FTX Bankruptcy Restructuring Team Promises Full Compensation to Users, Along with an Additional 18% Interest
After declaring bankruptcy in November 2022, cryptocurrency exchange FTX has finally brought a glimmer of hope to its affected users after a grueling 19-month legal battle and liquidation process. According to the restructuring plan released by the team on Tuesday (5/8) local time, claimants with amounts below $50,000, which accounts for approximately 98% of the creditors, will not only receive full compensation but also an additional 18% interest. All compensation will be paid in cash.
The bankruptcy restructuring team stated that if all of FTX’s assets are sold, the company will have up to $16.3 billion in cash available for distribution. The amount owed to customers and other non-government creditors is estimated to be around $11 billion.
Led by John J. Ray III, a bankruptcy lawyer with 40 years of experience who has previously handled Enron, the largest corporate fraud case in the United States, the FTX bankruptcy restructuring team has spent the past 19 months diligently collecting FTX’s scattered assets worldwide. The estimated compensation amount has progressed from 90% in October of last year to full payment in January of this year, and now most creditors will also receive interest. According to Bloomberg, this is a rare outcome in previous bankruptcy cases in the United States, where creditors not only receive full payment but also additional interest.
In order to generate sufficient cash for compensation, the team has liquidated FTX and Alameda Research’s investments in other startups and stocks, including an 8% stake in Anthropic, an artificial intelligence startup founded by former members of OpenAI and one of OpenAI’s largest competitors, which raised a total of $884 million in March.
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However, despite the generous-sounding plan, some FTX creditors are highly dissatisfied. The reason for the dissatisfaction lies in the common “dollarization” process in bankruptcy proceedings. This process forces users to calculate their asset losses in US dollars, and based on FTX’s bankruptcy restructuring application in November 2022, the price of Bitcoin had already dropped to $16,000. According to legal provisions, this is the basis for the team’s compensation.
However, the current value of Bitcoin has risen to over $60,000 per coin, and these creditors believe that being forced to accept compensation in “dollar terms” is an “insult” to them. Taking into account the increase in assets, the actual compensation for each person is less than one-third, and they believe that the “118%” figure is just a clever use of rhetoric by the bankruptcy restructuring team.
Furthermore, the plan includes a series of small-print stipulations, one of which is seen as having a threatening effect. According to bankruptcy restructuring practices, companies that declare bankruptcy can recover funds that were withdrawn from the company’s treasury before the official declaration of bankruptcy. In other words, if users attempted to withdraw funds between the crisis at FTX and the official declaration of bankruptcy, the bankruptcy restructuring team could initiate lawsuits against these users to recover the funds. However, this small-print stipulation states that if users agree to receive compensation in “dollar terms,” the bankruptcy restructuring team will not initiate lawsuits, meaning that users have no choice but to agree.
These creditors also accuse FTX of only having enough assets for cash compensation now due to the recent significant increase in cryptocurrency market prices. They have also organized a voting group of around 1,600 people to cast opposing votes in the upcoming vote on the implementation of the plan in June.
The restructuring team denies profiting from the increase in cryptocurrency prices and convinces government institutions to waive their priority claim rights.
Facing criticism from the public regarding the source of compensation funds primarily coming from the increase in cryptocurrency prices, the restructuring team firmly denies it. In a press release, they stated that when FTX.com filed for Chapter 11 in November 2022, there was already a significant funding gap. In reality, FTX only possessed 0.1% of the Bitcoin and 1.2% of the Ethereum as stated on the books, so as the debtor, FTX did not profit from the recent surge in prices.
In addition to the opposing creditors, the efforts made by the restructuring team, led by John J. Ray III, have also received approval from the majority of the public. Aside from the general public, regulatory and government institutions are also victims of FTX’s collapse. The restructuring team has negotiated with the Internal Revenue Service (IRS) and the Commodity Futures Trading Commission (CFTC), and the IRS has agreed to settle its $24 billion claim for $200 million in cash and $685 million in subordinated claims. The CFTC and other unnamed government entities have also agreed to downgrade their claims as long as FTX’s users and investors receive full compensation and interest. (Note: Subordinated claims are only compensated after all creditors and other government entities have been compensated.)
This plan is still pending approval from the US bankruptcy court, and the hearing is expected to take place in June. If the number of votes in favor exceeds two-thirds of the creditors and receives the approval of more than half of the voting creditors, the plan will be approved, and FTX expects to start repayment within 60 days after the plan takes effect.
Sources:
Coindesk, Wired, Bloomberg, The Block