Cryptocurrency Platform FTX Becomes Exceptional Case in Financial Collapses, Guarantees Full Reimbursement to Affected Parties

FTX has projected in recent legal documents that upon liquidation of its digital assets and various investments, it anticipates having a financial reserve ranging between $14.5 and $16.3 billion. This sum significantly surpasses the estimated $11 billion owed to its customers and non-governmental creditors.

The trapped funds of its clients have been inaccessible since November 2022, following a leadership change with Sam Bankman-Fried relinquishing company control. The newly appointed management proceeded to declare bankruptcy for FTX, initiating one of the most extensive recovery endeavors witnessed to retrieve misallocated assets.

The current administrative team secured the requisite finances to pay off FTX’s creditors, bolstered by a surge in the value of cryptocurrencies and the liquidation of equity acquired using customers’ funds in various high-risk crypto ventures and tech startups. The proceeding in bankruptcy court allowed FTX ample time to negotiate asset sales and address the deficit—culminating at nearly $9 billion—on its balance sheet.

The proposal for repayment, pending court approval, could establish FTX as an anomaly in the realm of financial malfeasance, reimbursing its victims fully and expeditiously. To illustrate, victims of Bernard Madoff’s Ponzi scheme—uncovered in 2008—have yet to fully retrieve their pilfered funds, even after more than ten years.

Among those benefitting from the disbursement plan are prominent Wall Street investment houses. These institutions speculated that post-bankruptcy, a sizable portion of FTX clients would prefer or necessitate immediate settlement of claims against the exchange, as opposed to a protracted wait for possible restitution.

Consequentially, investment firms such as Oaktree Capital Management, Attestor, Canyon Capital, Farallon Capital Management, and Silver Point Capital became holders of over $3 billion in customer claims, as revealed by legal documents. These firms have not responded to inquiries for comments.

Post bankruptcy declaration, distressed asset investor Thomas Braziel whose firm procured claims from FTX clientele, indicated that customer claims were being traded for as minimal as 3 cents on the dollar. Sellers who parted with their claims at such diminished rates may be experiencing regret now, as FTX has publicly declared that it anticipates returning to 98% of its users 118% of the worth held in their trading accounts.

“This event is unprecedented,” remarked Braziel. “It must be the most substantial creditor recuperation ever recorded in a bankruptcy case.”

FTX initially asserted that it could compensate its numerous users for their complete account values upon filing for bankruptcy. The recent statement underscored not only the ability to fulfill these account balances but also an additional 9% interest for most, retroactive to the filing date.

American legal authorities have branded FTX as a vast deception, with charges of fraud leveled against Bankman-Fried and other executives. Bankman-Fried was sentenced in March to a quarter-century behind bars for misappropriating billions from customers. The bankruptcy plan introduced delineates the first firm assertion by FTX regarding complete restitution for its users.

A critical component behind the reversal of user fortunes has been the resurgence of cryptocurrency markets. A substantial proportion of FTX’s assets ties into the erratic market of digital currencies, which have appreciated since the bankruptcy filing. Notably, the solana token, which has connections to Bankman-Fried, witnessed a sevenfold increase in value.

Nevertheless, some clients express dissatisfaction for being reimbursed with fiat currency instead of the cryptocurrency they initially deposited, with conversion rates locked at the time accounts were frozen. Consequently, they missed out on the potential gains as cryptocurrency values rebounded following the 2022 market slump.

“Receiving full payment during a bankruptcy differs substantially from economic restitution,” stated Saul Ewing attorney Candice Kline. “Even with some interest accounted for, creditors must contend with the real market value, the time value of money, and opportunity costs despite this optimistic news.”

The improved prospects for both clients and investors may also be attributed to the enhanced valuations of FTX’s venture capital stakes and its success in reclaiming assets that were extracted from the firm prior to its bankruptcy. For example, this year FTX sold a major share in the AI startup Anthropic for $884 million, a staggering 267% above its initial investment cost.

According to Brook Gotberg, a professor at Brigham Young University specializing in law, appraising claims in a bankruptcy context is complex and largely contingent upon the company’s relationship with its clientele.

“If the claims are measured simply by the dollar value of the cryptocurrency as of the bankruptcy filing, then the creditors of FTX will be paid fully,” she explained. “However, if the claims are for the cryptocurrency assets themselves, then the compensation for FTX creditors falls short of their actual entitlement.”

FTX’s proprietary FTT token holders, another creation of Bankman-Fried’s, are excluded from the repayment framework proposed by FTX. Equity owners of the exchange, including prestige firms like Sequoia Capital, the Ontario Teachers’ Pension Plan, SoftBank Group, and renowned celebrity endorsers such as NFL star Tom Brady and model Gisele Bündchen, will likewise receive no compensation.

Under the aegis of Bankman-Fried, company funds were squandered on unsuccessful or nebulous investments, ostentatious projects, high-profile endorsements, political contributions, and extravagant personal spending, according to FTX judicial declarations. Among the tangible assets reclaimed for clients post-bankruptcy are luxury properties in the Bahamas, the former headquarters of FTX, and two private aircrafts. Plans to relaunch its cryptocurrency exchange were also considered but ultimately discarded.

Prosecutors have likened Bankman-Fried’s embezzlement of client funds to a $10 billion loss, drawing parallels with Madoff. Subsequent to the bankruptcy of FTX, Bankman-Fried presumed that clients could be fully compensated. Prior to his conviction, he contended that FTX was solvent at the time of the bankruptcy petition and that there was essentially “zero harm” to customers, lenders, and investors due to the expected outcomes in the chapter 11 case.

John J. Ray III, the specialist supervising the restructuring who replaced Bankman-Fried, clarified that the post-bankruptcy asset recovery doesn’t negate the prior theft; rather, it signifies recouped assets, with many still unattainable.

U.S. District Judge Lewis Kaplan, considering the sentencing of Bankman-Fried, stated that the recoverability of consumer funds did not impact his ruling. Nonetheless, Bankman-Fried has appealed his verdict and sentence.

For further details, you may reach out to Becky Yerak at becky.yerak@wsj.com, Soma Biswas at soma.biswas@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com