As the dust settles from one of the most shocking financial explosions in history, one of the unknowns is how many customers who cannot access their money are expected to return from FTX, the crypto exchange filed for bankruptcy last week.
The answer, according to legal experts, would be zero.
Before it went bust, FTX.com marketed itself as a safe destination for beginners to buy and sell cryptocurrencies. But a liquidity crunch last week forced FTX to halt withdrawals, leaving customers and investors in limbo. FTX reportedly used customer funds to support the sister hedge fund’s high-risk trading operation without authorization, according to the Wall Street Journal.
On Friday, FTX and the hedge fund, Alameda Research, filed for bankruptcy.
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 based, launched a criminal investigation into the company over the weekend.
The legal consequences for FTX and its founder, Sam Bankman-Fried, remain unclear. But as the exchange, once valued at more than $30 billion, collapses, it’s more likely that customers who entrusted their money to FTX could be left holding the bag.
“We just don’t know the extent of the contagion,” said Howard Fischer, a partner at the law firm Moses Singer and a former attorney at the Securities and Exchange Commission. “The first ring of victims are people who have assets held by FTX … They probably won’t recover, or anywhere near it.”
There are several reasons for this.
In a traditional US bank failure, the government insures customer deposits, making them total up to $250,000. But there is no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies.
In theory, FTX customers should get a cut of the rest of the company’s assets at the end of the bankruptcy process. But so far, at least, it is unclear how much is left to be disbursed.
“As far as I know, they have two assets – the goodwill of the exchange and the value of their FTT coins,” said Eric Snyder, head of the bankruptcy department at the law firm Wilk Auslander. (Goodwill value refers to intangible assets such as a brand’s reputation and intellectual property. And FTT coins, the crypto token issued by FTX, lost more than 90% of their value last week.)
In bankruptcies, Snyder explained, there is a simple formula to determine how much creditors – in this case, FTX depositors – will receive.
“The numerator is the assets, the liability is the denominator. You divide one into another, and the [result] is what everyone gets,” he said. “But if people take away all the assets, then there won’t be much of a numerator.”
He added: “It can be assumed that the return is minimal at best.”
Of course, the sudden drop in FTX made it a difficult case to examine it earlier, lawyers said.
Typically, companies have weeks to prepare bankruptcy filings that reveal, among other things, an explanation of why the company is seeking Chapter 11 protection and what its purpose is. enforceable by the bankruptcy court.
Dan Besikof, a partner at Loeb & Loeb who specializes in bankruptcy, said it’s too early to say whether customers will get any money back.
“All you can do is guess from the tweets where things stand,” he said. “And how customers get their money back can depend on a lot of different things, including which entity they hold the money with, how many coins they have left.”
The fall of 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, sought to reassure his audience of the legitimacy of the sector.
“It’s clear that people are worried,” Zhao, widely known as CZ, said during a question-and-answer session. on Twitter. “I want to say, short-term, pain. But I think it’s actually good for the industry in the long run. ”
The giant crypto exchange briefly appeared as a lifeline for FTX before reversing course last week.
Zhao, whose tweet announcing Binance’s divestment of FTX helped fuel the small company’s liquidity crisis, denied there was a “master plan” to expose FTX. However, critics noted that the biggest, and perhaps only, winner of FTX’s fall was none other than Zhao, now undoubtedly the richest and most influential player in digital asset trading.
“As some people blamed me for whistleblowing or bursting the bubble, I apologize for that … I apologize for any trouble I caused. But I think anytime, if there is a problem, the sooner we reveal it, the better. ”
—CNN Business’ Matt Egan and Kara Scannell contributed to this article.
Correction: An earlier version of this article misstated the name of the law firm Loeb & Loeb.