Nov 16 (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:
WHERE IS FTX BANKRUPTCY?
A bankrupt business typically begins its Chapter 11 case by telling the judge about its debts and how it ended up bankrupt, and by applying for administrative clearances for routine bankruptcy transactions.
FTX has yet to file those routine applications or schedule a “day one” hearing to get initial approvals from the Delaware judge assigned to its case, a sign that its case is off to a slow start.
“If you’re an FTX client, you should expect to be disappointed with how long this is going to take,” said Harvard Law School professor Jared Elias.
Another key file that could provide insight is a request for debtor-in-possession financing, essentially a loan to keep the business running. It is unclear whether FTX will attempt to do so, and would require court approval to do so.
About 130 FTX subsidiaries have filed for bankruptcy in Delaware, and the company has chosen a new CEO, bankruptcy attorneys at Sullivan & Cromwell, and financial advisers at Alvarez & Marsal.
WILL CUSTOMERS BE REIMBURSED?
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.
WHAT ABOUT FTX CUSTOMERS WHO HAVE WITHDRAWN MONEY FROM FTX?
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,” Elias said.
WHAT OTHER RISKS DO FTX CUSTOMERS FACE?
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 to whom money is owed, how much is owed to them, 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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