Following its abrupt collapse, the cryptocurrency exchange FTX filed for Chapter 11 bankruptcy protection in the US on Friday, claiming it may owe money to more than 1 million creditors. Here is what the case probably has in store.
Where do things stand in FTX’s bankruptcy case?
When it came to filing “first-day” documents, which outline the company’s debts and how it got into bankruptcy, FTX had an abnormally delayed start. When FTX’s new CEO, John Ray, detailed the “unprecedented” disarray at the company in court documents on November 17, the reason for that delay became clear.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” said Ray, a restructuring expert with decades of experience who oversaw the multiyear liquidation of energy firm Enron after its collapse in 2001.
When it came to filing “first-day” documents, which outline the company’s debts and how it got into bankruptcy, FTX had an abnormally delayed start. When FTX’s new CEO, John Ray, detailed the “unprecedented” disarray at the company in court documents on November 17, the reason for that delay became clear.
Has FTX been able to secure customer assets?
According to sources who spoke to Reuters, Bankman-Fried surreptitiously utilized $10 billion in customer cash to support his trading firm Alameda Research, and at least $1 billion of those deposits have vanished. The $740 million in cryptocurrencies that FTX has found and acquired under its new management is “just a fraction” of the digital assets that the business will try to recover for its creditors.
FTX has not confirmed Bankman-2021 Fried’s assertion that its users held $15 billion on the network. Customer deposits were not shown as balance sheet assets by FTX, and Ray claimed that balance sheets created under Bankman-direction Fried’s could not always be trusted.
FTX is attempting to recoup more assets, including $372 million that was unintentionally taken out on the day the company filed for bankruptcy. According to the Nov. 17 filing, FTX believes the company’s co-founders and other insiders may have additional knowledge about additional crypto wallets that are unknown to the company’s restructuring team.
Will customers get their money back?
Will buyers be refunded their money? Customer accounts at crypto platforms like FTX are not covered by the Federal Deposit Insurance Corporation, in contrast to bank deposits. Customers must rely on the bankruptcy process because the U.S. government won’t intervene to cover consumer deposits as it would in a regular bank failure.
Customers will need to wait for the bankruptcy court to decide whether they will receive anything back from a bankrupt company because a Chapter 11 case stops attempts to recover assets from a bankrupt corporation. One of the main issues the court will have to decide is whether clients own the bitcoin they placed or if it belongs to FTX.
There isn’t much case law related to that issue. Both Celsius Network and Voyager Digital claimed ownership of all cryptocurrency held on their systems in recent cryptocurrency bankruptcy. That implies that the cryptocurrency would be divided among all creditors after being combined with the assets of the insolvent company. Customers would have relatively low-priority claims that are known as unsecured claims in that scenario.
Customers have a better chance of getting more of their money back if it is discovered that they hold the cryptocurrency. However, the extent of the recovery will still rely on FTX’s remaining assets and debt. According to James Van Horn, a bankruptcy lawyer in Washington, D.C., bankruptcy judges have so far accepted Celsius and Voyager’s claims, though that may change in subsequent legal disputes.
What about FTX clients who drew cash from FTX?
Customers that removed their valuables from FTX prior to its collapse may not always be safe. In order to provide a more equitable payout for creditors who were unable to make withdrawals, the bankruptcy court might permit FTX to claw back those withdrawals. The clawback time may well be prolonged for years in fraud instances. According to Harvard professor Jared Elias, “It’s risky to feel like you dodged a bullet because sometimes you didn’t.”
What other risks do FTX customers face?
The names, email addresses, and transaction histories of FTX customers may be made public due to the bankruptcy. Transparency is essential to the bankruptcy process; the court must at the very least be aware of who owes money, how much, and how to contact creditors. Customers of cryptocurrencies expect anonymity, which is at odds with the courts’ preference for transparency.
