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FTX bankruptcy: Why is the case so complex?


 On November 11, FTX and its ecosystem of 130 entities filed for US bankruptcy. But the complexity of the ecosystem created around the exchange could greatly lengthen the processing of the file. Creditors, investors and legal experts are now questioning the handling of the FTX bankruptcy. Will debts be honored? And if so, when?

FTX bankruptcy: Why is the case so complex?

The most complex bankruptcy in the history of the United States?

FTX bankruptcy: Why is the case so complex? This opinion is that of Caitlin Long, the founder of Custodia Bank. The digital asset specialist believes that the FTX bankruptcy case is highly complex. And that the collapse of the exchange could be the most complex bankruptcy in history in the country of Uncle Sam.

This complexity can be explained by several elements:

  • The number of entities involved in the bankruptcy procedure
  • The strong internationalization of FTX which was based in the Bahamas
  • The fact that bankruptcy directly involves more than a million creditors

This is also the opinion of crypto journalist Laura Shin. An opinion that she detailed in her Unchained podcast during a discussion with Thomas Braziel, the founder and current CEO of 507 Capital and with a lawyer specializing in business insolvency issues. During this discussion, the reporter speculated that reimbursing stakeholders could take up to 10 years. 

Bankruptcy FTX: How to manage novelty?

As we have seen, many factors make the FTX case more complex. But one datum could make the case even more complex: the unknown . Never had the legislator had to manage a crypto bankruptcy of such magnitude. As Joseph Moldovan, head of the New York law firm Morrison Cohen, points out.

What is most unusual about the FTX bankruptcy is that the debtors are complex entities with large amounts of debt. Normally, there are months and months of preparation. Business bankruptcies are usually very granular processes, choreographed and developed before being filed. This is simply not the case with the FTX bankruptcy. We (the creditors and other interested parties) are still awaiting the most basic information regarding the 130 different entities that have filed their case.

Moldovan does not believe that the difficulty of the case is related to the amounts. And to support this argument, he puts forward two concrete cases: Lehmann Brothers and Enron . Two bankruptcies involving several billion dollars in assets and thousands of creditors.

The FTX setup makes creditors much harder to map. Especially since the exchange's bankruptcy case has still not given rise to what is called “ first day hearings ”. During these hearings, the main lawyer for the debtors presents to the public the reasons for filing the case (in bankruptcy). This first hearing very often makes it possible to give a guideline. For now, creditors are still waiting for a hearing of this type.

Will creditors be able to get their money back?

  • If it is still difficult to answer this question, it already calls for another. Assuming that this is possible, the question is to know when. On this point, Margaret Rosenfeld showers the hopes of the most optimistic. The corporate bankruptcy attorney recently said of FTX:
  • It will be years before any creditor of FTX receives a penny in return. This includes FTX's customers and other parties to whom FTX may have owed money.
  • Statements confirmed by Joseph Moldovan who specifies that the reimbursement is more often counted in years than in weeks or months. A recovery procedure made long by the rules put in place. During a bankruptcy in the United States, creditors can make their fate known before a fixed date. Once the date is determined, each claim is handled on a case-by-case basis. It is then a question of comparing the amounts of the debts with the registers of the failing company. On this point, the volume of creditors, estimated at around 1 million, could therefore significantly lengthen the processing time. Especially since no reimbursement can take place before all the receivables have been analysed.
  • In the case of FTX, which held a large part of its reserves in the form of FTT, the announcement of bankruptcy had a direct impact on the price of the token. Making the pie much smaller for creditors. The processing time for the entire file will also require the payment of stakeholders such as lawyers, accountants or advisers, which also risks reducing the payments.

Are pre-bankruptcy platform withdrawals at risk?

Those who managed to withdraw their funds shortly before the announcement of the platform's bankruptcy are not off the hook. This is what Joseph Moldovan once again clarifies. The lawyer specifies that the payments of these funds can be suspended by a competent court:

US bankruptcy rules say the money can be recovered by the court, so don't assume the money is yours. If a creditor was paid 90 days before the bankruptcy, a court can ask for that money to be refunded.

Since the resignation of Sam Bankman-Fried, this procedure will be managed at FTX by John Ray, the new CEO of the structure.

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