Davis Polk partner Tim Graulich shared his thoughts on the FTX bankruptcy with Dutch publication M&A Magazine. “Many think that chapter 11 only allows for a reorganization, but through chapter 11 you could achieve liquidation,” said Tim. “It is more common for a large company to want to apply for liquidation through chapter 11. It comes as no surprise to me that FTX has opted for a chapter 11 proceeding.”

Discussing the disappeared crypto assets, Tim noted, “A company will not just miss its factory. These digital assets cannot be removed, unless they are stored in a so-called cold wallet (a digital wallet for crypto assets that is not connected to the internet, ed.) and there is no longer access to that wallet. In that case they are not deleted, but you have lost them. One of the advantages of digital assets is that they are connected to the blockchain and the transaction can therefore be traced. However, a disadvantage is that those assets also remain on the blockchain and are therefore not accessible through third parties.”

“The territorial fight between the different authorities is very interesting here,” Tim continued. “When Lehman Brothers went bankrupt, there was an effort between the various authorities to work together. Under some authorities, that was a written collaboration. We are currently witnessing the way the different authorities deal with each other in this case. There is friction here between the authorities, while they will need each other over time.”

Tim also offered advice for potential clients of crypto funds. “Customers are becoming increasingly aware of the fact that they need to do better research,” he said. “If you are a customer of a crypto company, you should be very careful who you do business with. You need to understand the terms, how the business operates, what kind of controls are in place and whether the business is subject to any kind of local regulation. Until you know for sure, it might be wiser to put the crypto back in the cold wallet after a transaction and not leave it on a platform.”

The settlement of FTX will be a major, complex challenge,” M&A Magazine (January 16, 2023)