Finance

FTX Bankruptcy: A Tale of Unexpected Recovery Amid Cryptocurrency Turbulence

(Bloomberg) -- The catastrophic fall of FTX sent shockwaves through the cryptocurrency world, obliterating the life savings of countless investors overnight. Among the unfortunate many were Arush Sehgal and Acaena Amoros Romero, a couple whose financial future was seemingly wiped out by the platform's deceitful demise. Yet, in a twist of fate, the subsequent year and a half have witnessed a dramatic rebound in the crypto markets. Bitcoin, the leading cryptocurrency, has soared to new heights, quadrupling in value – a change that would have increased their lost investments in FTX to an estimated $4 million.

This resurgence underpins the escalating furor among FTX customers who, despite being on the precipice of an extraordinary bankruptcy outcome, are grappling with a significant caveat. FTX's bankruptcy plan, while promising full repayment of customer losses with interest, does not include the return of actual cryptocurrencies. Customers are therefore receiving U.S. dollar compensation based on their portfolio's value at the time of FTX's insolvency. The recent crypto bull run therefore represents a missed fortune for account holders who might have seen their assets multiply in a vibrant market.

“A hundred cents on the dollar doesn’t really mean much to me,” Sehgal, a vocal critic of the bankruptcy proceedings and former FTX creditor committee member, lamented. Sehgal and Romero are now positioned to regain only a quarter of the contemporary worth of their account — roughly $1 million.

In comparison to standard bankruptcy resolutions, FTX’s situation is unusually favorable. Creditors typically brace themselves for a fraction of their claims amidst protracted legal disputes. Yet, when FTX collapsed under the weight of co-founder Sam Bankman-Fried's clandestine misuse of customer funds, the outlook for account holders was particularly bleak, prompting some to offload their claims at a sharp discount.

However, the rapid appreciation in cryptocurrency values, spurred by developments such as the introduction of Bitcoin exchange-traded funds, has markedly inflated the valuation of FTX's liquidated assets. Meanwhile, under new management, the company diligently recouped funds from a sprawling labyrinth of accounts and liquidated holdings like its stake in Anthropic, an AI firm. Together, these measures have surpassed the losses incurred by Bankman-Fried's reckless operations.

On May 7, FTX announced the expectation of amassing a staggering $16.3 billion from asset sales, far outstripping the $11 billion due to customers and other private creditors. This leaves a substantial portion of stakeholders positioned to receive 118% of their original account value. Predictably, this will lead to government regulators only receiving a minor portion, and FTX's shareholders will be entirely divested, common in bankruptcies wherein nothing remains for the initial owners.

Corporate bankruptcies yielding a complete recovery for creditors are few and far between, with notable exceptions such as Hertz's case. However, FTX's anticipated settlements are projected to surpass those of other crypto bankruptcies, with payouts potentially being disbursed later in the current year, a relatively swift outcome.

“That is a bankruptcy grand slam when you compare it to other major fraud cases over the past twenty-five years,” stated Deirdre O'Connor, managing director at Epiq, specializing in bankruptcy case claims processing.

Despite these potentially salutary returns, a faction of FTX users remains disgruntled. Over eighty individuals have formally opposed the bankruptcy approach championed by FTX Chief Executive Officer John Ray, scrutinizing account valuation methodologies, among other aspects. Sehgal has encountered approximately 1,500 individuals sharing grievances through FTX.vote, an opposition platform he founded. A collection of these upset customers filed a lawsuit in bankruptcy court in January, refuting FTX's authority to sell their cryptocurrency holdings.

Ray, a seasoned bankruptcy expert appointed to navigate the company through this financial morass, defends the decisions as aligned with prevailing bankruptcy law and precedents. According to Ray, the retrieval and return of cryptocurrencies were rendered impracticable due to insufficient resources. Consequently, available crypto assets are being sold to reconcile creditor debts.

“We’re not a hedge fund," Ray elucidated in a pre-plan release discussion. "We’re managing an estate for the benefit of all creditors, we’re not risk takers.”

US Bankruptcy Judge John Dorsey is set to consider propelling the FTX plan towards account holder voting in June. The verdict will factor in the creditor vote alongside their comments. Nevertheless, the widespread disarray among such a voluminous and diverse creditor body exacerbates the proceeding's unpredictability. Unlike the usual bankruptcy actors – investment firms, vendors, and systematic creditors – the crypto enthusiasts' readiness to endure market volatility further complicates the scenario.

“I can’t recall a case with that many voters,” expressed Cliff White, a seasoned bankruptcy attorney and former overseer of the Office of US Trustee for 17 years. “Here you’ve got a more multifaceted range of groups that is more difficult to corral.”

Among the diverse global customer base, Veno Bojanovsky, 34, had elected to maintain his distance from the unsettling downfall of FTX, coming to terms with the seeming inevitability of his lost investment. Despite skepticism towards the updated repayment plan, Bojanovsky preserved ownership of his claim rather than disposing of it prematurely.

“I’ve not regretted it, though I still don’t trust I’ll get anything much for it,” he reflected with cautious optimism.

The upheaval among certain customer circles contributes an additional layer of uncertainty to what is otherwise a procedure typically streamlined by standardized creditor influence. As the FTX bankruptcy saga unravels, it stands as a unique case study of financial recovery intertwining conventional bankruptcy narratives with the volatile and unpredictable sphere of cryptocurrency trading.

©2024 Bloomberg L.P. With assistance from Lucca De Paoli and Claire Ballentine.

Note from Editor: The information contained in this article represents current events up to the knowledge cutoff date. Any subsequent events or clarifications post-cutoff date may not be reflected herein. The story and its encompassing details are subject to ongoing developments as the bankruptcy process unfolds.

Arush Sehgal and Acaena Amoros Romero's lost FTX investments and their streaming efforts through FTX.vote.

The outcomes of FTX's bankruptcy proceedings point towards a rare positive resolution, offering key insights into the resilience and intricacies of cryptocurrency markets and the legal landscapes they navigate.