S’pore lawyer says Hodlnaut has a “fighting chance” to save crypto business, repay users

The Hodlnaut saga continues — after freezing fund withdrawals on August 8, the crypto company has since laid off 80 per cent of its workforce and filed for judicial management. As it stands, there may be as many as 10,000 investors waiting to see whether their US$250 million worth of assets can be recovered.

Those with an active Hodlnaut account are now able to access the company’s judicial management application and accompanying affidavit. Twitter user FatManTerra — who first began questioning Hodlnaut’s risk management back in June — posted a portion of these documents, revealing that the company realised losses of almost US$190 million during the crypto market crash.

The document also refutes a statement made by Hodlnaut’s CEO in June, claiming that the company hadn’t suffered losses as a result of the UST stablecoin depeg. Hodlnaut hadn’t directly invested in UST, however, it lent out deposits to the company’s Hong Kong-based subsidiary which had an exposure of 317 million UST.

As per FatManTerra’s tweets, Hodlnaut actively downplayed the impact suffered from the market crash and chose to keep investors in the dark.

While the Singapore court deliberates on Hodlnaut’s filing for judicial management, we spoke to Yuankai Lin, Partner at RPC Premier Law, about what this means for its users.

What is judicial management?

Judicial management is a process to help companies recover from their financial difficulties.

Currently, Hodlnaut faces the risk of liquidation in order to cover for its losses. This would mean selling off its Bitcoin and Ethereum holdings at today’s prices. At the time of writing, both cryptocurrencies are down over 60 per cent from their all-time-highs.

If Hodlnaut’s assets were liquidated at present, users would only be able to recover a small fraction of their investments.

On the other hand, if the filing proves successful, an independent judicial manager will be appointed to handle the company’s finances. Hodlnaut would also be temporarily shielded from legal proceedings by third-party creditors.

“By filing for judicial management, Hodlnaut is effectively seeking a temporary respite from any claims brought by its creditors which may force the company into liquidation,” says Lin. “Depending on the current state of affairs of Hodlnaut’s finances and operations, this may be more advantageous to both the company and its creditors.”

Would this guarantee the recovery of funds?

Judicial management wouldn’t guarantee that all funds are recovered, but it could improve the chances.

To determine whether Hodlnaut is eligible for this filing, the court is likely to consider two primary factors.

“The Singapore Court has to determine, first of all, that the company is or is likely to become unable to pay its debts and secondly, whether being placed in judicial management will allow the company to rehabilitate its business.”

If the application is successful, Hodlnaut might be able to recover its business or at least, offer a better return for investors.

The company has a fighting chance, with the help of the judicial manager, to rehabilitate its business and be nursed back to financial health. Even if the company’s business cannot be resuscitated, the judicial manager may be able to prevent a fire-sale of its assets.

Either scenario decreases the prospects of Hodlnaut’s unsecured creditors being paid cents on the dollar.

Was it legal for Hodlnaut to freeze withdrawals?

Along with the judicial management filing, there are also pending proceedings between Hodlnaut and the Singapore Police Force. At this stage, the company hasn’t disclosed any further details surrounding them.

It isn’t likely that Hodlnaut will face legal consequences for its decision to freeze withdrawals. “The standard Terms and Conditions of the crypto lenders will usually provide it with a broad and absolute discretion to suspend all, or any part, of its services to its customers.”

In Hodlnaut’s case, it did have a contractual right under its standard Terms and Conditions to “suspend or terminate the Service or any part of the Service, at its discretion and without prior notice to the User”, Lin adds.

By accepting the terms and conditions and depositing their funds with Hodlnaut, users took on the risk of losing access to their funds. “This acceptance will generally be binding on the customer.”

Hodlnaut’s lending and borrowing services weren’t regulated by the Monetary Authority of Singapore (MAS) either. The company had only received in-principle approval for a license to provide token swap services in Singapore.

Lin explains that this service will no longer be available for Singaporean users as the company has now withdrawn its application. “Hodlnaut can however still offer lending and borrowing services for cryptocurrency-related transactions as this is not an activity currently regulated by the MAS.”

How will this impact crypto regulations?

Hodlnaut is not the only Singapore-based crypto company reeling from the market crash. With Three Arrows Capital, Vauld, and Zipmex all struggling as well, it’s likely that the MAS will take this into consideration while shaping crypto regulations for the future.

“Prior to the crypto crash, the regulations for the industry in Singapore and most major jurisdictions were focussed on areas of Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT),” says Lin.

“The MAS has stated that it will look towards widening the scope of cryptocurrency regulations in Singapore to cover more areas such as consumer protection, market conduct and reserve backing for stablecoins.”

Featured Image Credit: RPC Premier Law / Hodlnaut