A group of FTX customers will try to secure quicker repayment for people who have money trapped with the defunct exchange by convincing a US court that clients’ cryptoassets remain their property.
Lawyers representing a group of FTX clients who had a total of $1.6bn stuck on the exchange when it collapsed last month say they plan to argue that those funds are held by FTX as “custody” assets, meaning they should be paid back swiftly rather than rolled into the sprawling bankruptcy proceedings for Sam Bankman-Fried’s crypto empire.
The status of customer deposits has emerged as a key legal question in the spate of bankruptcies of cryptocurrency firms this year, including the collapse of lenders Celsius Network and Voyager Digital. Clients face being lumped into the category of “general unsecured creditors”, which means they would probably have a long wait to recover money and might receive as little as pennies for each dollar they owe.
FTX faces as many as 1mn creditors in Chapter 11 bankruptcy proceedings in Delaware, including customers, suppliers and lenders, who will have to vie with each other for priority to receive payment out of the company’s remaining assets. The action by FTX clients is intended to avoid customers being last in line for refund.
“If the assets belong to the customer, there is no line. It’s just their assets,” said Erin Broderick, counsel to law firm Eversheds Sutherland, which is representing the group of FTX clients.
FTX, founded by Bankman-Fried, frozen customer withdrawals in November after a wave of clients rushed for the exits. Broderick argues that the collapsed exchange’s terms of service support clients having “ownership rights” over the funds left in their accounts. She said the firm planned to make a request to the court early in the new year at the latest to recognize the customers’ status.
FTX did not respond to a request for comment.
Earlier this month, a judge overseeing the US bankruptcy of collapsed crypto lender Celsius ordered that a small number of clients should be paid back assets that were never mingled with other cash at the company. The judge in the case is still weighing the difficult question of how to treat other customers’ funds.
Celsius has asked the court to treat client funds that were held in custody as being owned by the customers, while viewing assets pledged to receive high interest payments in the lender’s “earn” program as the property of the company.
Lender BlockFi on Monday asked a US court to allow it to reopen client withdrawals of some cryptoassets, which would allow “clients to access digital assets that are owned by them and were held in their Wallet Accounts on BlockFi’s platform,” the company said in a statement. file.
The road to recovery for FTX customers is further complicated by allegations that up to $10bn of the roughly $16bn that the exchange held was loaned or transferred to Alameda Research, a private trading firm also owned by Bankman-Fried.
The 30-year-old former billionaire has been denied intentional wrongdoing. He was arrested in the Bahamas last week after US federal prosecutors charged him with fraud.
Eversheds Sutherland will argue that if some client assets are no longer available to be paid back, customers should still receive priority compared to other groups of creditors.
“We think it is pretty clear that in the terms of service that the customers hold title to their assets,” said Sarah Paul, a partner and co-global head of corporate crime and investigations at the law firm. “I view it as one of the first issues that has to be addressed.”