Debtors of the now-defunct cryptocurrency exchange FTX have submitted an amended Chapter 11 of its reorganization plan, proposing a retroactive valuation of customer asset claims to the date of the exchange's November 2022 collapse.
In a recent submission to the U.S. Bankruptcy Court for the District of Delaware, the debtors suggested that compensation for customer claims against the exchange should reflect the assets' value as of November 11, 2022. Each claim's value will be determined by converting crypto assets into cash using the specified conversion rates outlined in a table.
The problem is that crypto prices have surged after its bankruptcy filing. At the time of filing, Bitcoin (BTC) was valued at $17,036. However, as of now, its price sits at $42,272. The global cryptocurrency market capitalization has also escalated from $856 billion to $1.6 trillion.
Even the exchange's native token has rallied during this period. The approval of the reorganization plan and its valuation method could mean creditors face potential losses and miss out on potential gains.
On 12/16/23, the FTX Debtors filed a revised Plan of Reorganization and accompanying Disclosure Statement, based on the agreement in principle reached between the Debtors, Official Committee and other creditor stakeholders on 10/16/23, in the Plan Support Agreement [DI 3291].
— Official Committee of Unsecured Creditors of FTX (@FTX_Committee) December 16, 2023
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According to Sunil Kavuri, a prominent critic and investor, the plan contradicts FTX's initial Terms of Service. The terms highlighted that FTX customers owned the titles to digital assets, not the exchange, especially as its former CEO and Founder, Sam Bankman-Fried, was convicted.
Recently, FTX debtors also expressed worries about the Internal Revenue Service (IRS) asserting a $24 billion tax claim, cautioning that it might hinder the reimbursement of customer funds. They argued that their earnings were far from the IRS claim and incurring significant losses instead.
"The only source of recovery for the IRS is by taking recoveries away from victims," lawyers representing the bankrupt exchange said. "As there is no basis to assert any tax claim against the Debtors, the IRS's reliance on its own processes only serves to delay distributions to those truly injured."
There has been increased scrutiny towards crypto asset activities related to both FTX and Alameda Research lately. Reports on December 9 disclosed that wallets affiliated with these defunct entities moved digital assets valued at $23.59 million to various cryptocurrency exchanges.
Returning customer funds
Joseph Moldovan, head of business solutions, restructuring, and governance practices at Morrison Cohen, a New York law firm, believes that the FTX bankruptcy is complex.
"What's most unusual about the FTX bankruptcy is that the debtors are complex entities with significant amounts of debt," Cohen said in a conversation with Coin Telegraph.
On November 30, FTX received approval to sell around $873 million worth of trust assets, aiming to use the proceeds to settle the debts owed by the defunct exchange.
Over a week later, on December 7, the FTX 2.0 Customer Ad Hoc Committee proposed adjustments to Chapter 11 of the reorganization plan. Their revisions aim to balance stakeholder interests, according to the Committee of Unsecured Creditors' assessment.
Next year, the completed plan, with modifications, will be submitted to creditors for voting before reaching U.S. Bankruptcy Judge John Dorsey for final approval. The proposed payout scheme includes the distribution of billions of dollars in cash after liquidating a significant portion of the company's cryptocurrencies.
Last month, a jury deemed Bankman-Fried guilty of defrauding customers and lenders. He now awaits sentencing on March 28, 2024, with legal estimates placing his potential prison term at 15-20 years.
Meanwhile, legal experts suggest that Caroline Ellison, CEO of Alameda Research, along with Gary Wang, co-founder of FTX, and Nishad Singh, FTX engineering chief, may receive minimal or no prison sentences due to their cooperation in the investigation.
Each confessed to engaging in fraudulent actions under Bankman-Fried, which entailed transferring billions of dollars in FTX customer funds to Alameda, a hedge fund predominantly owned by Bankman-Fried.
Nevertheless, they might encounter additional repercussions, including the potential return of unlawfully obtained profits and mandates for restitution payments to affected individuals.