Customers of the failed cryptocurrency exchange FTX are set to recover all the money they lost when the company collapsed in 2022 and receive interest on top of it, the company's bankruptcy lawyers said Tuesday.
The announcement marked a milestone in the attempt to trace the $8 billion in customer assets that disappeared when FTX imploded virtually overnight, triggering a crisis in the cryptocurrency industry. Under a plan filed in federal bankruptcy court in Delaware, virtually all of FTX's creditors, including hundreds of thousands of ordinary investors who used the exchange to buy and sell cryptocurrencies, would receive cash payments equal to 118 percent of the assets they owned. had stored on FTX. the lawyers said.
Those payments would flow from a pool of assets that FTX lawyers have gathered in the 17 months since the exchange collapsed, the lawyers said. They tapped into a wide range of sources, including digital currencies that FTX still held when it filed for bankruptcy and company assets, such as shares in startups, that could be sold to bidders.
The amount FTX recovered is “pretty unheard of overall,” said Yesha Yadav, a law professor at Vanderbilt University. “This is really surprising for a major bankruptcy.”
The plan comes with a warning. The amount owed to clients was calculated based on the value of their holdings at the time of FTX's bankruptcy in November 2022. That means clients will not reap the benefits of a recent surge in the cryptocurrency market that drove up the price. of bitcoin to a record. high. A customer who lost a bitcoin when FTX imploded, for example, would be entitled to less than $20,000, even though one bitcoin is now worth more than $60,000.
It will be months before payments begin. The plan must be approved by the federal judge overseeing FTX's bankruptcy, John T. Dorsey. If creditors raise any objections to the plan, that could extend the timeline.
“The timing of recovery remains a big question mark,” said Matthew Sedigh, CEO of Xclaim, a platform for creditors to negotiate bankruptcy claims. “Even if the recovery amount is better than expected, collecting these amounts within two years is kind of a slap in the face.”
Still, it seemed unlikely that customers would get their money back when FTX collapsed. Before its implosion, customers used the exchange as a marketplace to buy and sell digital currencies and stored billions of dollars in cryptocurrency on the platform.
After FTX failed, its founder and CEO, Sam Bankman-Fried, resigned, handing control to John J. Ray III, a corporate turnaround veteran who oversaw the liquidation of Enron, the energy company that collapsed in 2001.
Bankman-Fried was later found guilty of extensive fraud in which he diverted billions of dollars in FTX customer savings to fund venture investments, political donations and other expenses. He was sentenced to 25 years in prison in March.
After taking office, Ray described the cryptocurrency exchange as the biggest disaster he had ever seen. Over the next few months, he and his team began the painstaking process of locating the missing assets.
Some of the recoveries arose from successful investments Bankman-Fried made during her tenure at FTX. In 2021, the company had invested $500 million in artificial intelligence company Anthropic. The rise of the ai industry made those stocks much more valuable. This year, Ray's team sold about two-thirds of FTX's stake in Anthropic for $884 million.
FTX also reached a deal to recover more than $400 million from Modulo Capital, a hedge fund that Bankman-Fried had funded. And FTX lawyers filed lawsuits to recover funds from former company executives and others, including Bankman-Fried's parents.
crypto experts have been expecting significant recoveries in the FTX bankruptcy for months. Some opportunistic investors have bought bankruptcy claims from exchange customers for pennies on the dollar, hoping to profit when payments begin. And when he was sentenced, Bankman-Fried's lawyers said he should receive a lighter punishment because FTX customers were likely to get their deposits back. A judge rejected that argument.
The speed of the recoveries in the FTX case is unusual for a bankruptcy. In the Enron case, for example, it took about three years for a bankruptcy plan to be approved, and many more years for funds to be distributed to creditors, FTX lawyers wrote in Tuesday's court filing.
FTX's bankruptcy has “proceeded with remarkable rapidity given the challenges faced,” according to the document.
Bankruptcy has also been very profitable for the lawyers who work on it. As of last fall, the law firm Sullivan & Cromwell and other experts overseeing the FTX case had collected more than $320 million in fees.
“The lawyers have done a great job with this,” Yadav said. “This is a huge bonanza for crypto lawyers.
