Crypto exchange FTX filed for Chapter 11 bankruptcy protection in the US on Friday following its initial collapse, saying it could owe money to more than 1 million creditors. Here’s what’s likely to happen in this case:
Where do things stand in the FTX bankruptcy case?
A bankrupt company usually begins its Chapter 11 case by telling the judge about its debts and how it ended up in bankruptcy, and seeking administrative permission to conduct regular bankruptcy operations.
ftx has not yet filed these routine requests or scheduled a “day one” hearing to obtain preliminary approval from the judge assigned to its case in Delaware, a sign that its case is getting off to a slow start. .
“If you’re a customer of FTX, you should expect to be disappointed in how long it’s going to take,” said Harvard Law School professor Jared Elias.
Another important filing that may provide insight is a request for “borrower in possession” financing, essentially a loan to allow the company to continue operating. It is unclear whether FTX will attempt to do so, and it will need court approval to do so.
About 130 FTX affiliates have filed for bankruptcy in Delaware, and the company has selected a new CEO, bankruptcy attorneys at Sullivan & Cromwell and financial advisors at Alvarez & Marsal.
Will the customers get their money back?
Unlike deposits in banks, customer accounts on crypto platforms like FTX are not protected by the Federal Deposit Insurance Corporation. The US government will not step in to cover customer deposits as they would in a traditional bank failure, so customers have to rely on the bankruptcy process.
A Chapter 11 case halts efforts to recapture assets from a bankrupt company, so customers must wait for the bankruptcy court to determine how much they will get back. One of the key questions for the court will be whether the clients own the cryptocurrency they deposited or whether it is property of FTX.
There is little legal precedent for that question. In recent crypto bankruptcies, Celsius Network and Voyager Digital both claimed they owned all crypto Held on their forums. This means that the crypto will be credited with all the assets of the bankrupt company and will be divided to pay off all the creditors. In that scenario, customers would have claims known as unsecured claims that would be relatively low in priority.
If customers are found to own crypto, they have a great chance of recovering a substantial portion of their deposit. But recovery will still depend on how much FTX is owed and what assets it has left.
Bankruptcy judges have accepted Celsius and Voyager’s arguments so far, though it could be subject to a future court battle, said James Van Horn, a bankruptcy attorney in Washington, D.C.
What about FTX customers withdrawing money from FTX?
The clients who withdrew their assets prior to the collapse of FTX are not necessarily in the clear. The bankruptcy court may authorize FTX to hold back those withdrawals in order to make payments more equitable to creditors who were unable to make withdrawals. In cases involving fraud, the clawback period can be extended up to years.
“It’s risky to feel like you dodged a bullet, because sometimes you didn’t,” Elias said.
What other risks do FTX clients face?
Bankruptcy may result in the publication of the names, email addresses and transaction history of FTX customers.
Bankruptcy relies on transparency—at a minimum, the court needs to know who owes money, how much is owed, and how to contact creditors. The courts’ preference for transparency is at odds with crypto customers’ expectations of anonymity.
© Thomson Reuters 2022