FTX’s Collapse in 2022 Results in Full Recoveries for Customers, Thanks to Crypto Rally

Cryptocurrency exchange FTX has achieved a remarkable outcome in its recent bankruptcy proceedings, providing a rare full recovery, plus interest, for its customers. This stands in stark contrast to the usual outcome for lower-ranking creditors, who typically receive only a fraction of their holdings in similar situations. FTX’s success can be attributed to a strong rally in cryptocurrencies, particularly Solana, as well as the sale of various assets, including a stake in the artificial intelligence company Anthropic.

FTX’s Chief Executive Officer, John Ray, expressed his astonishment at the result, calling it an “unbelievable result” in any bankruptcy scenario. After selling all its assets, FTX is expected to have approximately $16.3 billion in cash, while owing around $11 billion to customers and other non-governmental creditors.

In recent times, there have been only a few cases where creditors received their full amount in large corporate US bankruptcies. These include Hertz, which exited bankruptcy with leftover funds to repay shareholders, and American Airlines Group Inc.’s parent company, which repaid unsecured creditors in full and distributed funds to shareholders upon exiting bankruptcy.

FTX’s collapse drew comparisons to infamous fraud cases like Enron Corp. and Bernie Madoff’s Ponzi scheme. However, the latest figures reveal a surprising turnaround for the company, which had approximately $6.4 billion in cash earlier this year.

While all debts will be repaid in full, there will be no remaining funds for equity holders, as per court documents. Notable equity holders in FTX include Sequoia Capital, Thoma Bravo, Temasek Holdings Pte, the Ontario Teachers Pension Plan, as well as individuals like Tom Brady and Gisele Bündchen.

To further boost recoveries, FTX’s restructuring advisers have suggested establishing a fund to pay select creditors, including those who lent FTX cryptocurrency. They have also been actively tracking down the company’s scattered assets worldwide.

The remarkable resurgence of the crypto market, with Bitcoin quadrupling in value since late 2022, has significantly contributed to the size of these recoveries. Depending on the type of claim held, some creditors may receive as much as 142% of their owed amount, while the majority of customers are likely to recover 118% of their FTX platform holdings on the day the company entered bankruptcy.

The increasing value of these claims has led to discontent among some creditors who argue that they are being shortchanged, despite the overall recovery exceeding the value of their claims. For instance, one UK-based creditor pointed out that they are only receiving 25% of their Bitcoin back, spread across several years.

As FTX progresses through the final stages of its bankruptcy case, payouts are expected to take several months. Meanwhile, the price of creditor claims has risen, with some now trading at over 100% of their face value, a substantial increase from the initial post-bankruptcy value of three cents on the dollar.

This growing value of claims is not only a testament to FTX’s successful recovery but also reflects the crypto market’s resurgence. Bitcoin’s rally from around $16,000 to over $62,000 since FTX’s bankruptcy adds weight to these claims.

Looking ahead, this case raises important implications for the industry. It highlights the potential for full recoveries in bankruptcy proceedings, especially in the crypto sector. While FTX’s success is indeed exceptional, it sets a precedent for future cases, where creditors can hope for better outcomes.

Considering the volatile nature of cryptocurrencies, it is crucial for investors and creditors to stay informed and cautious. This includes conducting thorough due diligence, understanding the risks, and diversifying their investments. Moreover, regulatory oversight and transparency within the crypto industry are becoming increasingly important to protect investors and prevent potential fraud.

In conclusion, FTX’s extraordinary recovery in bankruptcy proceedings serves as an encouraging development for creditors and investors in the crypto space. While caution is still warranted, this outcome reinforces the potential for improved recoveries in future cases. As the crypto industry continues to evolve, it is vital for all stakeholders to prioritize transparency and adherence to best practices, ensuring a more secure and reliable environment for all participants.