FTX, the exchange recently valued at $32 billion, has recovered $5 billion of assets. This is made up of cash and “liquid” investments and cryptocurrencies. This value doesn’t include the rest of the “illiquid” cryptocurrencies they found, although these can’t easily sell without crashing their respective markets.
This is great news for customers, especially after watching SBF live like a king when many believe he should already be behind bars in a substantially less comfortable location. Fortunately, the US Department of Justice seized SBF’s Robinhood account last Monday, adding an extra $465 million dollars of assets to the recovered funds.
None of these funds are guaranteed to go to FTX customers, though. US Attorney Seth Shapiro said multiple parties have claims on Robinhood shares, including SBF himself, BlockFi, FTX, and liquidators in Antigua. These funds may be distributed later, but they are being held under the US proceeds of criminal law because SBF is being charged with money laundering and wire fraud, among other things.
At the time of declaring bankruptcy, FTX declared that it had between $1 billion and $10 billion in outstanding customer assets. Additionally, SBF mentioned in one of his tweet storms that the number was around $8 billion. This means that there isn’t yet enough money to pay back all the customers in full, but getting back 65% from a bankrupt company is pretty good. The US Department of Justice made a statement in September 2022 that they managed to recover and repay 88.35% of funds for victims of Bernie Madoff’s Ponzi scheme, so there is still hope that they can recover even more.
One interesting thing about US bankruptcy law is that the courts have the right to reverse payments made while the company was trading insolvent. SBF and its executives have donated hundreds of millions of dollars in recent years, and this will likely have to be returned, either voluntarily or by force. FTX announced in December 2022 that it requested that any recent donations be returned. Perhaps we’ll find some of the donations in the pile of papers next to Joe Biden’s Corvette?
As part of the bankruptcy filing, FTX normally must disclose the names and details of its customers and creditors. Still, the judge in the case recently announced that these roughly 9 million names can remain secret for now. The court still needs to distinguish between ordinary creditors and creditors who are also customers, as this might change the order in which people are paid out.
Who gets paid first? When a company goes bankrupt, some creditors claim their funds before others. Typically any equity holders lose their entire investment, meaning Tom Brady, Robert Kraft, and Paul Tudor Jones will be walking away empty-handed. Creditors and customers are generally higher in the queue, and different types of bonds have different rankings.
BlockFi and Celsius both recently applied to have customer funds ranked at the top of the queue as these weren’t technically lent to the exchanges, but the exchanges were merely holding the funds. This would mean that the funds were technically customer property the whole time and, therefore, cannot be added to the pool of assets paid out in bankruptcy proceedings. The judge hasn’t yet decided this, but if customer funds are deemed to be normal debt, then this will get mixed in with the other loans that FTX has made, meaning that customers will receive a much lower amount than they should.
How do you get your funds back? The bankruptcy court has a list of all of the customers who are affected by the bankruptcy. When it comes time to distribute funds, there will be a process by which you will need to get in touch with the court to register yourself as a creditor and identify yourself by your account. In addition, there are extra circumstances, as US bankruptcy law allows certain transactions to be reversed if they happened up to 90 days before the exchange went bankrupt.
For example, if you withdrew funds from your account weeks before FTX went bankrupt, you could be asked to send these back. On the other hand, if you deposited funds shortly before the bankruptcy, these might be able to be 100% returned to you and not included in the total pool of assets for bankruptcy recipients.
We don’t yet know whether these funds will be measured in dollar value at the time of bankruptcy, but this is more likely than the court accounting for specific amounts of each different type of cryptocurrency held by each customer.
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