Opinion Article by CryptoJelleNL
It's been almost a year since FTX's demise. A criminal investigation, bankruptcy proceedings, assets being frozen, and only certain people being able to withdraw their funds; it's been one hell of a ride for those who lost their money in the collapse of FTX. In today's article, I will be the bearer of bad news: even though the deadline to file a claim is behind us, it'll probably take years until we see any of our money again.
Let’s start with a basic rundown of FTX’s collapse, before diving into what lies ahead.
The FTX Bankruptcy, in short
After CoinDesk published an article reporting how a large share of Alameda's balance sheet consisted of FTX's native token (FTT), Binance's Changpeng Zhao – more commonly known as CZ – said: "As part of Binance’s exit from FTX equity last year, Binance received roughly $2.1 billion USD equivalent in cash (BUSD and FTT). Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT on our books. We will try to do so in a way that minimizes market impact. Due to market conditions and limited liquidity, we expect this will take a few months to complete."
Binance's announcement triggered a larger sell-off in FTT and a bank-run-esque withdrawal frenzy at FTX that the company was not able to withstand. Due to a lack of funds, FTX completely halted withdrawals not long after.
In the days that followed, the Bahamian Securities Commission froze all FTX assets after the US Justice Department launched a joint investigation with the SEC into potential "mishandling and mismanagement" of customer funds, causing the Nassau-based exchange to declare bankruptcy.
John J. Ray III was hired as a replacement for SBF (the CEO of FTX at the time) – a heavyweight bankruptcy manager known for leading Enron through its bankruptcy proceedings in 2001. Even he had never seen "such a complete failure of corporate controls", he said.
After nearly a year of proceedings, the company asked those who were unable to withdraw money from the exchange during the collapse to file claims through their claim portal by the 29th of September. Users were told to "act immediately, in order to ensure that their rights are recognized in the ongoing bankruptcy proceedings".
The time to file those claims has passed – and the deadline is behind us. So what's next?
FTX's Bankruptcy proceedings: moving forward
With the claims deadline behind us, the bankruptcy proceedings can carry on as they usually do. Firstly, the bankruptcy court and FTX together review all of the claims that were submitted to prevent fraudulent or duplicate claims from potentially being included. Any other relevant parties will also be able to object to certain claims if they have a good reason to do so.
After all claims have been checked and approved, they will be hierarchically sorted based on their priority. Just like prioritized or senior debt, certain claims will be processed before the regular claims get any money. It isn't until this process is completed that FTX's assets will be distributed to claimants – and some claimants may never receive a payment if FTX has insufficient assets to cover all claims.
It will take years until FTX claims are processed
While the next steps seem relatively straightforward, the process can take years to complete. In fact, it generally does. John Ray's previous bankruptcy proceedings for example, have all taken extensive amounts of time.
Ray spent 5 years leading the effort to recover assets for Enron creditors between 2004 and 2009, after which he became the principal officer in the bankruptcy proceedings of Canadian telecom business Nortel – a process that took 8 years to complete.
As such, while these bankruptcy proceedings eventually came to a conclusion, it took a long time until the claimants and creditors recouped at least some of their money.
It gets even worse when we look at the most notable bankruptcy in crypto. Seasoned crypto veterans will remember the collapse of the cryptocurrency exchange Mt. Gox.
Reminder: Mt. Gox declared bankruptcy in 2014 after hackers ran away with 850,000 BTC (over 22 billion dollars at today's prices).
Since the security breach in 2014, the Mt. Gox bankruptcy proceedings have yet to pay out any reimbursements to the exchange's creditors. In fact, Nobuaki Kobayashi (the trustee for Mt. Gox) recently announced that the deadline for paying back exchange creditors has once again been moved from October 31 2023 to that same date in 2024 – with permission of the Tokyo district court. In his announcement, Mt. Gox underlined that the deadline for repayments may be subject to change.
As such, approximately 24,000 creditors have been waiting to recoup some of their Bitcoin for almost 10 years.
Now I'm not here to argue that John Ray will postpone paying FTX claims over and over again, but bankruptcy proceedings have historically shown to be incredibly lengthy and costly. To be precise, FTX does not expect any Chapter 11 plan to be approved before the second quarter of 2024, and that's just the start of things.
Not all doom and gloom
Nevertheless, the FTX team seems motivated to get through these proceedings as fast as reasonably possible, voicing ambitions to re-launch FTX at some point in the future. We can only hope that FTX's bankruptcy proceedings go well enough in order for an eventual re-launch to be a possibility – as it will mean that claimants will have recouped most of their losses.
And even if FTX never re-launches, the FTX bankruptcy team has already recovered about 7.3 billion dollars in assets, fueling optimism about the recovery of user funds. While most people initially expected to never see any money again, investors are currently expecting a pay-out of at least $0.37 on the dollar.
Time will tell how long FTX's bankruptcy proceedings will take to complete. Until then, we will have to be patient and hope the industry will have learnt another painfully expensive lesson – so collapses of this scale do not happen again.
Author's Disclaimer: This article is based on my limited knowledge and experience. It has been written for informational purposes only. It should not be construed as legal, trading or investment advice in any shape or form.
Editor's note: CryptoJelleNL provides insights into the cryptocurrency industry. He has been actively participating in financial markets for over 5 years, primarily focusing on long-term investments in both the stock market and crypto. While he watches the returns of those investments roll in, he writes articles for multiple platforms. From now on, he will be contributing his insights for WOO as well.
Check out his twitter: twitter.com/cryptojellenl
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