The Future Lawyer Weekly Briefing – W/C 22nd November

Sam Bankman-Fried And The FTX Collapse

Briefing by Aqua Koroma

Overview

FTX is the central trading platform of Alameda, founded by its CEO Sam Bankman-Fried (SBF), who, according to Forbes.com, ‘was one of the richest people in crypto, thanks to his FTX exchange and Alameda Research trading firm, before his empire came crashing down in November 2022’.

As a result of this collapse, SBF has stepped down as CEO of Alameda, FTX and other subsidiaries. SBF and FTX face criminal charges for fraud as filed by the office of the Manhattan US Attorney. Furthermore, Alameda, FTX, et al. have reportedly filed for bankruptcy protection from its creditors.

What caused the catastrophic collapse?

A very public ongoing Twitter fracas between the CEO of Binance (a rival of FTX), Changpeng Zhao (CZ) and SBF was the catalyst for FTX’s downfall. The spat primarily concerned front-running trades, which according to Insider, ‘means trading a financial asset by a broker who has inside knowledge of a future transaction which may affect the asset’s price’.

It was also apparent that cryptocurrency value had steadily declined in 2022, and all trading platforms worldwide were affected. However, SBF implied that Alameda Research was immune to the decline when the opposite was, in fact, true.

SBF, to keep up this facade of immunity and on behalf of Alameda, according to cnbc.com, ‘borrowed money to invest in failing digital asset firms this spring and summer to keep the industry afloat, then reportedly siphoned off FTX customer deposits to stave off margin calls and meet immediate debt obligations’.

CZ later revealed that Binance would liquidate its entire stock of FTT tokens (the indigenous token of FTX), valued at 530 million dollars received as a result of Binance’s investment in FTX stock in 2019, owing to ‘recent revelations’, although those revelations were never specified, neither revealed. CZ’s announcement almost immediately caused a crypto market loss of around 260 billion dollars.

For a while, it was believed that FTX was victim to hacking that caused the loss of 477 million dollars; however, it soon transpired that these funds were transferred to a crypto wallet owned by the Securities Commission of the Bahamas, which is perhaps not so coincidentally, the location of FTX’s head office.

Societal impact

It is believed that CZ’s decision to liquidate FTT tokens was the catalyst for FTX’s collapse, as following his announcement of the liquidation of FTT tokens and within 72 hours of it, there followed a mass withdrawal of funds from investors and traders, effectively the equivalent of a bank run, and a supposed sell-off of FTX to Binance, a deal which Binance later rescinded on. Consequently, bitcoin’s value slumped to a week low on Monday, 21^st November 2022, with other cryptocurrencies following suit.

It is estimated that around a million people worldwide are affected by FTX’s collapse contagion, from large traders such as Sequoia Capital and Galois Capital with respective losses of 213.5 and 100 million dollars to the ‘ordinary joes’ like David. David recently joined forces with around 600 Spaniards and Latin Americans to remediate their loss. Startlingly, FTX owes its largest creditors around 3 billion dollars, and it is highly improbable that they, along with others, may not be fully compensated, if at all, for their loss.

Additionally, FTX has since filed for bankruptcy, which means its shareholders and employees will likely be increasingly adversely impacted and, to inflate its woes, would, as a corporate body, face criminal fraud charges.

One is expected to witness catastrophic economic fallouts for companies and individuals akin to the 2008 crash and the Bernie Madoff scandal.

Impact on the legal sector

Cryptocurrency is now even more so under government scrutiny following FTX’s collapse. It is often thought of as not an adequately regulated financial sector.

Following FTX’s collapse, rigidly staunch cryptocurrency advocates, for example, Crypto.com’s CEO Kris Marszalek and Microstrategy’s founder, Michael Saylor, have called for more stringent crypto regulations to protect against such crashes.

Perhaps most tellingly, it is expected that there will be an influx of US lawyers seeking to specialise in cryptocurrency bankruptcy to protect their clients and perhaps more so to drive profits in a very precarious economic climate.

Many UK law firms, and with many of them originating from the US, have clients both nationally and internationally who were affected by the collapse; therefore, irrespective of the outcomes of this melee, the UK legal sector will most certainly be involved in almost identical ways by any ‘trickle-down’ legislative advancements and amendments from the US.

The Extension Of The Inheritance Tax Nil-Rate Band Freeze

Briefing by Aqua Koroma

Overview

The wills and probate sector is notoriously complex and intricate, with the slightest error in Inheritance Tax (IHT) planning typically proof of disproportionate disadvantage and detriment to a beneficiary.

Therefore, it is of great importance that beneficiaries are enlightened on the potential effects of the recently extended IHT Nil-Rate Band (NRB) freeze from 2025-2026 to 2027-2028 by the Chancellor of the Exchequer.

IHT is payable on a deceased’s estate, which any beneficiary, such as the spouse or children, bears liability for. This impost could be paid against any property, including insurance policies. It is not to be miscategorised as estate tax, the latter payable by the deceased’s estate, usually on income generated by estate interests.

Understanding IHT

IHT is payable before the granting of probate and the distribution of the assets and by the end of the sixth month after death.

Before, IHT was usually considered a complication for the wealthy, but not so currently; consistent house price increases mean many more beneficiaries are enmeshed with IHT.

The current standard IHT rate is 40%, payable after settling all estate debts. There are exemptions and reliefs applied to IHT, with the latter, for example, being taper relief, business property relief and agricultural property relief; however, the primary exemptions are no payment of IHT on an estate valued at £325,000 or below, otherwise known as the Nil-Rate Band (NRB), and no IHT payable should you convey all estate above the £325,000 to your spouse, civil partner, or an exempt beneficiary such as a charity or a community amateur sports club.

Additionally, there is the Residence Nil-Rate Band (RNRB) allowance of £175,000, which is applicable should you bequeath your property to your issues or direct relations, such as your children or grandchildren, meaning the £325,000 threshold could be increased to £500,000 for some families.

• It is important to note that while the NRB has remained the same since 2009, the RNRB has increased in line with inflation.

Therefore, what are the implications of an extended IHT NRB freeze for society and the legal sector?

The societal implications of the tax freeze

To all outward appearances, tax freezes seem a positive measure, and to some extent, are. The current IHT freeze and its extension temporarily resolve rising inflation and increasing living standards issues.

The duration of the freeze is highly unusual and very much comparable to a stealth tax – that is, tax collected in ways that may not be, at first glance, obvious to most taxpayers, with the primary ‘benefit’ to the government in this instance, being the arbitrary fortification of the public purse through increased tax revenue. In particular, the government is looking to plug a £55 billion deficit in public finances.

Freezing IHT means its rate does not keep up with inflation, and upon the freeze’s expiration, the rate will likely be adjusted to accommodate current inflation and recoup tax income lost during the freeze.

The extended freeze will reduce household incomes, with the average IHT bill continuing to rise and, in aid of shedding some clarity, from £165,000 in 2010, to currently circa £215,000, an increase of £50,000. With the current freeze in place, the average bill is expected to hit £280,000 by 2028, an increase of £65,000.

Whilst some could argue the rich, and with that being subjective, could afford it, for fear of facilitating ‘whataboutism’, those beneficiaries whose asset value sits just above the NRB will likely be more adversely impacted. Granted, beneficiaries need only pay the 40% IHT on any property above the NRB and RNRB. However, the more modest the amount above those reliefs for which IHT is payable, the more detrimental the tax bill is to the beneficiary.

Also, it could be considered discriminatory that the rich are heftily levied against for being in positions of privilege. This disincentivises people to better themselves financially and ensure family members are cared for after death. The heftier taxation of the rich further intensifies the class war, whereby the rich resent increasing taxes to bolster the public purse for those deemed underprivileged.

Implications for the legal sector

The potential financial strain on families means a spiralled emphasis on the estate or IHT planning to minimise a beneficiary’s tax burden. This necessary avoidance means that the need for probate lawyers is increased.

Furthermore, inflation and the increasing standard of living mean firms will charge higher fees, thus generating higher profits as clients pay more, all of which would be welcomed by law firms as profit-making businesses.

Conversely, and perhaps ironically, in-depth IHT planning to help minimise tax burdens is a high cost for clients. There are several ways of settling fees available to a client. Irrespective of which financial arrangement is utilised, be it conditional fee arrangements or instalment fee options, for example, the total sum payable remains the same amount as an initial or eventual lump sum payment. Adding legal fees to the higher IHT payable would mean a client suffers an even more significant loss.

What are the universal solutions to such problems?

It is difficult to tell as implementing any measure to counter the current financial crisis and its effects on society risk alienating anyone and anything on either end of the economic spectrum and in between.