The collapse of the FTX crypto exchange resulted in losses for more than a million investors. It has over $10 billion in liabilities and an estimated $900 million in liquid assets, but it also has $8.5 billion in less liquid assets, including various cryptocurrencies, which have plummeted since Sam Bankman-Fried, then FTX CEO, told investors those numbers.
FTX clients around the world are hoping to get refunds. But the almost complete lack of examples of such proceedings in the cryptocurrency industry and the unclear situation with the remaining assets of the exchange do not give the victims any idea of whether there is a real chance of a refund.
Creditor recovery procedure
The law of any state has provisions on the bankruptcy of a legal person and the order of creditors in this procedure.
By filing a claim against the debtor within the prescribed period of time the creditor gets some chances to get his funds back, the lawyer explains. He remarks that the faster the claim is filed, the better chances it has.
In practice, the likelihood of the return of funds will depend on the number of creditors, the amount of their claims and the amount of assets remaining with the cryptocurrency exchange. According to the expert, the bigger the “hole” in the capital of the exchange, the lower the chances to get the money back.
The procedure itself depends on the bankruptcy law in the jurisdiction in which the case is considered. For example, FTX group has more than 100 subsidiaries registered in different countries but the case was filed in the United States where the laws of some states may differ significantly from the laws of other states.
FTX managers have already begun to establish creditor lists. The usual practice is to form a bankruptcy committee after that, appoint a bankruptcy trustee and develop a reorganization plan. But the new exchange team is still working to make sense of the accounts of the FTX group and is bringing in outside lawyers and experts to do so.
The likelihood of a refund to FTX clients
Creditors will not be able to fully recover their money, said the managing partner of GMT Legal Andrei Tugarin. The fact is, explained the lawyer that FTX did not just act as an intermediary between buyers and sellers of assets and took a commission for their services, she also actively used customer funds for other purposes. For example, it loaned money to Sam Bankman-Frieda’s company Alameda against FTT’s own tokens, the lawyer said.
However, lenders will likely be able to recover some of their funds, Tugarin said. He pointed out that the company’s new CEO, John Ray III, a lawyer previously hired by oil company Enron during the scandalous bankruptcy, claims FTX has “valuable assets.”
FTX also filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the lawyer added. He explained that application of that chapter involves reorganizing the company to preserve the business. However, the lawyer noted that it is difficult to say exactly how much of the lost customer funds will be able to cover the assets FTX after the restructuring.
Due to the specifics of the cryptocurrency industry, the refund procedure for FTX clients has not yet been determined, the expert said. But in his opinion, there is a significant chance that it will be similar to the refund procedure for customers of the major exchange Mt.Gox, which went bankrupt in 2014. Customers had to apply in an online format with a choice of how to receive the payout.
In the near future, even partial refunds aren’t worth counting on, Tugarin says. The same Mt.Gox just this summer, eight years after bankruptcy, began preparing for payments to creditors.
