FTX is a Bahamas-based cryptocurrency exchange, and up until recently, it was the world’s second-largest centralised crypto exchange, with Binance being its largest rival. However, when Binance was recently examining whether they wanted to buy FTX, they found certain inconsistencies and regulatory issues.

“What they have found and what has resulted is that FTX has about $9 billion of liabilities and less than $1 billion of actual assets. FTX has obviously gone into Chapter 11 last Friday. At the global level, it was discovered that FTX and its venture capital arm were basically trading customer assets and on their own account,” Mr Myint explained.

“But economically, the way FTX Australia operated, which has now gone into administration, is that assets that were crypto assets by mums and dads in Australia were actually not held in custody in Australia. They were set to FTX Antigua, which has gone into Chapter 11. They’re all offshore. The Australians, the way it had been set up was that the Australian entities and through the Australian entities’ mum and dads, their only recourse to their assets, their perceived assets [were] not onshore in Australia, but there were right to close out which for those in the know and insolvency is quite limited.

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“The situation of FTX in Australia is a bit more challenging because there’s been ... FTX in Australia does have a licence. It’s an interesting licence; it’s all available to see. ASIC has revoked it, but it does have some interesting terms.”

There are 130 FTX entities around the world that have gone into Chapter 11 Bankruptcy — and Ms Blycha emphasised how enormous this shift has been.

“FTX made $1.02 billion worth of revenue in 2021. It has had up until now over 1 million users on its mobile and desktop platforms, and in a peak, 24-hour trading volume was $21 billion in 24 hours. You are talking about a lot of real fiat currency, and crypto assets were being exchanged on the platform, and last year they managed $385 billion of crypto-trading volume. You’re talking about a very, very big market,” she said.

“The one thing for lawyers to take away if they get involved in this space is that if you fail to have an Australian Financial Services Licence or a market licence and you’re dealing in financial products, you actually are exposed to criminal penalties. These are not just civil penalties.”

And as the Treasury looks to release legislation within this space in the next year, there are a number of things Stirling & Rose has in the pipeline, according to Ms Blycha.

“Something that’s really interesting to us is the work that’s being done by the UK Law Commission so that there is a properly funded government initiative, which is looking at digital assets, looking at the nature of the property rights around digital assets, smart legal contracts, decentralised autonomous organisations. It will be great to see,” she added.

“We are involved in a project with CSIRO early next year, which is responsible contracting. One of the biggest digital assets to come is smart legal contracts. And I think if I was to put anything out there to lawyers, smart legal contracts are the future of contracting. They are a digital asset as well. They also will be tradable at some point. There are real-li[f]e questions and familiarity that lawyers need and for regulators to see them being interested in critical infrastructure and cyber security requirements for digital assets, which are contracts.”

Whilst there’s likely to be a lot more action and clear guidance next year from regulators, Mr Myint emphasised the responsibilities of the legal profession moving forward, too.

“At the same time, I think there is a tremendous onus to bear on the legal community. The lawyers can’t just palm off and say, ‘Oh, this is a commercial risk.’ If the work that you see in front of your client is actually going to harm mums and dads, and people are not going to have a proper Christmas as a result of FTX, like it’s all fine and good to retreat to your Mosman mansion, but fundamentally you do have to ask the questions and test and say, maybe we should err the side of let’s get a licence and put the procedures and the actual substantive obligations in place rather than take the fees and walk away,” he explained.

“And I think we do, as an industry, need to owe it to our clients because they’re the ones who have criminal exposure.”

The transcript of this podcast episode was slightly edited for publishing purposes. To listen to the full conversation with James Myint and Natasha Blycha, click below: