FTX, to make clear cryptocurrency exchange, has plummeted from its high-profile position straight into bankruptcy court.
On Friday morning, FTX and related entities including Alameda Research, its affiliated cryptocurrency trading arm, filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the County of Delaware. FTX has a report 8 billion dollars shortand the CEO of the company, Sam Bankman-Friedresigned.
The fall from grace was swift. Now, however, the court-supervised settlement of which creditors – from lenders to account holders – will be paid and how much they will receive can be time-consuming and complicated. experts say.
Daniel Besikof, partner at Loeb & Loeb, said: “Customers should be prepared for what could be a very messy and complicated bankruptcy case.
But should they be prepared to get their money back? That’s another possible story, Besikof said.
“The FTX Terms of Service stipulate that customer deposits remain customer assets. Should this be the case and if the client’s deposits remain, the client will be entitled to recover those deposits, which can be relatively quick. However, it is a complicated matter and it is not clear what position FTX will take or what deposits will remain,” he said.
But if the deposits are considered FTX property, it is very likely that customers will not receive distributions until a court-ordered return plan is in place – “at least for a few more months, ‘ said Besikof.
In addition to FTX bankruptcy filing, other pending bankruptcy cases have crypto exchanges Voyager . Digital Network and Celsius; Cryptocurrency hedge fund Three capital arrows also bound in bankruptcy proceedings. Meanwhile, any precedent on crypto bankruptcy cases abroad does not set a precedent here.
Christopher Odinet, a University of Iowa law and finance professor who focuses on cryptocurrencies and unusable tokens and how they combine with commercial lending and bankruptcy rules.
So FTX proceedings will likely be mixed with open legal questions – and there are many. Here are some, according to Besikof: Who owns crypto assets? Are customer recovery requests priced in cryptocurrencies or US dollars? And when does the valuation happen?
Cryptocurrencies trade 24/7 instead of during traditional stock market sessions. On Friday, Bitcoin
BTCUSD,
is falling sharply and hovering around a two-year low.
The company’s newly appointed CEO John Ray said: “Filing for bankruptcy is the right move to give FTX Group” the opportunity to assess the situation and develop a process to maximize it. resiliency for stakeholders”.
The company has “valuable assets” and Ray said he wants to “ensure every employee, customer, creditor, contract, shareholder, investor, government agency and other stakeholders. other that we will conduct this effort with diligence, thoroughness, and transparency.”
What is Chapter 11 Bankruptcy?
There are different chapters of the US bankruptcy code. One of them is Chapter 11.
In this part of the code, the debtor – here FTX, Alameda Research et al. – records to reorganize the business and pay its creditors. That contrasts with other parts of the bankruptcy code, like Chapter 7, in which a business liquidates assets to pay creditors.
A bankruptcy case halts efforts to recover anyone’s assets outside of bankruptcy court, Besikof explains. “FTX’s demise was incredibly quick, so I imagine FTX would need to use that breath to recombine its actions very quickly. In the meantime, account holders should assume that withdrawals remain frozen for the time being. “
At the end of Thursday tweet regarding the withdrawal from FTX US, the company said that ethereum
ETHUSD,
withdrawals “will resume soon, we apologize for the delay.” FTX did not immediately respond to a request for comment on the status of withdrawals.
Who is the creditor of FTX?
FTX’s bankruptcy petition estimates it has more than 100,000 creditors (that’s the highest box that can be checked). But who are they?
Probably, mostly customers, says Besikof.
They can also include lenders, workers, software vendors, vendors, independent contractors and others, Odinet said. “This will create a lot of competition and conflict between all the customers,” he noted, and others are competing for their money back.
This is why it’s important to see what the company’s terms of service say about customer assets, says Odinet. If customer assets were interpreted by the court as actually belonging to the company, they would become property that other creditors would argue they were entitled to, he said.
In his research on various crypto exchange terms of service, Odinet said he has seen exchanges stating that they do not own the cryptocurrency but only hold it on behalf of a person. He has also seen terms stating that the exchange controls the assets and that users only execute the “buy” and “sell” orders that the platform grants. And he found the wording unclear.
“More often than not, it is not clear how the company holds the assets,” Odinet said.
He noted that FTX’s terms of service state that the digital asset belongs to the customer. For example, the terms say: “Ownership to your Digital Assets will always be with you and will not transfer to FTX Trading.”
But there may still be questions. “Sometimes the way people think about things when they interact with these crypto companies and the way things are actually from a regulatory perspective is completely different,” Odinet said.
Secured and unsecured creditors
In bankruptcy cases, there are unsecured creditors and secured creditors.
Secured creditors have collateral, Besikof explains, which is “a big advantage because they are entitled to recover the value of that collateral in the event of bankruptcy.”
On the other hand, unsecured creditors lack collateral. So they share in the proceeds that are left “behind the secured creditors and the business fees of the bankrupt company,” he said.
Is the FTX account holder an unsecured or secured creditor?
That has yet to be determined, Besikof said. “If the customer owns the coins, then they will be able to get their money back and not be considered an unsecured creditor.”
However, “if the coins are an asset to the real estate, then it is likely to be,” the account holder will not be guaranteed, he said.
Despite all the movies around the demise of FTX, the initial bankruptcy filing was pretty dry and mostly consisted of boxes to check. But there is one checkbox worth considering.
In the “estimated available funds” section, attorneys for FTX and Alameda Research ticked the box stating: “The funds will be available for distribution to unsecured creditors.” Besikof says that’s no guarantee of what will happen next. “It’s important, but it’s also standard in cases where there’s no such thing as a total absence of assets.”
Cryptocurrency Regulation – or Without It
But even if the assets are client assets in the eyes of the bankruptcy judge, experts note, there is still a problem.
If a traditional bank were to suddenly run out of cash, there would be government hurdles, starting with the Federal Deposit Insurance Corporation, established after Bank of the recession works. But there is no government insurance to match today’s crypto liquidity crisis, Odinet noted.
Attorney Eric Snyder, president of bankrupt firm Wilk Auslander, said cryptocurrencies and the brokerage firms that trade them remain unregulated, meaning any government agency may not be able to legally complete the settlement. money for FTX customers.
“Without any regulation, it would be difficult to point out fraud if the agreements between FTX and their customers allow FTX to use investments at their discretion,” Synder said.
“Crypto is not regulated like other financial companies. They do not have the same laws that protect investors. In an unregulated market, it can come down to what the customer has agreed to.”
–Steven Gelsi contributed to this report
