When the cryptocurrency exchange FTX declared bankruptcy about 15 months ago, it seemed few customers would recover much money or crypto from the platform. As John Ray III, who took over as chief executive during the bankruptcy, put it, “At the end of the day, we’re not going to be able to recover all the losses here.” He was countering Sam Bankman-Fried’s repeated claims that he could get every customer their money back.
Well, it turns out, FTX lawyers told a bankruptcy judge this week that they expected to pay creditors in full, though they said it was not a guarantee and had not yet revealed their strategy.
The surprise turn of events is raising serious questions about what happens next. Among them: What does this mean for the lawsuits FTX has filed in an attempt to claw back billions in assets that the company says it’s owed?
Will the possibility that customers could be made whole be raised at Bankman-Fried’s sentencing? Will potential relief for customers help his appeal?
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Some of the clawback cases involve allegations of fraud, but not all do. Before fraud claims are argued, there is typically a legal fight over whether a company was insolvent at the time of the investment or that the investment led to insolvency. If every FTX creditor stands to get 100 cents on the dollar, the clawback cases that don’t involve fraud wouldn’t serve much of a financial purpose and may be more difficult to argue, some lawyers say. “In theory, clawbacks may go away there,” said Eric Monzo, a partner at Morris James who focuses on bankruptcy claims.
we can now cautiously predict some measure of success. Based on our results to date and current projections we anticipate filing a disclosure statement in February describing how customers and general unsecured creditors, customers and general unsecured creditors with allowed claims, will eventually be paid in full. I would like the Court and stakeholders to understand this not as a guarantee, but as an objective. There is still a great amount of work and risk between us and that result, but we believe the objective is within reach and we have a strategy to achieve it.
The ‘full repayment’ part is only sort of true, in a similar way to what happened with MTGOX, due to bankruptcy claims being USD-denominated.
Suppose that:
You owe customers 100 Bitcoin and $1M.
You have only half of that, 50 Bitcoins and $500k.
The current price of Bitcoin is $20k.
You are clearly insolvent. You will enter bankruptcy, and the bankruptcy estate will say ‘you have $3M in liabilities’, since you owe $1M in cash and $2M in bitcoin.
Suppose that the price of bitcoin then recovers to $50k. You now have $3M in assets, since you have $500k in cash and $2.5M in bitcoin! You can ‘fully repay’ everyone! Hooray!
Of course, anyone who held a Bitcoin with you is getting back much less than a bitcoin in value, but since the bankruptcy court is evaluating your claims as USD liabilities you don’t need to care about that.
This ‘full repayment’ is plausibly still important from a legal or a PR perspective, but e.g. this part:
is better thought of as ‘our legal system may get confused by exchange rates and pretend FTX was always solvent’ rather than as ‘FTX was actually always solvent’.