FTX Customers To Get Back Billions After Judge OKs Bankruptcy Plan

A US judge has cleared the way for billions of dollars to be returned to former customers of bankrupt crypto exchange FTX.

At a hearing in Wilmington, Delaware, on Monday, Judge John Dorsey gave final approval to the FTX restructuring plan, the terms of which were previously set by creditors and voted down.

“I think this is an example of how to approach a complex Chapter 11 process,” Dorsey said. “I applaud everyone who took part in the talks.”

FTX filed for bankruptcy in November 2022 after running out of money to process customer withdrawals. FTX customer deposits worth billions of dollars were missing. The money, a jury later found, went into the brother’s company and was used for high-risk trading, business betting, debt settlement, personal loans, political donations, luxury real estate and other illegal activities.

A year later, FTX founder Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy, and sentenced to 25 years in prison. In September, his accomplice Caroline Ellison received a two-year prison sentence after testifying against Bankman-Fried in the trial.

First proposed in May, FTX’s bankruptcy plan outlines a path to full refunds, plus interest, for former FTX customers—a level of recovery rarely seen in bankruptcy. “Typically, anything over 100 cents on the dollar is close to a miracle,” said Yesha Yadav, associate director and bankruptcy expert at Vanderbilt University Law School. “What usually happens is that unsecured creditors get pennies on the dollar, if they’re lucky. What is expected is a deficit plan.”

In this case, however, the management of the FTX estate was able to recover billions of dollars by liquidating the investments made by the exchange company, FTX Ventures, and its sister company, Alameda Research, and other assets. The increase in the price of cryptocurrencies in the period since FTX filed for bankruptcy, on the other hand, increased the amount of coins remaining in the exchange’s wallet.

Under the plan, government agencies in the United States—including the Internal Revenue Service and the Commodities and Futures Trading Commission—agreed to freeze high-value FTX claims until creditors are paid (although the IRS will receive an initial payment of $200 million . as part of the agreement).

Even FTX shareholders, who usually end up being paid in bankruptcy, stand to get back a portion of their initial investment—as much as $230 million between them—paid to use the funds recovered by the Justice Department in prosecutions of FTX insiders. .

But despite the unusually high expected recovery, some creditors believe they are still getting a raw deal because of the way their claims have been valued.

Many customers hold crypto assets such as bitcoin on the FTX platform, but through a process called dollarization common in bankruptcy, their claims are instead assigned a dollar value based on the value of those assets on the day of the bankruptcy filing. When FTX collapsed, the crypto market was in a bad state, but it has since entered new highs, which means that some customer claims would be more important if refunds were mapped to the current value of crypto assets. So, while dollarization is fine under the bankruptcy code, he said [the return] it is more than 100 percent wrong,” said Yadav. “For the average person, it’s far from that.”