FTX, one of the largest crypto exchanges, has been ruling the headlines over the past couple of weeks, but for all the wrong reasons. The exchange has failed to sustain its liquidity, ultimately leaving it no option but to file for bankruptcy.
This Friday (11th Nov) morning, FTX and all its related entities, including its sister company Alameda Research, filed a Chapter bankruptcy petition. The petition has been filed in the US Bankruptcy Court in Delaware, and its CEO Bankman Fried has resigned following the cash shortfall of $8 billion.
However, there’s more than just a massive dip in fortune. Continue reading as we unfold the latest events via our weblog.
FTX: The Fall Of A Crypto Mammoth!
The fall of the FTX exchange has been somewhat swift, with several events unfolding in just a few weeks. As of now, the court ensures the resolution of its creditors would be monitored by the court, be it the account holders or lenders. But experts say this entire ordeal might take longer than one could imagine.
Experts suggested that customers brace themselves for a complex, messy bankruptcy case. However, they added that FTX creditors getting their money back is entirely different.
Daniel Besikof, a partner at Loeb & Loeb, explained that the terms of service for FTX state that client deposits are to be kept as the customers’ property. Customers would have the right to reclaim their deposits relatively soon if that is the case and the customer deposits are still present. It’s a tricky matter; therefore, it’s unclear what stance FTX will take or how much of the original deposits still exist.
He further added if the deposits are seen as FTX’s assets, then customers might not receive distributors until one can hammer a court-ordered repayment plan. This bankruptcy case also ties up FTX’s other entities, including the Voyager Digital and Celcius network and the crypto hedge fund Three Arrows Capital. In the meantime, any case law on cryptocurrency bankruptcy cases in other countries does not set precedence in the US.
Cryptos In A Negative Spotlight?
Even if the most recent turn of events was quick, it isn’t very comforting. The market wasn’t prepared for yet another significant decline in this protracted crypto winter. All of this brings up several legal issues related to cryptocurrency.
One of these concerns, according to Besikof, is who controls the cryptocurrency holdings. For example, do customer recovery claims use USD or cryptocurrency valuations? What time does the valuation happen?
It is important to note that cryptocurrency trading is constant, unlike traditional stock market trades. As a result, many other cryptocurrencies on the market suffered after FTX’s demise. Following the current changes in the business, Bitcoin just hit a fresh two-year low.
John Ray, the newly appointed CEO of FTX, stated that filing for bankruptcy was the best decision for FTX under the current circumstances. He added that this gives the FTX group a much-needed opportunity to assess the entire situation and roll out an effective plan to process recoveries to all stakeholders.
But What Exactly Is A Chapter 11 Bankruptcy?
Chapter 11 bankruptcy is one of many chapters in the US Bankruptcy Code. This chapter states that the debtor (in this case, FTX) files for a business reorganization and creditor payment under this section of the law along with all of its other organizations. This runs counter to other bankruptcy chapters, such as Chapter 7, when corporations must sell off their assets to pay creditors.
Anyone trying to retrieve their assets outside of the bankruptcy court is often put on hold by this bankruptcy case. Experts claim that FTX’s demise was swift; therefore, the company will need to use this chance to put its affairs in order as soon as possible. However, all account holders and creditors must be prepared for withdrawals to be stopped, at least temporarily.
Who Are FTX Creditors In This Picture?
The bankruptcy petition from FTX estimates that there are over a million creditors. But who are these million creditors? It is safe to say that most of these creditors are FTX customers. Besides that, this number could also include workers, lenders, suppliers, software providers, and independent contractors, among many others.
Experts say this phenomenon might create a lot of competition and conflict among customers since everyone is trying their best to reclaim their money. This makes it imperative to decipher the company’s terms of service concerning its customer’s assets. Experts further added that if the court interprets the customer assets belonging to the company, they will become assets that other creditors might argue to claim.
In most cases, it is observed that crypto companies claim they do not own the cryptos but only hold them on someone else’s behalf. Besides, there are specific terms where the exchange controls the asset while the customer buys or sells these assets through the platform. But there has not been effective clarification as to who owns the assets.
In the case of FTX, the terms and services of the platform indicate the assets belong to customers. For instance, the terms of the exchange state, “Title to your Digital Assets shall at all times remain with you and shall not transfer to FTX Trading.”
But that does not answer all the questions. According to experts, interacting with crypto companies is never easy. These companies often might say one thing, but that thing might pan out differently from a legal perspective.
Are Better Crypto Regulations The Need Of The Future?
Experts note that even if the assets are considered the customer’s property, there remains an issue. For example, in the case of a conventional bank, federal reserves can bail it out in case of a liquidity crunch. But the same is not available with cryptocurrencies since they operate in a decentralized environment.
This means no government or federal entity is liable to pay FTX customers. Without any regulation, it becomes very challenging to claim fraud since the agreements between FTX and its customers allow the company to use the investments at its discretion. It might boil down to what the customers of FTX agreed upon.
Takeaway Tip: Always look for regulated platforms before signing up for any crypto exchange.