A U.S. judge has approved a plan for billions of dollars to be refunded to former customers of the bankrupt cryptocurrency exchange, FTX.
During a court session in Wilmington, Delaware, on Monday, Judge John Dorsey gave the green light to FTX’s reorganization plan, which had previously received overwhelming support from creditors. “I think this is a model case for how to handle a complex Chapter 11 process,” stated Dorsey, commending everyone involved in the negotiations.
FTX declared bankruptcy in November 2022 after it could no longer fulfill customer withdrawal requests. At that time, billions of dollars in customer deposits were reported missing. A later jury determined that these funds had been funneled into a related company and misused for high-risk trading, venture capital investments, debt repayments, personal loans, political contributions, luxury real estate, and other inappropriate uses.
A year after the bankruptcy, FTX founder Sam Bankman-Fried was convicted on multiple charges of fraud and conspiracy, leading to a 25-year prison sentence. In September, Caroline Ellison, a co-conspirator, received a two-year sentence after providing testimony against Bankman-Fried during the trial.
The proposed bankruptcy plan, introduced in May, outlines a way for former FTX customers to potentially receive full refunds, including interest—a rare occurrence in bankruptcy cases. Yesha Yadav, associate dean and bankruptcy expert at Vanderbilt University Law School, noted, “Typically, anything over 100 cents on the dollar is nearly miraculous. Unsecured creditors usually receive only a fraction of their claims, if anything at all.”
In this instance, FTX’s estate administrators successfully recovered billions by liquidating investments from FTX Ventures, the exchange’s venture capital arm, and Alameda Research, as well as other assets. The surge in cryptocurrency prices since FTX’s bankruptcy filing further increased the value of the assets remaining within the exchange.
As part of the plan, U.S. governmental agencies—including the Internal Revenue Service and the Commodities Futures Trading Commission—have agreed to postpone high-value claims against FTX until creditors are compensated (the IRS will receive a $200 million upfront payment as part of the settlement).
Interestingly, even FTX equity shareholders, who typically receive payment last in bankruptcy cases, are expected to recoup some of their initial investments—a combined maximum of $230 million—funded by amounts recovered by the Department of Justice from FTX insiders.
However, despite the unusually high anticipated recovery, some creditors feel dissatisfied with the valuation of their claims. Many clients held cryptocurrency assets such as Bitcoin on the FTX platform, but through a process known as dollarization—a common procedure in bankruptcies—their claims were assigned dollar values based on the asset prices at the time of the bankruptcy filing. When FTX collapsed, the cryptocurrency market was struggling, but it has since surged to new record highs. As a result, some claims would be worth significantly more if assessed based on the current value of the cryptocurrencies. Thus, while dollarization is aligned with bankruptcy regulations, Yadav remarked, “Claiming that the recovery is over 100 percent is misleading. For the average individual, it is far from that.”.
