23:51,500 --> 01:23:59,640
bankruptcy and everything was frozen. Everybody, you know, let's say that we showed $300 million

820
01:23:59,640 --> 01:24:05,500
of wallet accounts that the debtors agreed. Yes, that's the right amount. Those are the

821
01:24:05,500 --> 01:24:10,220
transfers that we validated. We ran through up processes. But oops, this was the day we

822
01:24:10,220 --> 01:24:16,780
had the $4 million shortfall. What happens then? I would submit that the right answer

823
01:24:16,780 --> 01:24:24,340
is there's an allocation of the assets in the wallet reserves among all of the customers

824
01:24:24,340 --> 01:24:30,380
that said, I want out of BIA, just like the terms of service said I could. All they had

825
01:24:30,380 --> 01:24:35,340
to do was click that transfer button to say, I'm out. They stopped accruing interest. If

826
01:24:35,340 --> 01:24:41,900
the debtors had really intended for customers to remain in BIA until there was an actual

827
01:24:41,900 --> 01:24:50,580
transfer of assets from BIA into the wallet reserve on account of their specific request,

828
01:24:50,580 --> 01:24:55,020
then why didn't they continue to accrue interest until that happened? Sometimes that true up

829
01:24:55,020 --> 01:24:59,220
process was as much as three days later. They only did the true up on business days. So

830
01:24:59,220 --> 01:25:03,300
if there was a holiday weekend, that's three days of interest that BlockFi was shorting

831
01:25:03,300 --> 01:25:09,020
customers. I'm not assuming that BlockFi was cheating its customers. I'm assuming that

832
01:25:09,020 --> 01:25:13,900
BlockFi built its architecture to reflect the legal reality, which is that once you

833
01:25:13,900 --> 01:25:20,060
click that button, you're no longer in BIA. Doesn't mean you're going to recover in full.

834
01:25:20,060 --> 01:25:24,820
The wallet reserve may not be fully funded. That happens. It happened multiple times before

835
01:25:24,820 --> 01:25:30,740
the pause. It certainly happened by the petition date. But that doesn't mean that customers

836
01:25:30,740 --> 01:25:36,340
who exited BIA don't have the right to swivel this way and look to that undifferentiated

837
01:25:36,340 --> 01:25:41,620
mass of assets that, by the way, do not get allocated to any particular customer. And

838
01:25:41,620 --> 01:25:46,340
in fact, some of them didn't even end up there. If you look at Mr. Chilla's declaration,

839
01:25:46,340 --> 01:25:53,980
didn't even end up there as a result of customers transferring from BIA into wallet because

840
01:25:53,980 --> 01:25:58,980
the BitGo custodial wallets were also used as the on-ramp for all assets onto the platform.

841
01:25:58,980 --> 01:26:07,740
Some of those were just deposits that were coming in from outside. So you have this large

842
01:26:07,740 --> 01:26:14,820
undifferentiated mass of unallocated assets in a reserve. They're commingled not with

843
01:26:14,820 --> 01:26:18,380
the, they're not commingled with the rehypothecated wallets, I want to be clear, but they're commingled

844
01:26:18,380 --> 01:26:22,820
with each other. You can't point to any asset in there and say that belongs to a particular

845
01:26:22,820 --> 01:26:29,300
customer. All you can say is, I've exited BIA, I've swiveled over here, I'm looking

846
01:26:29,300 --> 01:26:35,140
at the wallet reserve, I have a right and title to look there. Sorry, that was a very

847
01:26:35,140 --> 01:26:36,700
long answer to your honor's question.

848
01:26:36,700 --> 01:26:40,340
No, that's fine.

849
01:26:40,340 --> 01:26:50,660
Okay. So there were a few things that I just wanted to make sure that I covered. Just to

850
01:26:50,660 --> 01:26:58,620
clarify a few things that were discussed in Mr. Slade's presentation. I think we may

851
01:26:58,620 --> 01:26:59,620
have covered some of these.

852
01:26:59,620 --> 01:27:00,620
That's fine.

853
01:27:00,620 --> 01:27:08,620
Oh, I do want to point out that also the response that the committee's argument that this is

854
01:27:08,620 --> 01:27:13,740
really like Blackfy saying the check is in the mail. I think that's really an apposite

855
01:27:13,740 --> 01:27:18,580
to this type of platform and this type of architecture because this is really much more

856
01:27:18,580 --> 01:27:23,700
like going into your banking app and then transferring money from a CD or a money market

857
01:27:23,700 --> 01:27:28,540
account to your checking account. And yes, the bank may at some point have to move things

858
01:27:28,540 --> 01:27:33,300
around on the back end, but you don't have to wait to be able to take cash out of the

859
01:27:33,300 --> 01:27:37,980
ATM. You can do that immediately. And I think that's probably a closer analogy than the

860
01:27:37,980 --> 01:27:43,980
check is in the mail. This is digital finance.

861
01:27:43,980 --> 01:27:47,820
Also want to point out that customers, and we covered this in our brief, but just to

862
01:27:47,820 --> 01:27:52,980
call it to the court's attention, customers who transferred out of BIA and into Wallet

863
01:27:52,980 --> 01:27:57,780
could immediately trade the digital assets that they had transferred even before any

864
01:27:57,780 --> 01:28:02,180
trip process had occurred. And in fact, if you look at the trading terms of service,

865
01:28:02,180 --> 01:28:08,000
it says that those transfers, or I'm sorry, that those trades can be settled by book entry.

866
01:28:08,000 --> 01:28:13,140
So the debtors were expressly recognizing that there could be trades in Wallet that

867
01:28:13,140 --> 01:28:20,060
were finalized and settled by book entry without digital assets actually moving. Customers

868
01:28:20,060 --> 01:28:24,020
who transferred out of BIA and into Wallet could immediately get a transfer out of the

869
01:28:24,020 --> 01:28:30,700
wallet reserves and into an external wallet before any true process was performed. And

870
01:28:30,700 --> 01:28:36,500
yes, there had to actually be enough assets in the custodial wallets to make that happen

871
01:28:36,500 --> 01:28:41,860
because you can't transfer what's not there. That's obvious and everyone agrees with that.

872
01:28:41,860 --> 01:28:46,460
But it was often the case that there would be assets there because there were always

873
01:28:46,460 --> 01:28:52,060
assets in the custodial reserves by definition, and BlockFi would just true the balances

874
01:28:52,060 --> 01:28:58,020
up later if necessary. And Mr. Slate's presentation seemed to suggest that the true up always

875
01:28:58,020 --> 01:29:02,740
meant pulling assets from BIA and sending them over to the wallet reserves or maybe

876
01:29:02,740 --> 01:29:06,940
even having to go and call loans and obtain assets elsewhere and send them over to the

877
01:29:06,940 --> 01:29:13,340
wallet reserves. But if you look at Mr. Chilla's declaration and the stipulated facts, in fact,

878
01:29:13,340 --> 01:29:19,100
sometimes the reserves were overfunded. And so assets got released back to the rehypothecated

879
01:29:19,100 --> 01:29:24,300
wallets. So it kind of seems like the debtor's position is almost that, well, if there happened

880
01:29:24,300 --> 01:29:30,020
to be enough assets in the wallet reserve to cover a customer, then okay, fine, the

881
01:29:30,020 --> 01:29:35,220
transfer out of BIA is valid. But if there doesn't happen to be enough there, then you

882
01:29:35,220 --> 01:29:41,580
have to wait until the next true up process runs, perhaps. It's not entirely clear, but

883
01:29:41,580 --> 01:29:45,820
it definitely doesn't make a lot of sense. And it especially doesn't make a lot of sense

884
01:29:45,820 --> 01:29:51,700
because as I've mentioned, there were all of those occasions where even after running

885
01:29:51,700 --> 01:29:58,580
the true up process, there was still a shortfall. And having a shortfall doesn't mean, oh, some

886
01:29:58,580 --> 01:30:02,980
of those customers didn't really exit BIA. It doesn't mean that some of them that exited

887
01:30:02,980 --> 01:30:08,460
BIA now somehow revert back to BIA. It just means there's a deficiency. It's kind of like

888
01:30:08,460 --> 01:30:15,420
being temporarily under-secured. And if everybody had tried to withdraw on the same day, there

889
01:30:15,420 --> 01:30:21,540
would have had to be some kind of a solution, probably an across the board haircut, like

890
01:30:21,540 --> 01:30:26,780
the one that was imposed in Celsius until the recent settlement. And it was discussed

891
01:30:26,780 --> 01:30:33,260
in our papers. And finally, a lot has been said about fairness and equity in support

892
01:30:33,260 --> 01:30:38,900
of the debtor's position. And I think we do need to address that. The ad hoc committee

893
01:30:38,900 --> 01:30:45,340
respectfully submits that it is not fair for the debtors to be able to ignore the plain

894
01:30:45,340 --> 01:30:51,500
language of the terms of service that say that exiting BIA happens instantly. It is

895
01:30:51,500 --> 01:30:57,740
not fair for the debtors now to try to pick winners and losers among their similarly situated

896
01:30:57,740 --> 01:31:01,860
customers, especially with respect to assets that everybody agrees aren't even property

897
01:31:01,860 --> 01:31:09,780
of the estates. It is not fair for the customer who clicked transfer at 8.14 p.m. to recover

898
01:31:09,780 --> 01:31:17,280
100% out of the wallet reserves and the customer who clicked transfer at 8.16 p.m. to get nothing.

899
01:31:17,280 --> 01:31:22,100
If the debtor's messed up and didn't fully reserve for every customer who transferred

900
01:31:22,100 --> 01:31:29,900
out of BIA, well, it's not the first time that it happened. But it's also not the first

901
01:31:29,900 --> 01:31:33,980
not it's really just one of a long list of bad things that the debtors have done to their

902
01:31:33,980 --> 01:31:41,260
customers. But the answer is not to give everything to one customer and nothing to another. That

903
01:31:41,260 --> 01:31:45,340
would be the opposite of fair and equitable. And if your honor has any further questions,

904
01:31:45,340 --> 01:31:47,340
I'm happy to try to answer them.

905
01:31:47,340 --> 01:31:49,340
I appreciate your time. Thank you, Council.

906
01:31:58,860 --> 01:32:00,860
Council, if you wish to respond.

907
01:32:00,860 --> 01:32:07,700
Yes, Your Honor. Just a few points. First, I just want to commend Ms. Cossey. She's doing

908
01:32:07,700 --> 01:32:13,420
an excellent job advocating for her clients and she does not need an army. She's a one-woman

909
01:32:13,420 --> 01:32:20,260
army and I think she did an excellent job presenting for clients. Just so we're clear,

910
01:32:20,260 --> 01:32:25,580
at the end of the day, the debtor's hope is that we can pay everybody 100 cents on the

911
01:32:25,580 --> 01:32:31,120
dollar. We have to pursue all this litigation against FTX and Alameda, who defrauded the

912
01:32:31,120 --> 01:32:37,680
debtors in order to see whether there's going to be enough assets to pay everybody in full.

913
01:32:37,680 --> 01:32:43,220
But as we're sitting here today, there are not. It's definitely not a wash for the estates.

914
01:32:43,220 --> 01:32:47,260
The reason that we're taking a position on this is pretty clear, is that we need to know

915
01:32:47,260 --> 01:32:52,980
who has an interest in these funds in order to propose and confirm a plan. And without

916
01:32:52,980 --> 01:32:57,500
taking a position on that issue, I'm not really sure what our plan would say. And the fact

917
01:32:57,500 --> 01:33:02,740
that the creditors committee has joined in our position in a case where we agree on nearly

918
01:33:02,740 --> 01:33:09,300
nothing is fairly remarkable. And it actually shows why this position is really pretty clear,

919
01:33:09,300 --> 01:33:15,220
because if there were a real argument for these pool of assets to be accessible to unsecured

920
01:33:15,220 --> 01:33:19,700
generals generally, one would believe that the unsecured creditors committee would be

921
01:33:19,700 --> 01:33:26,580
making that very argument. These are just not the state's assets. These are specific

922
01:33:26,580 --> 01:33:33,300
customers' assets. And assets are there because, as Ms. Kofsky said, people made initial deposits

923
01:33:33,300 --> 01:33:37,300
into the wallet product and just left them there because they did not want them to go

924
01:33:37,300 --> 01:33:44,460
to BIA. Those assets are those customers' assets. And some clients withdrew assets from

925
01:33:44,460 --> 01:33:50,660
their BIA accounts and had them deposited into the wallet accounts. The assets there

926
01:33:50,660 --> 01:33:57,780
today belong to those customers. It wasn't a mess up when BlockFi decided to pause the

927
01:33:57,780 --> 01:34:04,740
platform entirely. BlockFi had to do that. Otherwise, it would be a severe disadvantage

928
01:34:04,740 --> 01:34:12,980
to all clients. It did it precisely because the terms provided for it and the terms provided

929
01:34:12,980 --> 01:34:20,300
for it, and they require it. I don't agree with the position that we're being inconsistent

930
01:34:20,300 --> 01:34:24,140
with the terms and conditions for precisely the reasons that I described. And there's

931
01:34:24,140 --> 01:34:30,620
two reasons. If you look at the ones you relied on, first, withdrawal BIA terms and conditions

932
01:34:30,620 --> 01:34:37,740
one, I would just return to the argument that we had. It is true that a withdrawal of principal

933
01:34:37,740 --> 01:34:43,900
from the BIA account gets immediately moved to the wallet account. But the withdrawal

934
01:34:43,900 --> 01:34:49,380
of principal from the BIA account does not happen in the click of the button ever. But

935
01:34:49,380 --> 01:34:55,440
even if it did, as Your Honor pointed out, two terms down in the same terms of service

936
01:34:55,440 --> 01:35:01,860
that she relies on, it's very clear that we could immediately halt transfers and withdrawals

937
01:35:01,860 --> 01:35:08,340
of cryptocurrency temporarily or permanently, which is exactly what the company did. That's

938
01:35:08,340 --> 01:35:15,780
exactly what BlockFi did. We implemented a pause of all transactions, BIA transfers,

939
01:35:15,780 --> 01:35:23,340
withdrawals, trades, everything stopped at the program pause. A point on interest, just

940
01:35:23,340 --> 01:35:29,060
so we're clear, her clients will get interest through the petition date because they were

941
01:35:29,060 --> 01:35:34,740
in the BIA products. As Mr. Chila pointed out in his amended declaration, some of the

942
01:35:34,740 --> 01:35:40,540
schedules are correct for that period of time. Some of the schedules are incorrect for that

943
01:35:40,540 --> 01:35:45,340
period of time, and we're going to have to amend them. But that was always true. Ms.

944
01:35:45,340 --> 01:35:50,020
Kovsky mentions that you could look at your interest calculation when you open up the

945
01:35:50,020 --> 01:35:58,980
app. But when you did that, this is discussed in the agreed set of facts at paragraph 54,

946
01:35:58,980 --> 01:36:04,580
footnote 15. There was always a pop-up in the app that says, this is an estimate of

947
01:36:04,580 --> 01:36:09,020
your interest. And the reason is because at BlockFi, your interest was always calculated

948
01:36:09,020 --> 01:36:15,140
at the end of the month. And it was very complicated because the display had your dollar calculation

949
01:36:15,140 --> 01:36:21,300
of interest, but it really wasn't calculated until the end of the month's crypto price.

950
01:36:21,300 --> 01:36:27,700
So it was always an estimate. But isn't Ms. Kovsky arguing that the fact that interest,

951
01:36:27,700 --> 01:36:32,940
whenever that calculation is done, would cease on the dollars that were transferred as of

952
01:36:32,940 --> 01:36:40,140
the moment of the transfer on the app, does that reflect that there was an actual transfer

953
01:36:40,140 --> 01:36:48,500
of the funds or the coins in that account as of that moment? In other words, if BlockFi

954
01:36:48,500 --> 01:36:55,380
is not recognizing the entitlement to interest outside of this extraordinary situation that

955
01:36:55,380 --> 01:37:03,860
happened with the pause, why isn't that reflective of when funds are actually transferred?

956
01:37:03,860 --> 01:37:09,100
It's not, precisely because the interest calculation was always, it was automated and then it was

957
01:37:09,100 --> 01:37:14,060
redone at the end of the month manually. And it was often changed based on some of the

958
01:37:14,060 --> 01:37:19,620
items that I just discussed with the court. So it is correct that just like all the other

959
01:37:19,620 --> 01:37:23,940
things about the automated, people got an automated email saying that this transaction

960
01:37:23,940 --> 01:37:29,740
had happened. And at the end of the day, sometimes it did not. And BlockFi had the right under

961
01:37:29,740 --> 01:37:35,500
terms of service to calculate to cancel transactions at any time. And that kind of gets me to my

962
01:37:35,500 --> 01:37:40,740
more general point, which is their argument is essentially that whatever the user interface

963
01:37:40,740 --> 01:37:48,620
says is the truth and is binding on BlockFi and all customers at all times. But that can't

964
01:37:48,620 --> 01:37:52,420
be right for a lot of reasons. One of them, your honor pointed out, what if there's a

965
01:37:52,420 --> 01:37:56,740
hack in the system and there's some, what if somebody hacks into BlockFi system and

966
01:37:56,740 --> 01:38:02,260
says, Mr. Allette has a billion dollars in Ethereum today? I mean, that could happen.

967
01:38:02,260 --> 01:38:07,980
That doesn't mean it's correct. Companies make adjustments to their books all the time

968
01:38:07,980 --> 01:38:13,420
to make sure that their books reflect reality. In fact, that's the whole concept of closing

969
01:38:13,420 --> 01:38:17,860
the books. At the end of the month or at the end of the quarter, you go back and try to

970
01:38:17,860 --> 01:38:23,060
determine whether or not your books reflect reality. And if they don't, then you make

971
01:38:23,060 --> 01:38:29,540
adjustments. Their argument also, again, ignores the terms of service for precisely the reason

972
01:38:29,540 --> 01:38:35,620
that your honor focused on. BlockFi always has the option under its terms of service

973
01:38:35,620 --> 01:38:41,620
to cancel any transaction. BlockFi reserves the right to refuse service, terminate relationships

974
01:38:41,620 --> 01:38:48,100
and cancel orders or transactions in its discretion. That's exactly what we did. And we're asking

975
01:38:48,100 --> 01:38:54,300
your honor for permission to match the user interface for what actually BlockFi did in

976
01:38:54,300 --> 01:38:58,100
reality. Now, if you have any questions, that's all.

977
01:38:58,100 --> 01:39:05,220
No. Thank you. Mr. Kofsky, did you have anything else to add? I know, Mr. Allette, I'll let

978
01:39:05,220 --> 01:39:10,180
you respond. Actually, I did have one other point that

979
01:39:10,180 --> 01:39:14,860
I was going to make. I apologize. They argue about title. I wanted to directly, your honor

980
01:39:14,860 --> 01:39:20,740
asked about that. So they agree that when clients directed the placement of assets at

981
01:39:20,740 --> 01:39:27,860
BlockFi, title transferred to BlockFi, BlockFi owns those assets. So the client can ask to

982
01:39:27,860 --> 01:39:33,940
return the assets that BlockFi has title to. But even if we refuse, that doesn't change

983
01:39:33,940 --> 01:39:41,260
title to the assets. It just gives people a claim against BlockFi. So the customer cannot

984
01:39:41,260 --> 01:39:48,940
legally direct the return of assets over which we have title just by themselves without BlockFi's

985
01:39:48,940 --> 01:39:52,820
cooperation. That might give them a claim. It doesn't say anything about who owns the

986
01:39:52,820 --> 01:39:56,380
assets. That's all. Well, wait. And actually, I'll go to Mr.

987
01:39:56,380 --> 01:40:02,860
Allette. So Mr. Kofsky can respond to any other issues. But would you want to comment

988
01:40:02,860 --> 01:40:14,600
on the argument made that when there's been a transfer of cryptocurrency into the wallet,

989
01:40:14,600 --> 01:40:20,340
even before the batch or the true process, it could be traded?

990
01:40:20,340 --> 01:40:29,020
Okay. So this is also addressed in Mr. Chila's declaration. So there are book entries reflecting

991
01:40:29,020 --> 01:40:35,820
trades when those transactions happen. But they don't happen until after the true up

992
01:40:35,820 --> 01:40:43,540
process. And BlockFi retains the right to cancel transactions for precisely that reason.

993
01:40:43,540 --> 01:40:50,060
That the user interface will immediately reflect the trade. The trade may not actually be possible.

994
01:40:50,060 --> 01:40:55,740
BlockFi processes it on the back end. If it doesn't happen, trade is canceled. So I don't

995
01:40:55,740 --> 01:41:00,260
think that helps Mr. Kofsky's arguments at all. It isn't really germane to specifically

996
01:41:00,260 --> 01:41:04,380
what happened here. But I don't think it's advances for cause very much.

997
01:41:04,380 --> 01:41:16,820
What is, and this probably reflects my meager understanding of cryptocurrency and the process.

998
01:41:16,820 --> 01:41:22,580
But from what you just said, how does that relate to how changes are reflected on the

999
01:41:22,580 --> 01:41:29,860
blockchain when there's been a transfer of currency? If there were trading by a wallet

1000
01:41:29,860 --> 01:41:36,780
holder, doesn't that also have to get reflected on the blockchain at some point? And what's

1001
01:41:36,780 --> 01:41:38,380
the gap in between?

1002
01:41:38,380 --> 01:41:42,700
So this would be my meager understanding of cryptocurrency as well. But I don't think

1003
01:41:42,700 --> 01:41:47,980
there's anything that's reflective of the blockchain until at least the back end happens.

1004
01:41:47,980 --> 01:41:54,540
Certainly I don't believe there are changes to the blockchain when the button is pushed.

1005
01:41:54,540 --> 01:41:56,340
That doesn't happen. Thank you.

1006
01:41:56,340 --> 01:42:01,340
Thank you. Mr. Ouellette?

1007
01:42:01,340 --> 01:42:10,100
For the record, Kenneth Ouellette of Brown Rudnick for the official committee. I just

1008
01:42:10,100 --> 01:42:17,380
wanted to respond to a few of the points Ms. Kofsky made. The first was the question of

1009
01:42:17,380 --> 01:42:23,220
what is the committee's skin in the game? And Ms. Kofsky pointed to that in certain

1010
01:42:23,220 --> 01:42:28,380
interpretations, this is essentially a wash. It's an inter-creditor issue. And that's

1011
01:42:28,380 --> 01:42:38,060
precisely the point, Your Honor. This bankruptcy case, it's 650,000 individuals, a lot of their

1012
01:42:38,060 --> 01:42:43,740
life savings. There's significant inter-creditor issues here. And this is not a case where

1013
01:42:43,740 --> 01:42:50,740
there's a bottomless well of money to pay lawyers. Every dollar that we spend on attorney's

1014
01:42:50,740 --> 01:42:57,540
fees or anything else comes out of these people's life savings. Every day that we delay, it's

1015
01:42:57,540 --> 01:43:02,400
another day that these people don't get what's left of their life savings back. And the only

1016
01:43:02,400 --> 01:43:09,060
way that a case like this can move forward and reach an end is if everybody's treated

1017
01:43:09,060 --> 01:43:16,100
fairly. This is not a case where we can afford sharp elbows of individual creditor groups

1018
01:43:16,100 --> 01:43:22,380
trying to advantage themselves over others because at the end of the day, the case will

1019
01:43:22,380 --> 01:43:29,740
devolve and nobody wins. And so that's why the committee has a position here. In the

1020
01:43:29,740 --> 01:43:34,340
committee's view, and the committee considered this very carefully, the only way to get this

1021
01:43:34,340 --> 01:43:40,140
case resolved as quickly and efficiently as possible is for everybody to get what they're

1022
01:43:40,140 --> 01:43:45,020
legally entitled to. And for this, this is not a case where there's an operating debtor

1023
01:43:45,020 --> 01:43:50,900
to save where maybe it's worth tolerating a few sharp elbows and some people getting

1024
01:43:50,900 --> 01:43:56,860
more than they're entitled to to save thousands of jobs or the like. This is a case where

1025
01:43:56,860 --> 01:44:04,940
we've got to return people's life savings as in as much as as intact as possible. We

1026
01:44:04,940 --> 01:44:09,660
share Mr. Slade's hope that we can get 100 percent, but that's not going to be today.

1027
01:44:09,660 --> 01:44:14,680
It's not going to be tomorrow. And it's almost certainly not going to be when a plan is confirmed.

1028
01:44:14,680 --> 01:44:21,480
And we've got to get as close to what we've got as possible. And that means that the committee

1029
01:44:21,480 --> 01:44:29,100
needs things to go as they should. Everybody has to get what they're entitled to. And that's

1030
01:44:29,100 --> 01:44:38,860
why we can't support an effort to invade property that's not the estate's property. And, you

1031
01:44:38,860 --> 01:44:45,540
know, it would generate deficiency claims. And so it's a wash of the estate. But it's

1032
01:44:45,540 --> 01:44:51,060
a loss because then we're going to have to fight over it. And many of those 650,000 people

1033
01:44:51,060 --> 01:44:56,380
are going to come in, delay the process, and quite rightly feel aggrieved. And that's to

1034
01:44:56,380 --> 01:45:07,060
the loss of everyone. Next, Ms. Kofsky quoted a few lines from our initial pleading where

1035
01:45:07,060 --> 01:45:13,780
we referenced BlockFi's supposed best in class practices. Just to be clear, we're referencing

1036
01:45:13,780 --> 01:45:20,140
what BlockFi held itself out to be. That is not the committee taking the decision. And

1037
01:45:20,140 --> 01:45:28,220
then two final key points. The debtors' practical ability to reverse one of these transactions,

1038
01:45:28,220 --> 01:45:34,380
regardless of what the contract says, the debtors could go back. And if, as Mr. Slade

1039
01:45:34,380 --> 01:45:40,340
said, suddenly there's a transaction that says I'm due a billion dollars of Ethereum,

1040
01:45:40,340 --> 01:45:46,540
they have the practical ability, even if titled, instantly transferred to me, to go back into

1041
01:45:46,540 --> 01:45:51,500
their systems and say, wait a minute, that's not right, undo that. And that goes to what

1042
01:45:51,500 --> 01:46:00,020
we said in paragraph 11 of our reply in support of this, that where title transfers depends

1043
01:46:00,020 --> 01:46:05,420
on who has things like practical, who has greater control over the funds. And the debtors

1044
01:46:05,420 --> 01:46:11,240
have the ability, subject to now that they're in bankruptcy or honors approval, to say these

1045
01:46:11,240 --> 01:46:19,100
transactions didn't occur. And that means the title didn't transfer. And last, Ms. Kofsky

1046
01:46:19,100 --> 01:46:26,380
pointed to moving money at a bank and wire transfers. And as we all unfortunately learned

1047
01:46:26,380 --> 01:46:31,740
in the recent turmoil with Silicon Valley Bank, the fact that your bank has confirmed

1048
01:46:31,740 --> 01:46:38,340
a transfer, the fact that you have a federal reference ID for your wire transfer, the fact

1049
01:46:38,340 --> 01:46:44,500
that your bank is not yet in FDIC receivership does not necessarily mean that transfer is

1050
01:46:44,500 --> 01:46:52,460
going to go through. And with that, Your Honor, we just request that Your Honor find that

1051
01:46:52,460 --> 01:46:59,420
the post-pause transfers did not give legal title to the transfer of targets.

1052
01:46:59,420 --> 01:47:09,220
All right. Thank you. Mr. Gwynne, last comment.

1053
01:47:09,220 --> 01:47:17,300
Group of actual wallet holders. Just a few points. One, we are not similarly situated.

1054
01:47:17,300 --> 01:47:23,740
Our creditors assets were moved into the wallet account prior to the pause time. So we're

1055
01:47:23,740 --> 01:47:30,300
not similarly situated. It doesn't matter whether the terms and conditions say something's

1056
01:47:30,300 --> 01:47:36,700
going to be transferred immediately or instantaneously, because at the end of the day, the assets

1057
01:47:36,700 --> 01:47:44,500
were not transferred. It's no different than if a debtor promised to make a refund and

1058
01:47:44,500 --> 01:47:48,420
to give someone back their property. So we're going to give you back your purchase price.

1059
01:47:48,420 --> 01:47:52,180
We'll give you a refund. But then they don't give that person the refund and they file

1060
01:47:52,180 --> 01:47:57,020
bankruptcy. That doesn't give the person the right to go to other people who actually got

1061
01:47:57,020 --> 01:48:02,140
their money back, got their property back, and say, well, we're entitled to share your

1062
01:48:02,140 --> 01:48:10,900
refund. I mean, there's no basis for saying that the creditors are similarly situated

1063
01:48:10,900 --> 01:48:15,540
when you were in the wallet before the pause period versus if you're not.

1064
01:48:15,540 --> 01:48:25,300
Secondly, you can't decouple transferring a client to the wallet and then their assets

1065
01:48:25,300 --> 01:48:32,220
going over later, because the property that is in the wallet account belongs to those

1066
01:48:32,220 --> 01:48:38,700
clients whose assets were transferred to that account. You can't just move someone over

1067
01:48:38,700 --> 01:48:43,180
to share in other people's property. The debtor has no right to do that. And the Pearlman

1068
01:48:43,180 --> 01:48:49,420
case, Your Honor, again is binding on that, that the Bankruptcy Code, the Bankruptcy Act

1069
01:48:49,420 --> 01:48:55,340
does not give the debtor the right to use other people's property to pay its creditors.

1070
01:48:55,340 --> 01:49:01,940
And that's exactly what the Troutman Group is asking Your Honor to do. So once again,

1071
01:49:01,940 --> 01:49:06,020
Your Honor, we would just request a grant to relief request. And it's been almost five

1072
01:49:06,020 --> 01:49:12,060
months since the debtor filed the motion. And the clients who are in the wallet account

1073
01:49:12,060 --> 01:49:15,900
have always been entitled to get their property back. And there's nothing in the code that

1074
01:49:15,900 --> 01:49:22,020
prohibits that. But Your Honor, we request you expressly authorize the debtor to give

1075
01:49:22,020 --> 01:49:26,580
the property back to the actual wallet holders. Thank you, Your Honor.

1076
01:49:26,580 --> 01:49:32,380
Thank you, Mr. Gwyn. Now, Ms. Kofsky.

1077
01:49:32,380 --> 01:49:36,380
Thank you, Your Honor. Deb Kofsky, Troutman Pepper for the Ad Hoc Committee of Wallet

1078
01:49:36,380 --> 01:49:45,260
Account Holders. I think one way to think about this, maybe cut through some of the

1079
01:49:45,260 --> 01:49:54,300
noise, is to think about pushing the transfer button as being notice to the debtors. That

1080
01:49:54,300 --> 01:50:00,580
that was the notice that customers provided that, hey, I don't want to be in BEA anymore.

1081
01:50:00,580 --> 01:50:08,700
I'm no longer giving you right and title to my digital assets. I'm out of this program.

1082
01:50:08,700 --> 01:50:14,380
And that was the act that terminated the grant of title. Does that mean that the customers

1083
01:50:14,380 --> 01:50:19,460
could physically get back their assets to which they now had title? No, of course not.

1084
01:50:19,460 --> 01:50:25,700
They needed BlockFi's cooperation. But that doesn't mean that the assets that BlockFi

1085
01:50:25,700 --> 01:50:32,340
was holding did not revert back to being under the ownership of the customers who had put

1086
01:50:32,340 --> 01:50:37,540
them there in the first place, especially when we're talking about assets that were

1087
01:50:37,540 --> 01:50:45,380
all commingled and fungible and dealt with on omnibus net bases.

1088
01:50:45,380 --> 01:50:50,780
With respect to my colleague on the other side who spoke about the trading terms of

1089
01:50:50,780 --> 01:50:55,820
service, which your honor had questions about, I would just direct your honor to go back

1090
01:50:55,820 --> 01:51:00,780
and look at the terms of service themselves. They say really clearly that trades are settled

1091
01:51:00,780 --> 01:51:06,220
by book entry. It does not say that settlement is dependent on some other act happening.

1092
01:51:06,220 --> 01:51:09,980
Yes, there could be a true uplayer. Yes, there was some risk involved. But the settlement

1093
01:51:09,980 --> 01:51:19,300
itself happened by book entry. With respect to the committee's arguments,

1094
01:51:19,300 --> 01:51:26,620
this is actually not an inter-creditor issue at all. It's an inter-non-creditor issue.

1095
01:51:26,620 --> 01:51:34,300
These are not constituents of the committee. And as I think Mr. Arlott recognized, there's

1096
01:51:34,300 --> 01:51:44,060
no impact on the general unsecured creditors or the estates. Whichever way the pot of assets

1097
01:51:44,060 --> 01:51:50,020
that are there in the reserves are divided up between non-creditors of the estate has

1098
01:51:50,020 --> 01:51:55,660
no impact on the amount of assets available to the estate or available to general unsecured

1099
01:51:55,660 --> 01:52:00,060
creditors. And if lawyer fees are really the issue, well, that was the committee's decision

1100
01:52:00,060 --> 01:52:04,140
to jump into a fight that doesn't affect their constituents.

1101
01:52:04,140 --> 01:52:09,320
And respectfully, there have been no sharp elbows here. The ad hoc committee members

1102
01:52:09,320 --> 01:52:14,460
are the ordinary customers, just like all of the rest of them, who many have put their

1103
01:52:14,460 --> 01:52:18,900
life savings on the platform. And all they want is to be treated fairly and in accordance

1104
01:52:18,900 --> 01:52:25,940
with the terms of service to which they agreed. All they want is what they're entitled to.

1105
01:52:25,940 --> 01:52:31,860
Ms. Arlott says we can't allow non-creditors to invade non-estate property. It is completely

1106
01:52:31,860 --> 01:52:37,860
baffling that the committee has any position in this matter whatsoever. It simply doesn't

1107
01:52:37,860 --> 01:52:44,980
affect their constituents. With respect to the Reed Smith ad hoc committee's

1108
01:52:44,980 --> 01:52:53,580
arguments, we are similarly situated to the customers that moved out of BIA prior to the

1109
01:52:53,580 --> 01:53:02,020
November 10th tweet. November 10th at 8.15 p.m. wasn't a bright line in terms of anything

1110
01:53:02,020 --> 01:53:08,220
that the debtors actually did with respect to those transfers. The inter-account transfers

1111
01:53:08,220 --> 01:53:13,940
were not paused. There's no difference between the customer who pushed the button at 8.14

1112
01:53:13,940 --> 01:53:18,740
p.m. versus the customer who pushed the button at 8.16 p.m. Both of them told the debtors,

1113
01:53:18,740 --> 01:53:22,980
we want out of BIA. We are no longer giving you right and title to our assets. Title reverts

1114
01:53:22,980 --> 01:53:27,900
back to us. Now, what do we recover from? We're looking around. And the debtors, sometime

1115
01:53:27,900 --> 01:53:34,380
later, not at the moment that the 8.14 button was pushed, that wasn't the moment that assets

1116
01:53:34,380 --> 01:53:38,700
all of a sudden magically transferred over to the wallet reserve. Sometime later, maybe

1117
01:53:38,700 --> 01:53:43,740
the next day, maybe even later than that, it's not clear. The debtors made the decision,

1118
01:53:43,740 --> 01:53:49,300
yeah, we're going to put assets into the reserve for some customers, but not others. We're

1119
01:53:49,300 --> 01:53:53,900
not going to chew up the reserves fully to cover all of the notices that we got, that

1120
01:53:53,900 --> 01:54:00,940
people were exiting BIA and taking title back to their digital assets. And again, I go back

1121
01:54:00,940 --> 01:54:04,860
to the question, what would have happened if the debtors had filed on the day when they

1122
01:54:04,860 --> 01:54:11,260
had an almost $4 million shortfall? Some customers recover in full and some customers take a

1123
01:54:11,260 --> 01:54:16,820
bigger deficiency. Maybe some customers wouldn't get anything at all out of the wallet reserve.

1124
01:54:16,820 --> 01:54:23,860
There's no way to be able to point to an undifferentiated mass of an omnibus wallet and say, this Bitcoin

1125
01:54:23,860 --> 01:54:30,700
belongs to that customer, that 8th belongs to this customer. That's not how it works.

1126
01:54:30,700 --> 01:54:38,220
And we're in basically exactly the same situation. You have a reserve that has insufficient assets

1127
01:54:38,220 --> 01:54:45,060
to cover everybody who exited BIA and some solution has to be found, but it's not property

1128
01:54:45,060 --> 01:54:50,700
of the estate. It doesn't impact claims against the estate. It doesn't impact general unsecured

1129
01:54:50,700 --> 01:54:56,300
creditors. And further, I think Mr. Slated alluded to a problem with actually being able

1130
01:54:56,300 --> 01:55:03,100
to effectuate transfers out of wallet. My understanding is that if the ad hoc committee's position

1131
01:55:03,100 --> 01:55:09,460
prevails and there has to be some kind of a pro rata or other allocation of assets that

1132
01:55:09,460 --> 01:55:15,680
are available in the wallet reserves right now, BlockFi has the ability to reset the

1133
01:55:15,680 --> 01:55:22,700
amounts in customers' accounts and allow them to withdraw, I think, in fairly short order.

1134
01:55:22,700 --> 01:55:27,400
So the ad hoc committee is not standing in the way of customers getting back what is

1135
01:55:27,400 --> 01:55:32,900
rightfully theirs. The ad hoc committee is fighting for recognition that some of that

1136
01:55:32,900 --> 01:55:35,700
is rightfully theirs as well. Thank you.

1137
01:55:35,700 --> 01:55:42,540
All right. Thank you, counsel. Mr. Squander or Ms. Bielski, U.S. trustee taking any position

1138
01:55:42,540 --> 01:55:50,860
in this? I've got to get the legs moving.

1139
01:55:50,860 --> 01:55:53,420
Thank you, Your Honor. Good afternoon. Jeff Sponder from the Office of the United States

1140
01:55:53,420 --> 01:55:57,100
Trustee. The United States Trustee is not taking a position on this motion.

1141
01:55:57,100 --> 01:56:03,620
All right. Thank you. All right. I want to thank all counsel. Extremely well briefed,

1142
01:56:03,620 --> 01:56:09,140
well argued. And I appreciate the civility, the professionalism in reaching an accord

1143
01:56:09,140 --> 01:56:15,380
on the stipulated facts in lieu of dragging this out with testimony, which would just

1144
01:56:15,380 --> 01:56:22,620
be repetitive of what you have in there as well. It is, the court recognizes the impact

1145
01:56:22,620 --> 01:56:33,740
on customers who've waited months to have access to funds that they desperately need.

1146
01:56:33,740 --> 01:56:40,060
And it's been too long coming to this, although I think all parties recognize that there had

1147
01:56:40,060 --> 01:56:49,460
to be due diligence in trying to identify the issues and resolve certain questions of

1148
01:56:49,460 --> 01:56:56,940
fact. In order to try to move this process along for the benefit of customers, all customers,

1149
01:56:56,940 --> 01:57:03,500
I am going to issue a ruling. I have the Third Circuit Conference. I'm going to try to

1150
01:57:03,500 --> 01:57:11,180
carve out time this Thursday. I'm going to ask you all to note 1030. That seems to be

1151
01:57:11,180 --> 01:57:17,780
a break in the Third Circuit program. I'll run up to my hotel room and try to read into

1152
01:57:17,780 --> 01:57:28,500
the record a decision. It will be an abbreviated ruling, obviously. It can be supplemented

1153
01:57:28,500 --> 01:57:35,940
by proposed findings of fact and law, or at that point not proposed, findings of fact

1154
01:57:35,940 --> 01:57:44,020
and conclusions of law as needed to the extent the parties require. But I will issue a ruling

1155
01:57:44,020 --> 01:57:52,380
to move this process along as quickly as possible. This Thursday at 1030, my chambers will set

1156
01:57:52,380 --> 01:58:00,340
up a webcast. There will be no oral argument. It will simply be to allow me to read a ruling

1157
01:58:00,340 --> 01:58:04,300
into the record. All right. Thank you again.

1158
01:58:04,300 --> 01:58:08,180
Your Honor, may I address the Court on some ancillary issues?

1159
01:58:08,180 --> 01:58:13,860
Sure. Thank you.

1160
01:58:13,860 --> 01:58:17,100
Thank you, Your Honor. Richard Cano, it's Hanson Boone, Counsel for the Debtors. Your

1161
01:58:17,100 --> 01:58:25,220
Honor, harking back to a while back when we talked about some seizure orders that were

1162
01:58:25,220 --> 01:58:30,620
delivered to the debtor pre-bankruptcy out of the state of Washington, in furtherance

1163
01:58:30,620 --> 01:58:34,660
of what we advised, Your Honor, on January 9th, I believe, we did transfer the wallet

1164
01:58:34,660 --> 01:58:41,660
assets to the government in connection with that seizure order. We still are negotiating

1165
01:58:41,660 --> 01:58:48,060
with the government how to return what I would say is a very material amount of posted collateral

1166
01:58:48,060 --> 01:58:54,380
and BEA that the government seeks to obtain. Clearly, there's a large amount that's owed

1167
01:58:54,380 --> 01:59:00,300
to the debtor on the loan for the posted collateral. We're trying to work off those set-off numbers

1168
01:59:00,300 --> 01:59:05,340
and the process of doing so. The government's position is that the stipulation and agreement

1169
01:59:05,340 --> 01:59:10,180
between the debtor and the government should be determined by the District Court in Washington,

1170
01:59:10,180 --> 01:59:15,940
which issued the seizure order. We're speaking with the Committee about the process to have

1171
01:59:15,940 --> 01:59:20,780
that effectuated, whether we actually go there or whether something has to happen in front

1172
01:59:20,780 --> 01:59:25,940
of Your Honor to get that done. We're not there yet. We just received the proposed stipulation

1173
01:59:25,940 --> 01:59:30,420
from the DOJ the other day. It was a long time coming, as you can imagine. I broached

1174
01:59:30,420 --> 01:59:36,020
this issue with you in January. Scroll forward to another seizure warrant and order. This

1175
01:59:36,020 --> 01:59:43,860
one issued out of Texas. Much smaller amount. Right now, we're going to turn over from wallet

1176
01:59:43,860 --> 01:59:52,340
about $47,000, not the $700,000-plus we previously turned over. And the posted collateral set-off

1177
01:59:52,340 --> 01:59:56,940
amounts, we're talking about in the $500,000 range, not the multi-million dollar range

1178
01:59:56,940 --> 02:00:00,820
we're talking about in the State of Washington. Again, we're not there with the DOJ on this

1179
02:00:00,820 --> 02:00:06,900
seizure order and warrant, but the mechanics will likely be the same. And we're discussing

1180
02:00:06,900 --> 02:00:12,860
with the Committee, again, to try to appease the government and also satisfy the state's

1181
02:00:12,860 --> 02:00:18,100
interests in this collateral and these loans. And I just wanted to bring to your attention

1182
02:00:18,100 --> 02:00:22,860
the fact that we are going to comply with the seizure warrant and the orders so that

1183
02:00:22,860 --> 02:00:27,140
we are not held in contempt by transferring the wallet assets to the government wallet.

1184
02:00:27,140 --> 02:00:36,740
These transfers are coming out of the BIA account. Well, no. And some of these are sealed,

1185
02:00:36,740 --> 02:00:41,540
so I can't get into the details, but some of these customers had wallet. Some of them

1186
02:00:41,540 --> 02:00:47,020
had BIA and some of them had posted collateral, which is money given to back their loans,

1187
02:00:47,020 --> 02:00:52,940
which then BlockFi holds in separate own wallet accounts, unrelated to BIA and unrelated to

1188
02:00:52,940 --> 02:00:58,220
Wallet. So all of that comes into the mix, but what we've only transferred and going

1189
02:00:58,220 --> 02:01:02,940
to transfer is the money that's associated with these client identification numbers in

1190
02:01:02,940 --> 02:01:08,100
wallet, because it's our view and the government obviously has listened to our view that whatever's

1191
02:01:08,100 --> 02:01:11,420
in wallets, not property of the state, so why aren't you complying with the order?

1192
02:01:11,420 --> 02:01:15,660
That's what I wanted to clarify. Okay. Thank you, Your Honor.

1193
02:01:15,660 --> 02:01:17,620
Thank you. Mr. Rowlett?

1194
02:01:17,620 --> 02:01:24,300
Yes, Your Honor. Ms. Kenneth Rowlett, Brown Rodnick for the committee. The committee's

1195
02:01:24,300 --> 02:01:29,940
view is that any... We don't have an objection to wallet funds being returned. The committee's

1196
02:01:29,940 --> 02:01:36,460
view is that any return of funds on a BIA account or loan account has to come from order

1197
02:01:36,460 --> 02:01:43,420
of this court, and to the extent that that needs to be brought to Your Honor's attention,

1198
02:01:43,420 --> 02:01:48,700
we intend to do so quickly to ensure that this court gets a chance to review those issues.

1199
02:01:48,700 --> 02:02:18,620
Fair enough. Another battle down the road. All right. Thank you all again. We're adjourned.