FTX collapse – 1 million creditors

“If you’re going to do something wrong, do it big” American actress, Jayne Mansfield, famously said. While Mansfield probably wasn’t too familiar with the concept of digital asset exchanges, the recent collapse of FTX will do nothing to alleviate concerns about the safety and legitimacy of digital asset businesses.

In their bankruptcy filings in Delaware, FTX confirmed it expected to have more than one million individual creditors. In this article, we consider what to do if you are a customer of FTX.

FTX was once the third largest crypto exchange by volume, allowing people with little or no digital asset expertise to buy and trade digital assets. Like many exchanges, FTX had its own native digital token, FTT. After a run on selling FTT caused a collapse in its price, the company filed for bankruptcy on 11 November. Shortly after this filing funds were removed from FTX through a series of “unauthorised transactions”. Initially some $473m was removed, but estimates at the time of writing are that the total amount missing may be as much as $2bn. Users have had their accounts frozen with no ability to access their assets and are now beginning to consider their options for bringing claims against FTX.

Customers of FTX will need to act quickly to ensure that they understand the options that are available to them to decide which route is likely to provide the best outcome. This will be dictated not just by the bankruptcy filings that have been made, but the contractual relationship that exists between a customer and the relevant FTX entity including any marketing materials that the customer may have relied upon when deciding to open an account with FTX.

Bankruptcy processes, like chapter 11 in the US and the provisional liquidation in The Bahamas that have been utilised by the FTX group, have processes for stakeholders to prove their claim against the bankrupt entity, some of which have deadlines by which such claims must be made. Deciding whether to make a claim in a bankruptcy process or not can be a strategic decision which will be dictated by both the nature of your claim and whether you may have proprietary or other rights to any of the assets held by the office holder. If a claim is made in a bankruptcy process, having a seat on any committee that is formed to garner the views of creditors and stakeholders about the proposed steps that the debtor and/ or any liquidator is going to take can be very powerful because of the additional level of information that you will receive and the ability to influence how the bankruptcy process plays out. Being on a creditors’ committee does not necessarily bring with it any personal liability and a committee may engage its own lawyers to provide advice which can mitigate any risk if it does exist.

However, in some jurisdictions once you file a claim in the bankruptcy process you have agreed to have your claim adjudicated within that process under laws of that jurisdiction, which may prevent you from bringing proceedings elsewhere or exercising other rights you might have to FTX’s assets. If you have a direct claim to assets held by the debtor and/ or the provisional liquidators because you are able to show they are your assets held by FTX on your behalf and are not owned by FTX, it is important that that a claim to those assets is made as quickly as possible to ensure they are ring-fenced and not used or sold during the bankruptcy process.

It is also important to explore whether there are assets that sit outside the bankruptcy that you may be able to target or whether there are third parties that you might be able to target for any losses you have sustained. Another option may be to sell your claim if you don’t have the appetite to wait out the bankruptcy process.

Deciding which strategy is best for you can be a complex and difficult decision, especially when you have more than one bankruptcy process and a multitude of jurisdictions involved.