Fallen crypto exchange FTX has been searching behind the sofa for change and has, perhaps miraculously, found the funds to pay its creditors. But will they accept they deal? And is it fair?
Once a towering titan in the cryptocurrency world, FTX has tumbled from its lofty heights into the dismal depths of bankruptcy. This isn’t just your everyday corporate collapse; it’s a spectacular financial faceplant that's left creditors clamoring for billions. Grab your popcorn, because this chaos is crypto in its wildest form.
The Fall from Crypto Grace
FTX, once known for its ambitions in the blockchain arena, was seemingly on top of the digital world. With a valuation that soared into the billions, FTX wasn't just playing the crypto game; they were poised to redefine it. But alas, in late 2022, the empire built on blockchain dreams and digital derring-do began to crumble spectacularly. Accusations of misusing customer funds and risky financial practices turned crypto kingpin Sam Bankman-Fried’s playground into a perilous pit of regulatory scrutiny and public scandal. Read all about it here.
Billions in the Balance
As part of the plan to recover whatever can be recovered, the government - the Internal Revenue Service and the Commodities and Futures Trading Commission to name two agencies - has agreed to suspend high-value claims against FTX until creditors have been repaid. However, the IRS will receive $200 million upfront before anyone else gets a slice. There’s a surprise.
And so here we are. After the dust settled (or rather, the coins stopped clinking), FTX found itself staring at debts owed to customers and non-governmental creditors of around $11 billion. Yes, that's billion with a "B", and yes, those creditors are as happy about this as a cat in a bathtub.
However… It turns out that, once it’s sold all its assets, the company might have as much as US$16.3 billion in cash to distribute, according to documents filed with the federal court in Wilmington, Delaware, where the FTX case is being handled.
The Creditor Conundrum
Welcome to the Twitter account for the Official Committee of Unsecured Creditors (UCC) appointed in the @FTX_Official bankruptcy cases. You can learn more about the UCC in the below thread or on our official website (https://t.co/5o2kaNR3z3).
— Official Committee of Unsecured Creditors of FTX (@FTX_Committee) February 6, 2023
Among the jilted parties are a wild mix of hedge funds, venture capitalists, and Joe Schmoes—all united by their shared misfortune of trusting FTX with their digital dollars. Now, they stand in a snaking queue, hoping to salvage whatever scraps they can from the bankruptcy bonfire.
But, there’s an issue… Depending on the type of claim a creditor holds, some could recover as much as 142 per cent of what they are owed. Though 118 per cent somehow seems more likely. But, although all debts will be paid in full, nothing will be leftover for equity holders.
Rejection, Resentment, and Repercussions
Adding insult to insolvency, some creditors are scoffing at the idea of accepting payouts. In January, a block of creditors began to form, and it now sits over 1,600 members.
This block intends to vote in June as to whether it’ll accept 118 percent of their lost funds. “The recovery percentages are drawn from a fake baseline. It’s a false narrative,” said Arush Sehgal, one of the block leaders, in an interview with Wired. “It’s an insult to creditors,” he said.
But what’s the issue? Why’s it an insult?
Sehgal et al don’t like the way their claims have been valued. Many of the customers held crypto on FTX. But, because bankruptcy proceedings are all dollar-based, they believe that their holdings have been assigned an incorrect, low, dollar value. There’s an ongoing lawsuit, and they’re not happy campers. You can download the filing here.
FTX creditors will get OVER 100% of their money back, but @LouisOrigny (co-founder of @ftxcreditor_com) & I discuss why this is a deceptive statement & break down the pros/cons of FTX's new plan. A LOT of customers are getting screwed (feat. @arush). pic.twitter.com/cvOekwUpQL
— Tiffany Fong (@TiffanyFong_) May 10, 2024
Titanic Problems
What's left for FTX now? Well, it’s akin to rearranging deck chairs on the Titanic. As they navigate through bankruptcy, every move is scrutinized by disillusioned investors and a cynical public. As a company, they’re no doubt done. Their reputation gone. But, there’s the small issue of making sure that everyone gets what they deserve … the question is, who deserves what and who sets the value?
As we watch the continuing chaos, we’d do well to remember that all of this is relatively new and whatever happens could well end up being a precedent in future legal hearings. Interesting times. One thing remains as clear as ever, though: Caveat emptor!
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