New York
CNN Business
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As the dust settles from one of the most shocking financial implosions in historyOne of the key unknowns is how many customers who cannot access their money expect to recover from FTX, the cryptocurrency exchange that filed for bankruptcy last week.
The answer, according to legal experts, may be zero.
Before its unraveling, FTX.com marketed itself as a safe destination for beginners to buy and sell cryptocurrencies. But a liquidity crisis last week forced FTX to halt withdrawals, leaving clients and investors in limbo. FTX Client Funds Allegedly Used to prop up its sister hedge fund’s high-risk trading operation without permission, according to the Wall Street Journal.
On Friday, FTX and the hedge fund, Alameda Research, declared bankrupt.
Federal prosecutors in New York are now investigating the collapse of the exchange, a person familiar with the matter told CNN. And authorities in the Bahamas, where FTX is headquartered, launched a criminal investigation at the company over the weekend.
The legal ramifications of FTX and its founder, Sam Bankman-Fried, remain unclear. But as the exchange, once valued at more than $30 billion, collapses, it seems increasingly likely that customers who handed over their money to FTX will keep the exchange.
“We just don’t know the extent of the contagion,” said Howard Fischer, a partner at the Moses Singer law firm and a former Securities and Exchange Commission attorney. “The first circle of victims are the people who had assets in FTX… They probably won’t recover or even come close.”
There are some reasons for this.
In a traditional US bank failure, the government insures customer deposits, matching them up to $250,000. But there’s just There is no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies.
In theory, FTX clients should receive a portion of what remains of the company’s assets at the end of the bankruptcy process. But so far, at least, it is not clear how much will remain to be disbursed.
“As far as I know, they have two assets: the goodwill value of the exchange and the value of their FTT coins,” said Eric Snyder, head of the Wilk Auslander law firm’s bankruptcy department. (Goodwill value refers to intangible assets like brand reputation and intellectual property. And FTT Coins, the crypto token issued by FTX, have lost more than 90% of their value in the last week.)
In bankruptcies, Snyder explains, there’s a fairly simple formula for calculating how much creditors — in this case, FTX depositors — will receive.
“The numerator is the asset, the denominator the liability. You divide one into the other, and the [result] it’s what everyone gets,” he said. “But if people are getting all the assets out, then there won’t be much of a numerator.”
He added: “It is very conceivable that the return will be minimal at best.”
Of course, the suddenness of FTX’s downfall makes it a difficult case to assess from the start, the lawyers say.
Typically, companies would have weeks to prepare bankruptcy filings that reveal, among other things, an explanation of why the company sought Chapter 11 protection and what it intends to accomplish in bankruptcy court.
Dan Besikof, a partner at Loeb & Loeb who specializes in bankruptcies, says it’s too early to say whether clients will get any of their money back.
“All you can really do is guess from the tweets where things are,” he said. “And how customers get their money back can depend on a lot of different things, including who they have the money through, how many coins are still left.”
The fallout from FTX has shaken the entire crypto industry, raising serious questions about the future of digital assets and the lack of global regulation.
On Monday, Changpeng Zhao, the CEO of FTX competitor Binance, tried to reassure his audience about the legitimacy of the sector.
“It’s obvious that people are nervous,” Zhao, widely known as CZ, said in a question-and-answer session. On twitter. “I mean, in the short term, it’s painful. But I think this is really good for the industry in the long term.”
The giant cryptocurrency exchange briefly emerged as a lifeline for FTX before changing course last week.
Zhao, whose tweet announcing Binance’s divestiture of FTX helped fuel the smaller company’s liquidity crisis, has denied having a “master plan” to expose FTX. Still, critics point out that the biggest, and perhaps only, winner of the FTX crash is none other than Zhao, now arguably the richest and most influential player in digital asset trading.
“As much as some people blame me for blowing the whistle or bursting the bubble, I apologize for that…I apologize for any confusion it caused. But I think at any point, if there’s a problem, the sooner we reveal it, the better.” .
—Matt Egan and Kara Scannell of CNN Business contributed to this article.
Correction: An earlier version of this article misrepresented the name of the Loeb & Loeb law firm.
