What’s Next for Customers After the Big Crypto FTX Collapse

Crypto exchange FTX filed for Chapter 11 bankruptcy protection in the US on Friday following its massive collapse, saying it could owe more than $1 billion. Here’s what to expect in the case:

What are the items in an FTX bankruptcy case?

A bankrupt company usually begins its Chapter 11 case by telling a judge about its debts and how it ended up in bankruptcy, and requests administrative approvals for normal bankruptcy proceedings.

FTX has yet to file these formal requests or schedule a “day one” hearing to get initial approvals from the Delaware judge assigned to its case, a sign that its case is off to a slow start.

“If you’re an FTX customer, you should expect to be disappointed at how long this is going to take,” said Professor Jared Elias of Harvard Law School.

Another important filing that can provide insight is the financial request of a “creditor”, essentially a loan to allow the company to continue operating. It is unclear whether FTX will attempt to do this, and it will need court approval to do so.

About 130 FTX executives have filed for bankruptcy in Delaware, and the company has appointed a new CEO, bankruptcy attorneys at Sullivan & Cromwell and financial advisors at Alvarez & Marsal.

Will 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 it would in a typical bank failure, so customers will have to rely on the bankruptcy process.

A Chapter 11 case halts efforts to recover assets from the bankrupt company, so customers will have to wait for the bankruptcy court to determine how much, if any, they will receive. One of the key questions for the court will be whether the customers own the crypto currency they invested or whether it is FTX property.

There is very little legal precedent for that question. In the latest crypto crash, Celsius Network and Voyager Digital both claimed ownership of all crypto stored on their platforms. That means that the crypto will be combined with all the assets of the bankrupt company and distributed to pay all the creditors. In that case, customers will have what are known as unsecured claims which will be relatively low.

If customers are found to own crypto, they stand a greater chance of getting a larger portion of their deposit. But the recovery will still depend on how much FTX owes and what assets it has left.

Bankruptcy judges have so far accepted Celsius and Voyager’s arguments, though that may depend on future court cases, said James Van Horn, a bankruptcy attorney in Washington, DC.

What about FTX customers who have withdrawn money from FTX?

Clients who withdrew their assets from FTX prior to its collapse are unclear. The bankruptcy court may authorize FTX to return such withdrawals for the equitable payment of creditors who cannot withdraw. In cases involving fraud, the retroactive period can be extended for years.

“It’s dangerous to feel like you blocked a bullet, because sometimes you didn’t,” said Elias.

What other risks do FTX customers face?

Bankruptcy may result in the publication of FTX customers’ names, email addresses and transaction history.

Bankruptcy relies on transparency—at a minimum, the court needs to know who the creditors are, how much they owe, and how to contact the creditors. The courts’ preference for transparency conflicts with crypto customers’ expectations of anonymity.

© Thomson Reuters 2022

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