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Explained: What’s next in FTX’s bankruptcy

Nov 17 (Reuters) – Crypto exchange FTX filed for Chapter 11 bankruptcy protection in the United States on Friday after its precipitous collapse, saying it may owe money to more a million creditors. Here’s what’s likely waiting in the bargain:


FTX had an unusually slow start to bankruptcy, taking nearly a week to file “day one” documents that outline the company’s debts and how it ended up bankrupt.

The reason for the delay became apparent when new FTX CEO John Ray described the company’s “unprecedented” chaos in court filings Nov. 17.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has happened here,” said Ray, a restructuring expert with decades of experience. experiment that oversaw the multi-year liquidation of energy company Enron after its collapse in 2001.

Ray, who took over as CEO when FTX filed for bankruptcy, said his immediate priorities were locating and securing assets, investigating claims against insiders like the former CEO of FTX, Sam Bankman-Fried, and cooperating with dozens of regulatory investigations in the United States and abroad. .

FTX’s dire situation will make it difficult for the company to borrow new funds that could be used to reorganize the business or buy time for a sale, according to University of Pennsylvania law professor David Skeel.


Bankman-Fried secretly used $10 billion in client funds to support his trading company Alameda Research, and at least $1 billion of those deposits have disappeared, sources told Reuters.

Under its new leadership, FTX has located and secured $740 million in cryptocurrency, which represents “only a fraction” of the digital assets the company will seek to recover for creditors.

Bankman-Fried claimed in 2021 that clients held $15 billion on FTX’s platform, but FTX did not verify that amount. FTX has not recorded customer deposits as balance sheet assets, and balance sheets prepared under Bankman-Fried’s direction are not necessarily reliable, Ray wrote.

FTX is trying to recover additional assets, including $372 million that was withdrawn without permission on the day the company filed for bankruptcy. FTX believes the company’s co-founders and other insiders may have further information about other crypto wallets unknown to the company’s restructuring team, according to the Nov. 17 filing.


Unlike deposits in banks, client accounts on crypto platforms such as FTX are not protected by the Federal Deposit Insurance Corporation. The US government will not step in to cover customer deposits as it would in a traditional bank failure, so customers will have to rely on the bankruptcy process.

A Chapter 11 case stops attempts to recover assets from a bankrupt business, so customers will have to wait for the bankruptcy court to determine what amount, if any, they will recover. One of the key questions for the court will be whether the clients own the cryptocurrency they deposited or whether it belongs to FTX.

There are very few legal precedents for this issue. In recent crypto bankruptcies, Celsius Network and Voyager Digital both claimed that they own all crypto held on their platforms. This means that the crypto would be bundled with all the assets of the bankrupt company and divided to pay all creditors. In this scenario, customers would have what are known as unsecured receivables with relatively low priority.

If clients are found to own the crypto, they are more likely to get back more of their deposits. But recovery will still depend on how much FTX owes and what assets it has left.

Bankruptcy judges have so far accepted Celsius and Voyager’s arguments, though that could be the subject of future court battles, said James Van Horn, a bankruptcy attorney in Washington, DC.


Clients who withdrew their assets from FTX before its collapse are not necessarily in the clear. The bankruptcy court could allow FTX to recover these withdrawals so that there can be a more equal payment for creditors who were unable to make withdrawals. In cases of fraud, the recovery period can be extended by several years.

“It’s risky to feel like you’ve dodged a bullet, because sometimes you don’t,” said Harvard professor Jared Elias.


The bankruptcy could lead to the publication of the names, email addresses and transaction history of FTX customers.

Bankruptcy depends on transparency – at a minimum, the court needs to know who money is owed to, how much they are owed, and how to contact creditors. Courts’ preference for transparency is at odds with crypto clients’ expectations of anonymity.

Reporting by Dietrich Knauth in New York Editing by Alexia Garamfalvi and Matthew Lewis

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