FTX Trial: Major Developments Impacting Cryptocurrency Customers

Key Developments in the FTX Bankruptcy Case

A US judge has cleared the way for billions of dollars to be refunded to former customers of bankrupt crypto exchange FTX. At a court hearing in Wilmington, Delaware, on Monday, judge John Dorsey gave final approval to FTX’s reorganization plan, the terms of which had previously been put to creditors and voted through by a landslide.

“I think this is a model case for how to deal with a very complex Chapter 11 proceeding,” said Dorsey. “I applaud everyone involved in the negotiation process.” FTX filed for bankruptcy in November 2022 after running out of funds to process customer withdrawals. Billions of dollars’ worth of FTX customer deposits were missing. The money, a jury later found, had been swept into a sibling company and spent on high-risk trading, venture bets, debt repayments, personal loans, political donations, luxury real estate, and other illegitimate dealings.

Impact on Former Customers

In a significant development, FTX founder Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy, then sentenced to 25 years in prison. In September, coconspirator Caroline Ellison received a two-year prison term after testifying against Bankman-Fried at trial. The FTX bankruptcy plan, first proposed in May, charts a path to a full refund, plus interest, for former FTX customers—a level of recovery rarely seen in bankruptcies.

Under the plan, government bodies in the United States, including the Internal Revenue Service and the Commodities and Futures Trading Commission, have agreed to suspend high-value claims against FTX until creditors have been repaid. Even FTX equity holders stand to recover a portion of their initial investment—up to $230 million between them—paid for using funds recovered by the Department of Justice through the prosecution of FTX insiders.

Continued Controversy and Legal Objections

Despite the abnormally high expected recovery, some creditors believe they are still getting a raw deal by virtue of the way their claims have been valued. Many customers held crypto assets like bitcoin on the FTX platform, but their claims were assigned a dollar value based on the price of those assets on the date of the bankruptcy filing.

In August, several former FTX customers filed formal objections to the plan in bankruptcy court, raising concerns regarding legal immunity for administrators, potential taxable events for creditors, and other elements of the plan. Nonetheless, Judge Dorsey rejected the pending objections and cleared the way for FTX administrators to begin executing the plan. Logistical complications may delay repayments to creditors, expected to begin late this year at the earliest.

As the cryptocurrency market witnesses new highs, the handling of the FTX case becomes increasingly significant for the finance landscape. While concerns remain, the decisive court ruling marks a defining moment for recovering funds in cryptocurrency bankruptcy cases.