Oon January 5th Sam Bankman-Fried showed up at the funeral of his own crypto empire. He appealed against this ftx‘s bankruptcy proceedings seeking $500 million in frozen assets earmarked for creditors. Mr. Bankman-Fried wants the money to pay his legal fees criminal trialin which he is accused of siphoning off billions of dollars in customer deposits from the crypto exchange for his own use (he has pleaded not guilty).
The demand is an opening salvo in a long, chaotic battle. America’s bankruptcy laws have evolved over centuries to dismantle regular businesses. Now lawyers have to figure out how to apply them to crypto companies on the fly. In November ftx filed for Chapter 11 bankruptcy, allowing a bankrupt company to reorganize rather than go into liquidation. The process usually takes the form of a court-led dispute between a company and its creditors. The company, which has been told what it owes by a court, is trying to persuade lenders to accept shares in the company in lieu of cash. If successful, it emerges with less borrowing and a bright new growth plan. If this does not succeed, it closes the shop. A major restructuring could have 100 creditors. A long one lasts a year. A complex needs at least a few.
counting of investors and depositors, ftx has over a million creditors – making it the ugliest corporate carcass ever seen by that measure. The implosion of the empire left 134 insolvent companies in 27 jurisdictions. They range from ftx Zuma, a stock exchange in rural Nigeria, to Good Luck Games, a developer of online card games. The trial could go on for a decade and uncover more allegations of misconduct. While sorting the mess, John Ray III succeeds Mr. Bankman-Fried as head of ftx, has become a de facto federal investigator. At a recent congressional hearing, he vowed to put forward more suspects for criminal charges when he comes across candidates.
The first task of the bankruptcy court is to find the money owed. Creditors are usually interested in coming forward. Not in bankruptcies related to crypto. For many, the appeal of wealth preservation lies in its facelessness. Making a claim requires a I would check, so creditors must decide how deep their desire for privacy goes. Investors, which include some of the tech’s most famous backers, are also reluctant to admit their involvement. To lure them out of hiding, the court has – in a highly unusual move – agreed to keep FTX’s top 50 creditors under wraps.
At the same time, Mr. Ray III is striving to locate assets. This involves creating corporate accounts from what he calls the worst records he’s ever seen. ftx didn’t even keep track of how much customers deposited. Alameda, a sister trading company, lost billions of dollars. Until November 29, lawyers thought there was at least next to no third-party credit. Then BlockFi, another bankrupt exchange, asked for $500 million in shares ftx held in Robinhood, a stock trading platform that insists ftx had put them up as collateral for the loan.
So far, Mr. Ray III has only pieced together a few billion dollars in assets. And finding assets is only half the battle—getting at them is even harder. In an early uproar, American and Bahamian authorities spent months berating each other before agreeing to inject at least $3.5 billion worth of tokens into American proceedings. Mr. Ray III also hunts ftx‘s donations. Mr. Bankman-Fried voluntarily relented Politician and Effectively altruistic charities. ftxs new boss has announced that he will sue for the money.
American courts have yet to complete a major crypto restructuring. This raises problems. Crypto has been around for 15 years, but nobody can agree on what it is. Token swaps are recorded in virtual ledgers by software on a blockchain that no single person controls. This does not fit with property law, which assumes that people own things because the law requires them to do so or because they have physical possession of them. Stocks have certificates of ownership; Chairs are occupied by their owners. In contrast, the law does not enforce crypto ledgers and recording something on a blockchain does not conjure up physical coin.
Creditors who come forward cannot be compensated either. When an exchange that trades stocks goes under, customers are protected by the Uniform Commercial Code, a law that governs commercial transactions in America. ftxThe Terms of Service expressly disclaims this law. On Jan. 4, in yet another crypto bankruptcy, the judge ruled that some customers lack ownership of their deposits. ftxcustomers may have to wait years to find out what they will receive.
If an agreement is reached, the depositors face a final danger. Most ftxThe recoverable value of will likely be in crypto tokens. The only thing such tokens are not – lawyers and politicians agree – is currency, as money needs to be backed by a government. It seems that when the time comes to carve ftx‘s assets, the court must award claims in dollars. This raises the question of which daily rate to use. ftx‘s estate contains so many tokens that her auction could trigger a fire sale and burn the market value of the tokens.
Another way would be to sell accounts to a solvent exchange. That would avoid the need to squeeze money out of tokens that no one wants, but it would leave the debris of the worst embarrassment in crypto history floating around the industry for years to come — and a buyer would need to be found. On Jan. 5, US regulators stepped in to delay a deal that would have seen Binance, the world’s largest exchange, acquire $1 billion in assets from another bankrupt firm, Voyager. There is one certainty from the forthcoming proceedings. ftx will perish as it lived: in breathtaking chaos. ■
