As the dust settles from one of the most shocking financial implosions in history, one of the key unknowns is how much customers who can’t access their money expect to get back from FTX, the crypto exchange which filed for bankruptcy last week.
The answer, according to legal experts, could be zero.
Prior to its collapse, FTX.com marketed itself as a safe destination for beginners to buy and sell cryptocurrencies. But a liquidity crunch last week forced FTX to suspend withdrawals, leaving customers and investors in limbo. According to the Wall Street Journal, FTX allegedly used client funds to support its sister hedge fund’s high-risk trading operation without permission.
On Friday, FTX and hedge fund Alameda Research filed for bankruptcy.
Federal prosecutors in New York are currently investigating the stock market crash, a person familiar with the matter told CNN. And authorities in the Bahamas, where FTX is based, launched a criminal investigation into the company over the weekend.
The legal ramifications for FTX and its founder, Sam Bankman-Fried, remain unclear. But as the exchange, once valued at more than $30 billion, plummets, it seems increasingly likely that customers who handed over their money to FTX could end up with the bag.
“We just don’t know the extent of the contagion,” said Howard Fischer, a partner at law firm Moses Singer and a former Securities and Exchange Commission attorney. “The first circle of victims are the people who had assets held in FTX… They probably won’t be cured, or thereabouts.”
There are several reasons for this.
In a traditional bank failure in the United States, the government insures customer deposits, bringing them up to $250,000. But there are simply no depositor insurance mechanisms in the largely unregulated world of cryptocurrencies.
In theory, FTX clients should get a share of what remains of the company’s assets at the end of the bankruptcy process. But so far, at least, it’s unclear how much will be left to shell out.
“As far as I know, they have two assets – the value of the exchange’s goodwill and the value of their FTT coins,” said Eric Snyder, head of the bankruptcy department at law firm Wilk Auslander. (Goodwill value refers to intangible assets like a brand’s reputation and intellectual property. And FTT coins, the crypto token issued by FTX, have lost over 90% of their value in the past week. .)
In bankruptcies, Snyder explains, there is a fairly simple formula for determining how much creditors — in this case, FTX depositors — will receive.
“The numerator is the asset, the denominator is the liability. You divide into each other, and the [result] is what everyone gets,” he said. “But if people take out all the assets, then there won’t be much of a numerator.”
He added: “It’s very conceivable that the return will be minimal at best.”
Of course, the suddenness of FTX’s fall makes it a difficult case to assess early on, the lawyers say.
Normally, businesses would have weeks to prepare bankruptcy filings that disclose, among other things, an explanation of why the business sought Chapter 11 protection and what it aims to accomplish in bankruptcy court.
Dan Besikof, a partner at Loeb & Loeb who specializes in bankruptcies, says it’s too early to tell if clients will get any money back.
“All you can really do is guess from the tweets where things stand,” he said. “And how customers get their money back can depend on a lot of different things, including the entity they hold the money through, the amount of coins left over.”
The FTX fallout has rocked the entire crypto industry, raising serious questions about the future of digital assets and the lack of global regulation.
On Monday, Changpeng Zhao, the CEO of FTX competitor Binance, sought to reassure his audience of the industry’s legitimacy.
“People are obviously nervous,” Zhao, widely known as CZ, said during a question-and-answer session. on Twitter. “I feel like saying, in the short term, it’s painful. But I think it’s actually good for the industry in the long term.
The giant crypto exchange briefly appeared as a lifeline for FTX before reversing course last week.
Zhao, whose tweet announcing Binance’s divestment from FTX helped fuel the small business’ liquidity crisis, denied having a “master plan” to expose FTX. Yet critics note that the biggest, and perhaps the only, winner of FTX’s downfall is none other than Zhao, now unquestionably the richest and most influential player in digital asset trading.
“As much as some people blame me for speaking out or pushing the bubble, I apologize for that…I apologize for any trouble I have caused. But I think at any time, if there’s a problem, the sooner we reveal it, the better.
—Matt Egan and Kara Scannell of CNN Business contributed to this article.
Correction: An earlier version of this article included an error in the name of the law firm Loeb & Loeb.
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