FTX bankruptcy filings show ‘some of the poorest financial, security, operation controls’: BitGo CEO

BitGo Co-Founder and CEO Mike Belshe joins Yahoo Finance Live to discuss BlockFi's upcoming appearance in bankruptcy court, BitGo being chosen to take custody of FTX's remaining funds and assets, and the overall state of the crypto market.

Video transcript

JARED BLIKRE: Crypto lender BlockFi has its first day in bankruptcy court today. BlockFi says its exposure to FTX, as well as the crypto winter, caused this bankruptcy filing. And since the FTX fallout, the new acting CEO selected BitGo to take custody of FTX's assets. Joining us now to talk about this is Mike Belcher, BitGo co-founder and CEO. How was the hearing today? I want to find this out because I know it was about 10 days in to the bankruptcy filing that we finally got the first day motion. So was today any different? Was it still chaotic a little bit?

MIKE BELSHE: Well, I think the bankruptcy court and proceedings is mostly an area that the lawyer are going to be able to talk more intelligently about. I think with FTX, it's going to take a while to sort out exactly what the status is of the assets, and then figure out what goes to which creditors.

JARED BLIKRE: All right, and let me ask you about your upcoming role. If confirmed in this upcoming hearing, you would take custody of these assets. What is the state of these assets? We know some of the figures. Only a fraction seems to be available recovery wise. But what's your role in this process?

MIKE BELSHE: Sure. Well, imagine you're John Ray, and you've just been appointed CEO of FTX, kind of, in bankruptcy. And you've let the previous management go, and you discover that the assets that are held by the company are actually held in self custody under the possession of the prior management. And your job is to make sure that this goes through an orderly, disciplined process, to make sure that the money gets right back to its rightful owner.

So, look, I think the new team is doing a great job. They've got a lot of work to do. They've done this before. And in the filings that they've had so far, they've said, look, this has been some of the poorest financial controls, security controls, operational controls that they've ever seen. So they got a big challenge cut out for them. They picked BitGo to help with custody.

Right away, they had to figure out how to get the assets away from the prior principals to make sure that there can't be further losses. And as you know, there's been some rumors of hacks. There have been not just rumors, confirmed hacks. And the question is like, who was doing those? So job number one, get control of those assets and make sure that you're going to be able to distribute them properly later.

JARED BLIKRE: And I'm guessing you're in this for the long haul because it was only in September, a precious few months ago, that the Lehman Brothers' bankruptcy from 2009, I believe, was finally wrapped up. These are lengthy proceedings. I'm not going to ask you for legal advice here, but a lot of customers are looking at this process. And they want to know when they're going to get their money back. What's your role in facilitating that? Any projections that you can offer on that time horizon?

MIKE BELSHE: Well, that's going to be a legal process. And there's going to be courts that decide the answers to that question. BitGo is also one of the agents helping distribute the proceeds coming out of the Mount Gox bankruptcy, which is all the way back to 2014. So seven, eight years in the making, looking to be distributed kind of in the Q1, early Q2 next year. So yeah, it takes a long time. Now, that's, of course, the Japanese bankruptcy court. This would be the American one. But it's going to take some time.

JARED BLIKRE: And how did we get here? That's a big question. That's another big question investors are asking. And you've been vocal on Twitter. Here's a quote from you in a tweet. By failing to create an ETF for Bitcoin, the SEC allowed the Grayscale-- that's GBTC-- trade to rip retail for 5 plus years, created the GBTC negative premium.

That's where it trades under the price it should because it's a closed end fund. Because it is not available to be offered as an ETF, it forced most crypto trading outside the US jurisdiction, let FTX's fraud hit millions of Americans. It shouldn't have. That's kind of an indictment. That is an indictment of the Securities and Exchange Commission. Any details there that you'd care to get into?

MIKE BELSHE: Sure. Well, I mean, to a lot of folks' understanding, what is an ETF is really kind of a concept. But an ETF is a really simple and highly structured, regulated product, whereby the SEC can apply some of its controls that have worked great in all kinds of other asset classes and products, so that we can have a Bitcoin-based ETF available to retail markets today. And I do not believe that that type of product would have had any of the susceptibility to straight up fraud, like what we've seen with FTX.

There's been, I think, two dozen ETF proposals put in-- proposed to the SEC. All of them have been rejected for various reasons. But I think the custody and the framework around it is completely ready to go. And yet, the SEC has continued to deny it, based on a number of factors. So instead, investors went and sought out the only things available to them and have ended up on rickety exchanges. And this has subjected them to basically a total disaster. I think a lot of this could have been averted.

JARED BLIKRE: I happen to agree with you there. But we've got to leave it there as well. Thank you, Mike Belshe, BitGo co-founder and CEO.