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FTX is on track to repay its customers up to two-fifths more than the initial value of their claims as administrators for the collapsed exchange capitalise on surging prices of cryptocurrency and artificial intelligence assets.
Customers are likely to be repaid as much as 120-140 per cent of what their assets were worth on the day of FTX’s bankruptcy, according to two people with knowledge of the restructuring negotiations, owing to the rising value of assets such as bitcoin and its stake in AI start-up Anthropic.
The repayments to more than 100,000 creditors have become a critical plank for lawyers defending former FTX chief executive Sam Bankman-Fried ahead of his sentencing in the US this week.
The 32-year-old was found guilty of seven counts of fraud and money laundering last year related to the failure of FTX in November 2022, after an $8bn hole was uncovered in its balance sheet.
His lawyers have argued their client should serve a sentence of no more than six and a half years in total, in part because FTX’s customers would be repaid in full through the bankruptcy proceedings. Prosecutors are seeking a 40- to 50-year sentence.
Negotiators are exploring a little-used US legal mechanism called post-petition interest, which entitles lenders in rare cases to receive extra payment for the potential investment gains they lost and for other related losses, people told Banking Risk and Regulation, a service from the Financial Times.
Last week John Ray, the caretaker chief executive of FTX, told a US judge that the exchange “will return substantial value to creditors”, but strongly criticised the argument by Bankman-Fried’s legal team that customers would be paid in full. FTX did not comment.
FTX creditors will be paid out based on the dollar value of their deposits at the time of bankruptcy but many of the assets have quadrupled in value or more since FTX’s bankruptcy. The extra payment customers could receive remains far less than the gains they would probably have made from the return of their assets.
Bitcoin was worth about $16,000 at the time of FTX’s collapse and is trading at about $70,000. The administrators have agreed to sell about two-thirds of the 8 per cent stake in Anthropic for about $884mn to a group of 22 investors, including ATIC and Jane Street, according to filings on Friday. FTX spent $500mn on the stake.
After FTX’s collapse some customers sold their claims to investors who held out for a future payout. Claims worth more than $1mn traded at 10 cents on the dollar in November 2022 but now trade at about 90 cents on the dollar. Bankruptcy claims broker Cherokee Acquisition says FTX’s creditors have sold more than $425mn of their claims via its platform.
Some FTX customers have contrasted their payout in dollars with the case of failed lender Genesis, where customers have been promised the return of their digital assets. However, the majority of FTX claims have been made in dollars.
The extra repayment hinges on whether the Internal Revenue Service, the US’s tax agency, agrees to subordinate its own claim for unpaid tax, which would have seen the IRS’s claim prioritised ahead of FTX customers. The IRS alleges the crypto group owes $24bn in unpaid taxes.
One person with knowledge of the negotiations said that the parties discussing the payouts are operating under the assumption that the IRS will do so. The IRS declined to comment.
But the 140 per cent payout may surpass even that figure if a new legal argument in play is received well, the person said. They added that the Commodity Futures Trading Commission, which has its own fraud claim against FTX, could be convinced to pass on any amount it manages to recover via its own $8bn claim to customers — potentially bringing the amount doled out to creditors above even 140 per cent. The CFTC said it was unable to comment.
Ellesheva Kissin is a reporter at Banking Risk and Regulation, a service from the Financial Times
