David Canellis

This is a segment from the Empire newsletter. To read full editions, <a href="https://blockworks.co/newsletter/empire" target="_blank" rel="noreferrer noopener">subscribe</a>.



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Today’s subject is an unsolved mystery of crypto market microstructure. We only have so many facts, and we’ll likely never know all the details.



To get up to speed with the fundamentals of what happened over the weekend, I recommend the <a href="https://x.com/i/broadcasts/1YqGolZBBRgJv">Empire livestream</a> from Sunday with Doug Colkitt, as well as Doug’s <a href="https://x.com/0xdoug/status/1976850615621107743">helpful X thread</a> on Auto-Deleveraging.



For those wanting the quick and dirty headline summary, here goes.&nbsp;



For some silly reason, Binance was using spot prices to value three tokens accepted as collateral for margin positions — liquid staking derivatives wBETH and BNSOL, alongside Ethena’s synthetic dollar USDE.



Not exactly a problem when Binance’s order books for those tokens were thick with bids on either side. But they’d quickly dried up around the time that bitcoin and other coins started dumping on word that Trump’s trade war with China would persist, leading prices to slip well below par, and in the case of the two staking derivatives, almost to zero.



Bad news for anyone using the affected coins as collateral for margin trading on Binance. Suddenly their collateral wasn’t considered valuable enough to cover their position — even though prices remained much more stable elsewhere — and they were liquidated.&nbsp;



At the same time, leveraged traders on perps DEXs like Hyperliquid, many incentivized to take margin by points campaigns for airdrops, were also hit as a result of second-order price effects.&nbsp;



So, if you’re after an analogy, it’s easiest to consider Binance as the epicenter of an earthquake. Had Binance valued USDE, wBETH and BNSOL using an index or some other pricing system, rather than its own illiquid spot markets, maybe there would have been no earthquake at all. The Ethena protocol was still redeeming USDE tokens for $1 value throughout the entire ordeal, for instance.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">While we share these suggestions privately with any partner we work with across both DeFi and CeFi, want to surface this publicly so there is zero doubt going forward on what we view as appropriate oracle design and risk management for USDe: <a href="https://t.co/lb4OeaGn9Y">pic.twitter.com/lb4OeaGn9Y</a>&mdash; G | Ethena (@gdog97_) <a href="https://twitter.com/gdog97_/status/1977302774636540403?ref_src=twsrc%5Etfw">October 12, 2025</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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Now comes the mystery: As Colin Wu <a href="https://wublock.substack.com/p/opinion-is-this-crash-an-attack-on">pointed out</a> earlier this week, Binance had, only days before the liquidation quake, publicly <a href="https://www.binance.com/en/support/announcement/detail/d6deec042d784b6ba5d8710a8c69d79d?utm_source=chatgpt.com">announced</a> that it would be reconfiguring its price oracles away from its own spot markets for wBETH and BNSOL “to minimise the risk of depegging.”



Hypothetically, that opens the door to the whole situation amounting to a coordinated attack on Binance (or one of its market makers).&nbsp;



Whether Binance knew it or not, the announcement made it clear that there was a structural weakness in the way its oracles were valuing certain tokens used as collateral. Any malicious whale with a decent-enough position in the implicated spot markets could (again, hypothetically) dump enough coins to depeg those assets, triggering liquidations that shouldn’t be triggered at all.



Which, I suppose, could be the case. But for such a plan to work, it would take knowing that the order books were so thin that prices would actually collapse under a certain amount of acceptable selling pressure applied by the malicious whale.&nbsp;



As it so happens, there is data that suggests that this might’ve been possible.&nbsp;



The tip off came from an X poster by the name of Benson Sun, who has been unpacking the implications in a series of articles. Sun <a href="https://x.com/BensonTWN/status/1978083314121552360">wrote</a> that between 21:18 and 21:20 UTC, Binance underwent an “abnormal, synchronized withdrawal of liquidity,” through which “order books were nearly drained, leaving the market in a brief but total vacuum.”



Indeed, bid and ask volumes on Binance’s BTC/USDT market evaporated by more than 95% between 21:13 and 21:22, per Blockworks Research data and as shown on the chart below. The orderbooks were drained almost completely in under 10 minutes and would take the better part of an hour to recover to reasonable levels.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1282" height="718" src="https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=1024&amp;h=1024" alt="" class="wp-image-109104" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=1282 1282w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=466 466w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2025/10/image-45.png?w=80 80w" sizes="auto, (max-width: 1282px) 100vw, 1282px" /></figure>



Binance, meanwhile, compensated liquidated users affected by localized depegs that occurred between 21:36 UTC and 22:16 UTC.&nbsp;



Which makes sense: The depegs had started around 21:40 UTC, with the worst of it coming about 10 minutes later. Trump’s announcement of potential additional tariffs on China came 20 minutes after that, at 20:00 UTC, on Truth Social.&nbsp;



Curiously, two Hyperliquid accounts <a href="https://www.wsj.com/finance/currencies/a-historic-crypto-selloff-erased-over-19-billion-but-two-accounts-made-160-million-3144cccd">got ahead of the news</a> by shorting bitcoin and ether minutes before that post, leading to $160 million profits.



Were those traders the same whales who might’ve intentionally crashed prices on Binance after they simultaneously pulled their chips off the table, imploding markets that they themselves turned illiquid? Was that a strategy to profit even more from their shorts, fueled by the tears of liquidations across the exchange ecosystem?



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Reminded by <a href="https://twitter.com/BensonTWN?ref_src=twsrc%5Etfw">@BensonTWN</a> <a href="https://twitter.com/Arthur_0x?ref_src=twsrc%5Etfw">@Arthur_0x</a>, I further explored the data points of <a href="https://twitter.com/ethena_labs?ref_src=twsrc%5Etfw">@ethena_labs</a> price at 9:18 pm UTC and 9:19 pm UTC on 10 Oct across <a href="https://twitter.com/binance?ref_src=twsrc%5Etfw">@binance</a> <a href="https://twitter.com/okx?ref_src=twsrc%5Etfw">@okx</a> <a href="https://twitter.com/Bybit_Official?ref_src=twsrc%5Etfw">@Bybit_Official</a> <a href="https://twitter.com/bitgetglobal?ref_src=twsrc%5Etfw">@bitgetglobal</a> . 0.34 -&gt; 0.27 at 9:18 pm 0.27 -&gt; 0.15 at 9:19 pm It looks like mms withdrew the liquidity… <a href="https://t.co/PhtTWMHAqx">https://t.co/PhtTWMHAqx</a> <a href="https://t.co/Fyvycbethz">pic.twitter.com/Fyvycbethz</a>&mdash; YQ (@yq_acc) <a href="https://twitter.com/yq_acc/status/1978138671531618777?ref_src=twsrc%5Etfw">October 14, 2025</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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We’ll never know without Binance publicly releasing details of how their largest traders operated around the time of the crashes (which would never happen).&nbsp;



But remember the part about pattern recognition: In a separate post, another analyst <a href="https://x.com/yq_acc/status/1977433963728867630">catalogued</a> four other instances of attacks on oracles prone to manipulation since late 2020, including bZx, Harvest Finance, Compound and Mango Markets.



So the $19 billion question of whether a single culprit caused the chaos might be a misnomer. It was a situation that could’ve easily been caused by just one person.&nbsp;



Whether or not they intended to trigger the situation is the real kicker. And it doesn’t take a tinfoil hat to suggest that exchange operators (CEX or otherwise) would do well to consider this a coordinated attack in any case.&nbsp;



Fingers crossed, at least.



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Binance

Attack on Binance? Crypto meltdowns are starting to rhyme

Andrew Thurman

A sector-wide digital asset rally has pushed the prices of bitcoin, ether and other top cryptocurrencies higher — upwards of 14% in the past 24 hours — and liquidated hundreds of millions of dollars worth of short positions from traders betting on a pullback.



According to Coinglass, $323 million in short positions were liquidated in the past 24 hours, compared to $103 million in long positions. 



Binance accounts for the majority of the liquidations, with $141 million liquidated — 73% of which were short positions. Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) traders were by far the hardest hit, with $233 million in positions liquidated.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/c3w-N5W6Yik_ATUJ4OO-Q_NNeR4Z-ZAuHLlennAtSz38TgcffjOP_hnlxAWH953sx9l1Yvzu7iUQF7TvZV5rl5V7wnfMF5BjNFmtT8I9Vlk1OGzSA6Kwg8uqnB44nGUHv4FpAqAupkEULgjis82LaF4" alt=""/></figure>



Source: Coinglass



The liquidations come amid an industry-wide rally that has seen the price of key assets such as BTC rally as much as 13% on the day.&nbsp;



In the past 24 hours, Bitcoin has climbed from $30,600 to as high as $35,000 – one of its strongest days in the past year.&nbsp;



Bitcoin is largely leading the rally, with Bitcoin dominance – a term for Bitcoin’s contribution to the overall cryptocurrency market capitalization – <a href="https://blockworks.co/news/bitcoin-dominance-34k">climbing to a two-year high of 54%</a>.&nbsp;



The rally has been remarkably broad-based. According to data on CoinGecko, in the past 24 hours there are only 8 assets in the top 100 by market capitalization that are in the negative.&nbsp;



Of them, many are stablecoins or commodity-backed tokens such as Paxos’ (<a href="https://blockworks.co/price/paxg">PAXG</a>) spot gold token. The only native digital asset that is down over the past day is Bitfinex’s (<a href="https://blockworks.co/price/leo">LEO</a>), down just 0.4%.&nbsp;

$325 million in shorts liquidated amid crypto-wide market rally

Following a historic ruling that may clear the path for an eventual spot bitcoin ETF, traders holding short positions have been liquidated to the tune of $120 million in just 24 hours.&nbsp;



On Tuesday, a panel of three judges from the DC Circuit Court of Appeals sided with asset management company Grayscale in their June 2022 suit against the US Securities and Exchange Commission, which centered on whether the $50 billion firm could convert its Bitcoin investment trust to a direct exchange traded fund (ETF). 



In an email to Blockworks, an SEC spokesperson <a href="https://blockworks.co/news/grayscale-sec-spot-bitcoin-etf">wrote</a>, “We are reviewing the court’s decision to determine next steps.” Nonetheless, many observers have said that the ruling <a href="https://blockworks.co/news/sec-spot-bitcoin-etf-blackrock">paves the path to an eventual Bitcoin spot ETF</a>.



In anticipation of fresh inflows from Wall Street investors, prices across the cryptosphere ripped higher on the news. Ether (<a href="https://blockworks.co/price/eth">ETH</a>) rose as much as 5.5% and bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) by 7.2% in a broad-based rally.



Read more: <a href="https://blockworks.co/news/grayscale-sec-decision-bitcoin-etf">Court grants Grayscale’s petition for review in bitcoin ETF case against SEC</a>



The volatility proved to be particularly troublesome for derivatives traders. Per data from <a href="https://www.coinglass.com/LiquidationData">Coinglass</a>, $169 million in positions were liquidated, with short positions accounting for nearly two-thirds at $120 million. The liquidations were the most since Aug. 16 when <a href="https://blockworks.co/news/price-dip-long-liquidation">over $1 billion in positions were wiped</a> as the market crashed.&nbsp;



The wipeout hasn’t stopped new traders from piling in, however. According to DeFiLlama, the amount of open interest on-chain increased 150% in the past 24 hours on Ethereum alone, with total cross-chain derivatives volume reaching over $2.5 billion.&nbsp;



Additionally, according to Velo, during a four-hour period on Tuesday the total open interest increased nearly <a href="https://velodata.app/market">tenfold</a> from $3.8 billion to $34 billion. 



Despite another strong ruling as a court <a href="https://blockworks.co/news/uniswap-class-action-dismissed">dismissed a class-action suit against the Uniswap developers</a>, prices have largely drifted lower on Wednesday. Bitcoin has fallen to $27,200 from a peak of $27,850 earlier in the day.



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GBTC

$120 million in shorts liquidated following Grayscale ruling

For the second time in a matter of days, liquidators have stepped in to restore the health of a notorious DeFi lending position.&nbsp;



A whitelisted liquidator address controlled by core Binance Coin (BNB) team members seized $32.6 million worth of BNB on Monday morning from a notorious Venus Protocol lending position in order to liquidate $29 million worth of stablecoins. The position still has $94 million outstanding. 



The <a href="https://debank.com/profile/0x489a8756c18c0b8b24ec2a2b9ff3d4d447f79bec">position</a> was created in October 2022 following a Binance Smart Chain bridge hack, one of the largest in crypto history. The attacker, believed to be the North Korean-funded Lazarus Group, stole $560 million worth of BNB. 



Unable to sell all of it efficiently, they opted to deposit a major sum into Venus, using the BNB as collateral to take a stablecoin loan of $150 million that was then largely bridged to different chains.&nbsp;



On lending protocols such as Venus, “liquidators” are often bots that seize collateral to sell and repay a delinquent user’s position if it falls below a certain collateralization rate. Because of the size of Lazarus Group’s BNB position, liquidation could send the price spiraling and put the protocol at risk of bad debt — and the entire ecosystem at risk of cascading liquidations. 



As a result, BNB core team members proposed becoming the sole whitelisted <a href="https://community.venus.io/t/bnb-chain-core-team-as-the-sole-liquidator-of-the-bnb-exploiter-address/3202">liquidator</a> of the position in November 2022. The team would take on the BNB and refrain from selling it, and instead pay down the debt to prevent systemic risk. 



<a href="https://blockworks.co/news/bsc-venus-protocol">The team finally had to step in on Friday</a>, using half of a $60 million stablecoin fund deposited into the liquidator address to pay off $30 million in debt across three transactions.



Earlier today, they spent the remainder of the fund and paid off an additional $30 million.&nbsp;



The position currently remains unhealthy and is poised for another liquidation at a BNB price of $198. While it initially appeared that the liquidator address was out of stablecoins, an additional $30 million in USDT has been added to the address from <a href="https://blockworks.co/tag/binance">Binance</a>. 



In an interview with Blockworks, pseudonymous Venus BD &amp; Community Lead “Danny” said that “BNB Chain will continue to monitor and manage the health of the account as necessary.”



<a href="https://blockworks.co/price/bnb">BNB</a> currently sits at $210.



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binance coin

Venus liquidates additional $30M of notorious lending position

For the second time in just a matter of weeks, a DeFi protocol has taken unusual measures to prevent systemic risk relating to a lending position.&nbsp;



 The Binance Smart Chain-based lending protocol, Venus, announced on Thursday night that a notorious quarter-billion dollar position was “made healthy” by the BNB core team following a liquidation of $33 million worth of Binance Coin.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Following today’s market movement, the BNB Bridge exploiter account was made healthy as promised by <a href="https://twitter.com/BNBCHAIN?ref_src=twsrc%5Etfw">@BNBCHAIN</a> using whitelisted liquidation without any resulting shortfall or further impact to <a href="https://twitter.com/search?q=%24bnb&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$bnb</a> <a href="https://t.co/TGZ7nbiDPN">https://t.co/TGZ7nbiDPN</a>&mdash; Venus Protocol (@VenusProtocol) <a href="https://twitter.com/VenusProtocol/status/1692421277762412586?ref_src=twsrc%5Etfw">August 18, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The position was first created in October 2022 following one of the largest hacks in crypto history. An attacker — now widely believed to be the North Korean-affiliated Lazarus Group — stole 2 million Binance Coin (<a href="https://blockworks.co/price/bnb">BNB</a>) worth over a half billion dollars at the time from a cross-chain bridge. 



Unable to offload their haul without drastically reducing the BNB price, the attacker hesitated. They might have feared a chain rollback or another retaliatory action from Binance. Instead, the attacker deposited hundreds of millions into Venus as collateral. This allowed them to secure a massive $150 million stablecoin loan, most of which was then <a href="https://twitter.com/SlowMist_Team/status/1578159110708940801?s=20&amp;t=l3ut_4eHdcnOIU7oz0ibhQ">bridged</a> to other chains and exchanged for ETH. Only a minor portion of it was frozen by Tether. It is unlikely the attacker ever intended to repay this debt.



Per data from <a href="https://defillama.com/protocol/venus-finance">DeFiLlama</a>, at the time of the attack the deposit from the exploiter accounted for nearly 20% of Venus’ total value locked, and limited liquidity for BNB meant that liquidating the position could pose existential risks for Venus in the form of bad debt.&nbsp;



As a result, in November the BNB core team successfully <a href="https://community.venus.io/t/bnb-chain-core-team-as-the-sole-liquidator-of-the-bnb-exploiter-address/3202">proposed</a> becoming the sole liquidator responsible for the position via Venus governance.



“As the market is very volatile, there is potential risk that if liquidated, there is potential this large portion of BNB may cause more cascading liquidation effect and unnecessary damage to the market and cause more risks to Venus, Venus users, BNB token, and BNB chain,” a core team representative wrote in the formal vote.&nbsp;



The position then largely sat dormant until June 2023, as the price of BNB fell close to liquidation threshold. $30 million tether (<a href="https://blockworks.co/price/usdt">USDT</a>) was <a href="https://twitter.com/ScopeProtocol/status/1668159956598800384?s=20">added</a> to the liquidator address, adding to an initial $30 million BUSD position.&nbsp;



Last night, <a href="https://blockworks.co/news/bitcoin-crypto-sell-off-market-jitters">amid a marketwide rout</a>, BNB dipped below the liquidation threshold of roughly $220 million, leading the assigned BNB core team liquidation address to step in.&nbsp;



In an interview with Blockworks, pseudonymous Venus BD &amp; Community Lead “Danny” confirmed that – despite widespread reporting that the liquidation was for over $60 million – the BNB core team seized $33 million of BNB collateral by liquidating $30 million in USDT in debt across a series of three <a href="https://debank.com/profile/0x489a8756c18c0b8b24ec2a2b9ff3d4d447f79bec/history">transactions</a>.&nbsp;



Even with the liquidation the protocol may not be out of the woods, as Debank shows that the health rate of the position is perilously low, and another downturn could lead to further liquidations at a price of roughly $210.8 per BNB. After the liquidations today, the liquidator address has an <a href="https://www.scopescan.ai/address/0x56306851238d7aee9fac8cdd6877e92f83d5924c?network=bsc">additional</a> $29.9 million in stables remaining, relative to $126 million in outstanding remaining debt.&nbsp;



“BNB Chain will continue to monitor and manage the health of the account as necessary,” said Danny.&nbsp;



<h2 class="wp-block-heading">Lending markets under stress</h2>



Venus is not the only lending market to come under stress in recent weeks.&nbsp;



On July 31, decentralized exchange <a href="https://docs.google.com/document/d/1vpS9XmPjwCHd2JZxqj84oW_8YTzDuR72YJXpa_Et1pE/edit?usp=sharing">Curve Finance suffered a $70 million hack</a>. While much of the losses were later recovered or seized by whitehats, one of the greatest losses was to a CRV/ETH pool, which was central to CRV’s onchain liquidity.&nbsp;



CRV’s liquidity depth and price soon became a focal point for the DeFi community, as <a href="https://blockworks.co/tag/curve">Curve</a> founder Michael Egorov had outstanding loans worth upwards of $110 million owed to various protocols using CRV as collateral. The liquidation of these positions without a source of onchain CRV liquidity could have caused a rash of bad debts and liquidation cascades across the space.&nbsp;



Ultimately Egorov managed to pay down large swaths of his debts by <a href="https://blockworks.co/news/curve-egorov-exit-defi-positions">selling large sums of CRV OTC</a> to a number of counterparties.&nbsp;



Egorov still has over $45 million in outstanding <a href="https://debank.com/profile/0x7a16ff8270133f063aab6c9977183d9e72835428">liabilities</a> owed to various protocols.



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DeFi on the brink of second bailout as Venus liquidates $30M

Jack Kubinec

<div id="highlights-block_62c46bcb5aa90" class="highlights">
 <ul>
 <li>Crypto centralization and regulation would provide better protections for investors</li>
 <li>Three Arrows Capital liquidation is a “test case” that could lead to a “raft of bankruptcy cases”</li>
 </ul>
 
</div>



Blockchain and crypto may aspire to be fully permissionless, but in the meatspace of high-stakes finance, replete with conflicting interests and disparate regulatory regimes, litigation figures to become a prominent feature.&nbsp;



Advocates often focus on the technology’s promise to eliminate middlemen or trusted third parties. So, where do lawyers — who often act as middlemen to establish trust between transactors — fit in?



Blockworks spoke with three crypto-focused lawyers to get their perspective on crypto&#8217;s need for legal counsel.



<h3 class="wp-block-heading">Timothy Spangler, Dechert LLP</h3>



Blockworks: What impact will the upcoming litigation surrounding Three Arrows Capital (3AC) and Celsius have on the crypto industry in the years to come?


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="240" height="300" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg" alt="" class="wp-image-23888" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=240 240w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=206 206w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=209 209w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=175 175w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=64 64w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=40 40w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Timothy-Spangler-240x300.jpg?w=360 360w" sizes="auto, (max-width: 240px) 100vw, 240px" /><figcaption>Timothy Spangler</figcaption></figure></div>


Spangler: This period of restructuring and bankruptcies will educate people in the space, and we’ll see that people who retained lawyers and increased levels of protection will have much better outcomes than people who said, &#8220;well, crypto is a take-it-or-leave-it environment, it’s all risk, all reward.&#8221; At this stage, it’s a conceptual hurdle to jump. People who are investing and building out businesses need to understand that at a high level, lawyers and protections move the needle.



Blockworks: What is a misconception people in the crypto space have about the law?



Spangler: So many people in crypto talk about &#8220;code is law.&#8221; Code says what code says and digital assets do what they do. Code isn’t law, code is code. Law applies to any sort of transaction, and the purpose of law is about shifting losses from where they fall to some other party. Historically, when the sums of money get larger, the amount of lawyering that goes on around those sums of money increases. And the sums of money are now sufficiently high around crypto that you’ll see that start to happen.



Blockworks: What do you make of the debate regarding whether decentralization is a myth in the crypto space?



Spangler: Decentralization is not a statement someone can say. Decentralization is a fact that needs to be established and proven. Wagging your finger in the air and saying &#8220;we’re decentralized&#8221; is not enough. If people set up a [decentralized autonomous organization] and are involved in its operation, it’s hard for that platform to be decentralized enough to protect those people from liability. People harm themselves because they act like they’re bulletproof and don’t have a care in the world and think they’re beyond the reach of law enforcement, and that’s the worst thing you can be. Liability is real. Prepare for it.



Timothy Spangler focuses his practice on the intersection of alternative investment management and financial technology, including the impact of blockchain, cryptocurrencies and digital assets on the financial services industry and the innovation economy.



<h3 class="wp-block-heading">William Brannan, Lowenstein Sandler LLP</h3>



Blockworks: How do you think US regulatory efforts in the crypto space are going to shake out?


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="300" height="276" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png" alt="" class="wp-image-23890" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=280 280w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=284 284w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=238 238w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/William-Brannan-300x276.png?w=712 712w" sizes="auto, (max-width: 300px) 100vw, 300px" /><figcaption>William Brannan</figcaption></figure></div>


Brannan: I’m not confident there’s going to be meaningful regulatory guidance in the short term — that hasn’t been the case for six, seven, eight years now. At this point, crypto is so diverse in its applications that you have a number of projects that seem to dip into different regulatory regimes. But these questions are not new — we’re now just seeing those questions become more important to find solutions to. Regulation is a little esoteric when the market is great and everyone’s making money, but it’s more pressing when the market is down and everyone is facing liquidity issues.



Blockworks: Should crypto companies strive for decentralization?



Brannan: There’s a constant tension between the principles of decentralization and what I think most retail investors are really looking for — between the tech entrepreneurs who are building these products and what the average customer wants. If crypto companies insert some level of centralization, the trade-off from a retail perspective may be worth it.



Blockworks: In the current market, a lot of crypto companies are facing insolvency. What should companies be doing to stay sustainable in the long term?



Brannan: If you’re a platform that faces retail customers, a huge element of creating a successful platform is making sure that you’re educating those retail customers. Retail customers see they can earn 12% yield on their cryptoassets, but it takes a long time to educate a customer on the risks involved. Losses become very concerning for the retail investor when they don’t understand what it is that they’ve bought into.



Will Brannan is a partner at Lowenstein Sandler and vice chair of Lowenstein Crypto, which provides counsel to the industry’s most sophisticated entrepreneurs, financial institutions, venture investors, asset managers and financial technology companies.



<h3 class="wp-block-heading">Paul Ferguson, Addleshaw Goddard LLP</h3>



Blockworks: What’s novel about the 3AC liquidation from a legal perspective?


<div class="wp-block-image">
<figure class="alignright size-medium"><img loading="lazy" decoding="async" width="300" height="300" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg" alt="" class="wp-image-23891" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=150 150w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=257 257w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=261 261w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=219 219w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/07/Paul-Ferguson-300x300.jpeg?w=359 359w" sizes="auto, (max-width: 300px) 100vw, 300px" /><figcaption>Paul Ferguson</figcaption></figure></div>


Ferguson: There’s an interesting provision in the liquidation order that says the liquidators have the power to sell any crypto or convert to fiat currency to protect against volatility. That provision has never existed before, but the price of bitcoin has plummeted, so creditors can transfer the money into a more stable asset. But no one quite knows how a liquidator is going to deal with cryptoassets.



Blockworks: How do you think the legal field feels about the liquidation?



Ferguson: 3AC is a test case. Everyone is watching what’s going to happen, and then you’ll see a whole raft of bankruptcy cases. People have lost their life savings in this.



Blockworks: And what will the broader outcome of those bankruptcy cases be?



Ferguson: I think you’ll see capital requirements like what exists for banks. If you’re going to take deposits from Joe Public, you’ve got to guarantee you can pay that back. Post-Lehman, most banks face stringent capital requirements, and I definitely foresee something similar happening in the crypto sphere. I don&#8217;t see how crypto platforms can survive without similar protections, and I don&#8217;t see why they’d want to. If you want people to give you their money, then why would you not want a requirement in place? And given the volatility of cryptoassets, the capital requirement will need to be greater than for fiat.



Paul Ferguson is a UK-based lawyer whose practice is centered around claims involving digital assets, cryptocurrencies, online trading platforms and the recovery of assets from cybercrime. His previous firm was employed by <a href="https://cms.blockworks.co/?s=craig+wright" target="_blank" rel="noreferrer noopener">Craig Wright</a>, who claims to be Bitcoin founder Satoshi Nakamoto.



Comments have been edited slightly for clarity and brevity.



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