Will FTX Traders Get Their Money Back? Bankruptcy experts appreciate

FTX founder Sam Bankman-Fred appeared in a Manhattan courtroom Thursday to face federal charges, a major step as prosecutors search for answers to what they describe as a “fraud of epic proportions.”

Some bankruptcy experts told ABC News that more than a million potential victims are still in the early stages of a bankruptcy proceeding that could drag on for years and which will likely return only a portion of the money they lost.

According to the indictment, Bankman-Fried — who was ordered to be released on $250 million in bonds and did not file for one — allegedly stole $8 billion from FTX investors and clients and used it to pay off the debts and expenses of Alameda Research, which is privately owned. hedge fund. Prosecutors said he also used the money to buy luxury real estate and make political donations mainly to Democrats but also to some Republicans in his bid for influence in Washington.

Many cryptocurrency traders, who deposited their savings on the platform, fear that they may never get their money back.

The sudden collapse of a $32 billion cryptocurrency swap presents a challenge to officials overseeing the bankruptcy. Experts said they will seek to identify missing assets that are shrouded in the complexity of the new digital currency, a highly unregulated financial sector and an alleged absence of adequate record-keeping.

c said Ray Warner, professor of bankruptcy law at Saint John’s University, told ABC News: “You have a real holy mess here.” “This is no ordinary corporate bankruptcy.”

FTX did not immediately respond to a request for comment.

In testimony before the House of Representatives last week, John Ray, CEO of FTX, said he and his colleagues are “now working on behalf of the FTX Group toward one primary goal: maximizing value for FTX’s customers and creditors so that we can mitigate, to the greatest extent possible, the harm it has suffered.” Lots “.

Here’s what experts say you need to know about the current state of bankruptcy proceedings, the process of returning funds to cryptocurrency traders and whether they will eventually get any of their money back.

What is the bankruptcy situation now?

Previously announced cryptocurrency exchange FTX filed for Chapter 11 bankruptcy on November 11 following a wave of customer withdrawals. On the same day, Bankman-Fried stepped down as CEO and was replaced by Ray, a veteran of corporate bankruptcies who oversaw the dissolution of scandal-plagued accounting firm Enron.

The bankruptcy filing listed more than 130 business entities affiliated with FTX and its sister hedge fund, Alameda Research. The filing said the number of creditors seeking repayment figures is at least 100,000 and could reach more than a million.

The company, which had $1.25 billion in assets as of last month, said it owed more than $3 billion to its 50 largest creditors, plus additional money on top of that.

Ray told members of Congress last week that FTX lacks corporate controls to an extent it has not seen before, complicating efforts to recover lost assets. “I’ve never seen a complete lack of record keeping,” Ray said. “There are certainly no internal controls.”

Edward Junger, a professor of bankruptcy law at Brooklyn Law School, told ABC News that FTX’s sudden downfall left the company little time to prepare for an orderly liquidation.

“Sometimes companies flop into bankruptcy without any planning,” Junger said.

How will cryptocurrency traders try to get their money back?

The number one claim some cryptocurrency traders make is that the missing funds belong to them, not FTX, said Warner of St. John’s University.

He added that if creditors can prove that their money is being held independently of the company’s asset pot, the money will be returned to them before bankruptcy procedures are completed, giving them the best chance at full repayment.

“The difference is if you loaned me your car for a week and I didn’t return it and you filed for bankruptcy, the car wouldn’t be part of my bankruptcy estate,” Warner said. “You’ll be able to get your car back from me.”

Warner said such attempts to expedite a speedy recovery of assets usually fail because they must meet stringent conditions and otherwise undermine the fairness of dividing the assets equally among creditors. He added that some cryptocurrency traders may get money back in this way, possibly in cases where they deposited money into an FTX account but did not invest in it.

For the most part, FTX’s creditors will wait for the full bankruptcy process in which administrators recover, select and value the company’s assets and eventually reorganize or liquidate.

FTX said in a statement Monday that some donation recipients from the company, Bankman-Fried or other officials have requested instructions to return the funds. The company called on other donation recipients to come forward, stating that it would pursue legal action to secure the funds.

After recovering the assets, cryptocurrency traders will have to wait in line behind other parties standing to receive the lost funds. Priorities include unpaid taxes, unpaid salary payments to employees, and other company expenses. Shareholders and other investors in the company stand at the end of the line, behind the traders.

How long will it take for cryptocurrency traders to get their money back?

Some bankruptcy experts said that the exact duration of the bankruptcy process is still uncertain, but that it could take several years before cryptocurrency traders get their money back.

Stuart Brown, a partner at DLA Piper who specializes in bankruptcy, told ABC News that similar proceedings have been popping up for months without resolution.

“Other cryptocurrency bankruptcy cases have been pending for nearly six months with no clear path out and these cases do not involve the level of complexity that FTX offers,” he said.

Warner said it will likely take several years to recover the assets before the company can start returning money to creditors.

“Distribution to claimants – it probably won’t be for long,” he said.

There is also the potential for further delays due to a court battle between the Bahamas and US authorities over who should decide the bankruptcy, Warner said. Such disputes are usually resolved in settlements, but potential litigation around this issue could take several years, before bankruptcy proceedings can move forward.

What is the probability that cryptocurrency traders will get their money back?

Bankruptcy experts said cryptocurrency traders are likely to recover at least some of their lost assets.

“If history is any indication into the future, there is a good chance that creditors will make a significant recovery,” said DLA Piper’s Brown.

But Warner said the outlook is bleak for a full recovery of the lost assets.

“They will almost certainly get that back,” he said. “But it’s not likely that they’ll get anything close to 100%.”