A roadmap to crypto bankruptcies?

The approval of Celsius’s reorganisation allows for the release of some $2bn in cryptocurrency, and frowns on a creditor’s reliance on AI.

In an opinion that stresses the value of expert witnesses and discourages the use of artificial intelligence to lighten the load of their analyses, Judge Martin Glenn of the New York bankruptcy court ruled in favour of the reorganisation plan of Celsius, the cryptocurrency lending platform that filed for bankruptcy in July 2022.

The plan entails the release of Celsius’s cryptocurrency (perhaps $2 billion worth) back to its hundreds of thousands of customers/creditors. A consortium called Fahrenheit LLC will manage the reorganised company, NewCo.

The court’s decision to allow this reorganisation may prove to be a valuable roadmap for lenders to the crypto world. Two points stand out: first, it will always be helpful for the creditors of such a bankrupt platform who hope to affect the outcome of bankruptcy proceedings in their favour to track the issue of valuation and have expert testimony prepared on that point. Second, the experts ought to be human beings, not algorithms, or humans overly dependent on algorithms.

As one might expect in a matter of such complexity, not all creditors approved of the plan. One objection came from Richard Phillips, an individual creditor representing himself in the action. Phillips believes that an orderly wind-down of Celsius would produce better results than the creation of NewCo. In his view the value of NewCo’s equity is as a mining/staking company, so the value of its equity as an element in distribution to the creditors has been overstated.

Glenn notes that Phillips’ testimony “was neither proffered nor qualified as an expert witness during the confirmation hearing”. Phillips offered arguments drawn from his personal analysis of the issue, but Glenn found them unpersuasive without expert analysis of fact. This will be helpful to creditors’ lawyers who want to understand the sort of case they must make to produce the result Phillips intended.

Another objecting creditor, also advocating pro se, and like Phillips contesting matters of valuation, was Otis Davis. Davis was a holder of Celsius’s utility token (CEL) and understandably dissented from the finding of the court that CEL is of zero value.

Davis’s argument brings us to a fascinating aspect of the case: the significance of AI in the context of expert valuation testimony. Davis contended that the value of a CEL was $0.71 when the petition was filed. In hope of establishing this, he offered the expert testimony of Hussein Faraj, chief executive officer of NuGenesis, a blockchain consultancy based in Australia.

The judge was not impressed. What was “most troublesome to the Court [was] Mr Faraj’s methodology and approach to preparing his report… Mr Faraj used artificial intelligence to generate the report over the course of 72 hours when – by his own testimony – a comprehensive report would have taken over 1,000 hours to generate”.

Like many high school students today, it seems, Faraj used AI to lessen the burden of completing the homework. Largely as a consequence, “the Court concludes that the Faraj report is not admissible as expert testimony, and thus rejects the $0.71 valuation in the Faraj report as an appropriate CEL token value”. Bankruptcies and AI, it seems, may not be perfect bedfellows.

Write to the author at christopher.f@pei.group

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