A US judge has cleared the way for billions of dollars to be refunded to former clients of the bankrupt FTX crypto exchange.
At a court hearing in Wilmington, Delaware, on Monday, Judge John Dorsey gave final approval to FTX’s reorganization plan, the terms of which had previously been presented to creditors and voted by an overwhelming majority.
“I think this is a model case of how to approach a very complex Chapter 11 proceeding,” Dorsey said. “I applaud everyone involved in the negotiation process.”
FTX filed for bankruptcy in November 2022 after running out of funds to process customer withdrawals. Billions of dollars in FTX customer deposits were missing. The money, a jury later discovered, had been transferred to a sister company and spent on high-risk transactions, high-risk gambling, debt payments, personal loans, political donations, luxury real estate and other illegitimate businesses.
A year later, FTX founder Sam Bankman-Fried was found guilty of multiple counts of fraud and conspiracy and later sentenced to 25 years in prison. In September, co-conspirator Caroline Ellison received a two-year prison sentence after testifying against Bankman-Fried at trial.
First proposed in May, FTX’s bankruptcy plan charts a path toward a full refund, plus interest, for former FTX customers, a level of recovery rarely seen in bankruptcies. “In general, anything over 100 cents on the dollar is almost miraculous,” says Yesha Yadav, associate dean and bankruptcy specialist at Vanderbilt University School of Law. “What tends to happen is that unsecured creditors get pennies on the dollar, if they’re lucky. The expectation is that it will be a process of scarcity.”
However, in this case, FTX’s wealth managers were able to recover billions of dollars by liquidating investments made by the exchange’s venture capital arm, FTX Ventures, and its sister company, Alameda Research, along with other assets. . Meanwhile, a rise in the price of cryptocurrencies in the period since FTX filed for bankruptcy has raised the value of coins remaining in exchange coffers.
Under the plan, United States government agencies, including the Internal Revenue Service and the Commodity and Futures Trading Commission, agreed to suspend high-value claims against FTX until creditors have been repaid (although the IRS will receive an initial payment of 200 million dollars). as part of the agreement).
Even FTX shareholders, typically the last to be reimbursed in the event of bankruptcy, can recover a portion of their initial investment (a maximum of $230 million between them) paid with the use of funds recovered by the Department of Justice through FTX insider processing. .
But despite the abnormally high expected recovery, some creditors believe they are still getting a raw deal under the way their claims have been valued.
Many clients held crypto assets like bitcoin on the FTX platform, but through a process called dollarization common to bankruptcies, their claims have been assigned a dollar value based on the price of those assets on the date of the bankruptcy filing. . When FTX crashed, the cryptocurrency market was in the doldrums, but it has since reached new all-time highs, meaning some customer claims would be much more valuable if the refund were allocated to the current value of the cryptoasset. Therefore, while dollarization is appropriate under the bankruptcy code, “to say that (the yield) is more than 100 percent is simply incorrect,” Yadav says. “For the average person, it’s a long way from that.”