16 June 2023

FTX’s Collapse – What’s Next?

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  • Legal
  • Blockchain / Digital Assets
  • Regulatory Compliance

Picking up the pieces after the collapse.

In our previous article, we outlined the milestones leading up to this astonishing and unprecedented collapse that has rocked the crypto industry. Since November 11, 2022, the date on which FTX filed for Chapter 11 protection, not a week has gone by without a new twist. If you missed some of the episodes of this complicated process, here is our selection of the most interesting ones.

1.            Finding the Right Claim and Contact

As if the case wasn't explosive enough, the US and Bahamian liquidators decided to engage in a spirited battle for exclusivity in their respective jurisdictions.

After FTX Trading Ltd. filed for voluntary bankruptcy in the US Bankruptcy Court for the District of Delaware, the Bahamian authorities quickly stepped in to take control of the bankruptcy process. On November 16, 2022, the liquidators of FTX's Bahamian entity (FTX Digital Markets) filed a Chapter 15 petition in the U.S. Bankruptcy Court for the Southern District of New York, seeking to treat the Bahamian liquidation as a foreign main proceeding. Finally, on January 6, 2023, the US and Bahamian liquidators entered into a cooperation agreement pursuant to which: “the parties commence work together to share information, secure and return property to their estates, coordinate litigation against third parties and explore strategic alternatives for maximizing stakeholder recoveries”. As a result, the Provisional Liquidation process for FTX Digital Markets is conducted independently of the ongoing Chapter 11 proceedings in the US.

Finding the right place to file a claim has been a major headache for FTX’s creditors. As consumers usually do not know which company, they were customers of, there are several options available:

  • At the US Level (FTX Trading Ltd and its affiliates)The restructuring administrator of FTX, i.e., Kroll Inc., has recently updated the information on its website. For non-customer creditors, an electronic/email proof of claim had to be filed no later than June 30, 2023. On June 28, 2023, the Court set the Customer Bar Date for September 29, 2023 (last visit to the website July 7, 2023). An online claim portal is being finalized by the FTX Debtors. Instructions on how to file a proof of claim and important dates and deadlines are available to creditors throughout the case the following address: https://restructuring.ra.kroll.com/FTX/
  • At the Bahamian Level (FTX Digital Markets): An FTX creditor can visit PwC’s claim portal and share their contact details if they think they “may have a claim against FTX Digital Markets”.
  • At the European (Cyprus) Level (FTX EU Ltd.): An FTX former creditor may issue a withdrawal request on a new website launched by FTX EU and approved by the Cyprus Securities and Exchange. It should be noted that the website can only be used by FTX EU LTD clients, as it requires the same email account from ftx.com/eu.to log in. Normally, clients will have received an email to assist them with this process.


2.            Finding Liquidity for the Creditors

Following the Chapter 11 filing, Mr John Ray III agreed to assume over the position of Chief Executive Officer of the FTX Group. As stated in his testimony to the U.S. House Financial Services Committee on December 13, 2002, Mr. Ray III and his team were committed to "maximising value for FTX's customers and creditors". With this statement, the restructuring expert opened the hunt for FTX's assets.

Naturally, the hunt for cash began in FTX's financial accounts to determine the amount of cash on hand. Due to the "complete lack of trustworthy financial information", John Ray's team had to seriously question the accuracy of the balance sheets. After a Herculean investigative effort, $5.5 billion in liquid assets were found on January 17, 2023. To our knowledge, this figure has not been updated since then.

The sale of business units is the other solution to raise cash for FTX's former customers. In January, Delaware bankruptcy judge John Dorsey gave the go-ahead for the sale of four subsidiaries: derivatives platform LedgerX, equity trading platform Embed, FTX Japan and FTX Europe. Specifically, only LedgerX was allowed to be sold, while the other three will be auctioned off. These assets did not enjoy the same level of confidence:

  • LedgerX: after overcoming the U.S. trustee and an hoc committee of 18 non-customers, LedgerX entered into a purchase agreement with the Miami International Securities Exchange (MIH), a subsidiary of Miami International Holdings for a price of $50 million, on April 25, 2023, subject to court approval. Judge John Dorsey of the U.S. Bankruptcy Court for the District of Delaware approved the deal on May 4, 2023.
  • FTX Europe AG: a Swiss court has approved a petition for a Swiss moratorium proceeding, submitted on April 12, 2023 by the Board of Directors of the debtor FTX Europe AG, the holding company of the FTX’s European business. The purpose of the moratorium is to facilitate the potential sale of the business through a bidding process approved by the US Bankruptcy Court.
  • FTX Japan: FTX Japan’s customers appear to have been the most fortunate as the platform had resumed withdrawals on February 21, 2023 with some customers successfully recovering all of their funds. The next step for FTX Japan is to find a suitable bidder in the auction process.

Other actions have also been taken to recover as much money as possible. These include the sale of FTX's preferred shares in Mytsen Labs for approximately $95 million, and the settlement agreement with Modulo Capital - an investment firm to which FTX had provided funds - for the immediate recovery of approximately $460 million (including more than $404 million in cash).

3.            Finding Culprits

It was not only FTX's key executives who faced intense criticism and lawsuits. FTX's influencers have also come under the spotlight. On March 15, 2023, a class action lawsuit was filed in the Southern District of Florida, Miami Division against a group of YouTube “FTX Influencers”. It seeks $1 billion in damages for promoting FTX without disclosing compensation.

As the collapse had such a massive impact on consumers, regulators and lawmakers rushed to either promote regulation, such as MiCA while others took serious action against the crypto community, as evidenced by Mr. Gensler’s aggressive agenda.

Please note the information provided on this website does not, and is not intended to, constitute legal advice, and should not be relied upon as such. Should you need advice MME team will be happy to assist.