IDK — the HODLin’ Globes?
Turning the digital asset lens back on ourselves.
Awards season is upon us — and what a dazzling year we had!
With leverage as kindling, Three Arrows Capital lit the first spark — quickly, though, to be outshined by the blaze of Terra, with its compelling protagonist and fanciful storytelling.
Voyager then fanned the dramatic flame, but it was the incendiary Summer blockbuster Celsius that blew us away, appearing poised for an awards sweep.
But wait!
Summer is for tickets; Fall is for trophies — everyone knows that November is prestige season. And, wow, did November ever deliver. With FTX we got it all: a white knight and (twist!) conniving villain, political thrills and corporate intrigue, unexpected commentary on domestic and foreign criminal justice systems — the ever-crowd-pleasing combo of comedy, love, and a bit with a dog.
FTX and its stars are shoe-ins for a raft of awards, including:
- Sam Bankman-Fried — Best Actor
- FTX Accounting Software — Best Editing
- Securities Commission of The Bahamas — Outstanding Legal/Courtroom Drama
- Tom Brady — Outstanding Guest Performance in a Drama Series
- Leaked Alameda Balance Sheet — Best Makeup
Win or lose, though, what’s most important about FTX and all the nominees is what they can teach us about ourselves. So, instead of counting accolades — and because this premise is getting sweaty — let’s focus on the major lessons learned from this year’s drama.
Define your relationships
On whether/when to return Celsius customer crypto, the bankruptcy court looked to the terms of service for the customer accounts — the contractual language defining the Celsius-customer relationship. Where account terms said Celsius owned the crypto, customers were back-of-the line unsecured creditors. Where terms established Celsius as a custodian, the crypto was returned to the account holders.
So, to the extent that FTX’s terms of service contained similar custodial language, as crypto assets are recovered, customers should be at the front of the line.
What this shows is that, for intermediated asset management, the legal relationship among the parties and the assets (legally, whose cheese?) is as important as which party holds the assets (practically, whose keys?).
Understand your assets
The Celsius court also confirmed the previously-not-quite-settled position that, under the Uniform Commercial Code (or UCC), crypto is a “general intangible” asset that requires filing a financing statement to broadly enforce an interest in the asset.
This authoritative recognition should be noted by everyone in the crypto world, because buyers of (or lenders against) crypto general intangible assets essentially take the crypto subject to any prior perfected interests — and those interests can continue to run with the crypto no matter how many times it’s transferred.
Protect your crypto
Being a general intangible is a bummer, but the UCC provides a mechanism — a so-called UCC Article 8 opt-in — to transform crypto assets from non-negotiable “general intangible” assets into negotiable digital “financial assets.” Probably the most notable deployment of this mechanism is Coinbase, which updated its user agreement for hosted wallets to explain that customers’ crypto assets are “financial assets” held in an Article 8-compliant account.
Other custodians and lenders have followed suit, the result being that assets traveling between these types of accounts do so free from prior claims that otherwise stick to untransformed crypto. The downside here is that some intermediation is necessary, meaning that fully disintermediated transfers (say, between self-custody wallets) don’t enjoy these same legal protections.
Consider your future
This transformation mechanism has huge potential application beyond crypto, as really any asset can be opted into the “financial asset” framework, providing a tokenization model that is more complete, more efficient, and less intermediated than current models — most commonly, securitization and LLC equity trading.
Until UCC Article 12 is widely adopted — it’s been introduced in only ten states — the UCC Article 8 opt-in appears to be the most promising way to create and freely transfer digital assets that would otherwise not be negotiable.
In Closing
We’ve obviously learned a lot this year — read your terms of service! — and we’d be remiss if we didn’t express some gratitude to the people, inanimate objects, and abstract concepts that helped us get to this point.
First and foremost, thank you to this year’s nominees for accelerating our understanding of the risks and nature of digital asset ownership.
Thank you to the Fed — without you, who knows how far the crypto tide could have risen above all these rocks.
Big ups to the Super Bowl celebrities who encouraged us to bravely seek our fortunes by buying in at the top.
Thank you to FTT, etc. for showing us that you truly can make something out of nothing — follow your dreams, rewards token issuers!
And lastly a huge generic thank you to all the buzzwords that made 2022 what it was — Razzlekahn, The Merge, The Flippening, FUD, NFT subpoena, Fox Hill rats . . . I’m sure I’m forgetting someone.
Thank you, we love you!
CHRIS KARLSSON
Attorney with Figure Technologies focused on digital lending strategy and the development of new blockchain-based assets and marketplaces. Former litigator and “cool” compliance guy. Not a right-clicker — don’t play.
