In a rare and unexpected outcome, cryptocurrency firm FTX has received court approval to fully repay customers whose digital assets were frozen on the platform after its collapse nearly two years ago. This decision might also allow shareholders of the Sam Bankman-Fried-founded exchange to benefit from up to $1 billion in seized assets.
On Monday, U.S. Bankruptcy Judge John Dorsey approved a comprehensive plan to reimburse FTX customers who were affected by the exchange’s downfall. The proposal was developed by advisers who assumed control of FTX after its implosion in November 2022. At that time, the outlook for recovery was grim, with advisers initially estimating that creditors would only recover a fraction of their owed funds.
However, customer recovery prospects improved significantly as the bankruptcy process advanced. By June, FTX’s asset base had grown to $12.6 billion, with projections suggesting this could increase to $16.5 billion once all assets are accounted for. These include various venture-capital projects, such as FTX’s investment in artificial intelligence firm Anthropic.
“We certainly benefitted from the bull crypto markets of the last year,” said Ken Pasquale, a creditor attorney, during the bankruptcy hearing. According to Pasquale, FTX was able to capitalize on rising crypto values by negotiating deals with creditors, regulators, and other stakeholders.
The turnaround has been so significant that even FTX’s preferred shareholders could see some returns. A portion of the seized funds includes approximately $626 million from the sale of Robinhood Inc. stock, which was once held by Bankman-Fried and FTX co-founder Gary Wang. Although rare in Chapter 11 cases—where stockholders are often wiped out—these funds may allow some return for shareholders.
Prominent preferred shareholders include Canyon Partners, Tribe Capital Management, and Steadview Capital Management. According to a recent court disclosure, Canyon Partners is one of the largest holders of FTX customer claims, with over $600 million in such claims.
Not all customers are pleased with the repayment plan, however. Unlike other bankruptcies, FTX will issue repayments in cash rather than cryptocurrency. This decision has left some customers disappointed, as they’ll miss out on gains from digital assets’ appreciation since the firm’s collapse. Additionally, FTX’s utility token, FTT, will not be part of the customer repayment scheme.
In the last few years, only a handful of large U.S. corporate bankruptcies have managed to fully repay creditors. One notable example is Hertz Global Holdings, which emerged from bankruptcy in 2021 with enough funds to also repay shareholders, thanks to a surge in used car prices.
Despite the full repayment, equity holders won’t receive any leftover funds unless federal prosecutors decide to share the seized $1 billion, according to FTX bankruptcy attorney Andrew Dietderich. Under current agreements, shareholders could potentially receive up to 18% of any forfeited assets returned, capped at $230 million.
The crypto rally that drove Bitcoin’s price up by four times since late 2022 has bolstered FTX customer recoveries. According to FTX lawyers, the decision to issue cash repayments was due to a substantial crypto deficit compared to what customers had been led to believe. In response, FTX CEO John J. Ray III sold off digital assets like Solana, which saw a spike in value due to its association with Bankman-Fried.
Galaxy Digital Capital Management LP was hired to sell and hedge FTX’s remaining digital assets. This arrangement contributed significantly to FTX’s recovery efforts, helping to ensure that customers will receive their funds with interest.
Customer payouts won’t be immediate. FTX must first establish a trust and appoint a firm to manage the fund distribution process. The bankruptcy case, titled FTX Trading Ltd., is being handled in the U.S. Bankruptcy Court for the District of Delaware.
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