Justice has not been served, FTX customers say after bankruptcy plan confirmation

Court approval of restructuring sets a dangerous precedent for future bad actors, users say

Sunil Kavuri, a representative of the largest FTX creditor group, says many customers would like to be paid in crypto rather than cash. Photo: Sunil Kavuri

Customers whose digital assets are locked in now defunct-cryptocurrency exchange FTX say they are not satisfied with a bankruptcy plan that will return some of their lost investments.

Most have lost out on a strong rebound in crypto prices since the platform imploded nearly two years ago, they said in response to the court approval of the company’s bankruptcy proceedings.

The price of a Bitcoin has risen to more than $62,500 from its November 2022 price of $16,000.

“They are being paid back the price of Bitcoin in November 2022, plus a proposed interest rate,” said Sunil Kavuri, a representative of the largest FTX creditor group.

“Justice has not been served. Importantly, it sets a dangerous precedent for future bad actors to commingle customer property and claim it as their own as the FTX debtors have done.

“Many customers would like to be paid in crypto rather than cash. We filed an objection to the plan requesting debtors to allow for the option for creditors to receive their claim back in kind or crypto."

Mr Kavuri has $2 million locked in FTX after he transferred the funds to the exchange in 2021. He has spent the last two years working as a volunteer to support the FTX community, provide correct information about the bankruptcy process and maximise recovery through filing lawsuits.

FTX received court approval of its bankruptcy plan on October 7, which will allow it to fully repay customers using up to $16.5 billion in assets recovered since the crypto exchange collapsed.

The company will repay 98 per cent of its customers who have held $50,000 or less on the exchange first, within 60 days after the plan's effective date.

US bankruptcy judge John Dorsey approved the restructuring plan at a court hearing in Wilmington, Delaware. The settlements allow FTX to use its assets to repay customers of its crypto exchange first, before paying potentially competing claims filed by government regulators.

Once among the world's leading crypto exchanges, FTX collapsed after news surfaced that founder Sam Bankman-Fried took customer money to pay off risky bets made by his hedge fund, Alameda Research.

Mr Bankman-Fried was sentenced in March to 25 years in prison for stealing from FTX customers, and he has appealed against his conviction.

US government agencies, including the Commodity Futures Trading Commission and Internal Revenue Service, agreed to let FTX prioritise customer repayment over fines and tax debts.

FTX said the result was a victory for creditors, made possible by its ability to recover cash and crypto assets that had gone missing during the company's collapse. The company also raised additional funds by selling off other assets, including its investments in tech companies like the artificial intelligence start-up Anthropic.

Customers with funds under $50,000 will receive their money first. This is likely to be paid out in January or February 2025 and those with more than this amount will receive their money in the first quarter or second quarter of 2025, according to Mr Kavuri.

Interest payments will be ongoing for those with more than $50,000 claims as they will not be fully paid back, he says.

“FTX customers have suffered significantly from the incident and the fact that no one has received any money despite the bankruptcy estate taking billions of dollars in fees,” he says.

“I know of at least three suicides, many suffered from mental distress and hospitalisation from panic attacks, many divorces. It has been a long two years, with thousands of FTX customers suffering from depression.”

The FTX creditor-activist says the exchange’s terms of service are “explicitly clear and unambiguous – the title of digital assets remains with the customer”.

Digital assets are the property of users and not FTX trading. Unfortunately, at the bankruptcy plan confirmation hearing, the FTX debtors claimed if customer property is commingled, it becomes the property of the estate/debtors, Mr Kavuri says.

“If this was the case, Sam Bankman-Fried would not have gone to prison for 25 years for stealing customer property. Sam commingled customer assets and as a result can claim the property as his own, which is against international theft laws,” he says.

“The plan states customers who held one Bitcoin on FTX when they collapsed should get one Bitcoin back from the estate. Instead, customers are mischaracterised as unsecured creditors by the estate, meaning they will receive $16,871 for each Bitcoin they held on FTX, which was the price as of November 11, 2022.”

Lidia, another FTX customer, says the money she had deposited in FTX was what she received as compensation for a car crash that left her disfigured when she was 19 years old.

“This money was the only way to give me an old age with dignity. First, I was confused, then depressed, then suicidal. Nobody was giving me any sort of answer,” she adds.

“I think that to argue now, after 22 months that digital assets belong to the debtor’s estate would be inconsistent with the criminal court findings and SBF conviction. The FTX.com terms of service grant customers legal title to their assets.”

She claimed that her contractual rights and ownership rights had been “trampled” and her property rights “disregarded” under the restructuring plan.

“If the plan will be approved without sorting out the matter of the terms of service, and they will be ignored, the FTX bankruptcy will set a dangerous practical precedent for property and contractual rights,” Lidia says.

Meanwhile, Talal Tabbaa, chief executive of crypto trading platform CoinMena, says the FTX bankruptcy plan will “hopefully” allow users to recover some of their funds.

“I'd imagine that a good portion of the FTX payouts will find their way back into crypto. The secondary market for claims is trading at more than 110 per cent of their value, which is a positive sign, but bankruptcy processes can take time,” he adds.

Bhavik Mehta, deputy head of research for investment products at Dubai's Century Financial, says the FTX saga has shown that investors should not blindly follow the herd and invest money with any entity.

Investors’ thirst and greed for instant riches have exposed the risks and dangers of losing one's entire savings, he adds.

“The FTX debacle has thrown a bad spotlight on how ill-prepared and ill-informed the regulators are in managing and providing guidelines for this space,” Mr Mehta says.

“Even as the crypto industry is recovering from this debacle, the regulators need to show further urgency in classifying different projects in this space, while ensuring that investors don’t suffer from any strict and non-implementable legislation.”

As regulators in the US and EU have started to take this non-regulation threat more seriously, many firms with Ponzi-like operations could think twice before committing any major fraud, he believes.

Furthermore, many small-scale alt-coin set-ups could look to merge to create more economies of scale and better synergies for the market participants, he says.