FTX Bankruptcy and Creditor Recovery

Throughout the FTX bankruptcy, many different avenues have been explored or proposed to maximize creditor recovery. This includes relaunching the FTX exchange to recover funds for creditors or distributing claims as tokens in a new venture that can be traded.

Some decentralized marketplaces, such as Found.xyz and Figure Markets, launched support for tokenized FTX claims trading this summer. One crypto CEO called this move “one of the most crypto things” he’s ever seen.

However, FTX, led by CEO John Ray III and legal counsel Sullivan & Cromwell, dismissed the idea of restarting the exchange, stating no investors would provide the necessary capital to revive the offshore exchange. While some creditors have requested in-kind distributions (paying back lost crypto in crypto), FTX’s current plan is to compensate creditors in cash or U.S. dollar-pegged stablecoins.

Recently, the Securities and Exchange Commission (SEC) warned FTX in a filing that it reserves the right to challenge the legality of the proposed repayment plan or any attempt to profit from its crypto asset securities. The SEC’s filing also highlights a lack of clarity regarding who would distribute the stablecoins, should the plan be approved.

Although the SEC did not explicitly label the action as illegal, it commented, “The SEC is not opining as to the legality, under the federal securities laws, of the transactions outlined in the Plan,” while asserting its right to contest transactions involving crypto assets.

Additionally, the SEC joined the U.S. Trustee overseeing the bankruptcy in opposing a provision in the plan that would protect FTX debtors from future legal actions by creditors. The U.S. Trustee stated that unless the plan specifies the debtors will not receive a discharge and removes any discharge injunction, the court should deny confirmation.

The administrative costs of FTX’s bankruptcy have surged since the exchange’s collapse; fees requested by its staff have recently surpassed $800 million, according to a tally from X user Mr. Purple.