Customers who rely on cryptocurrency giant FTX may be missing out

New York
CNN Business

As the dust settles from one of history’s most shocking financial meltdowns, one of the key unknowns is how much customers who couldn’t get their money can expect to get back from cryptocurrency exchange FTX, which filed for bankruptcy last week.

The answer, according to lawyers, may be zero.

Prior to launch, marketed itself as a safe place for beginners to trade cryptocurrency. But last week, a liquidity crunch forced FTX to halt withdrawals, leaving clients and investors in the dark. According to the Wall Street Journal, FTX allegedly used client funds to support its sister hedge fund’s high-risk trading operation without authorization.

On Friday, FTX and hedge fund Alameda Research filed for bankruptcy.

Federal prosecutors in New York are currently investigating the stock market crash, a person familiar with the matter told CNN. And authorities in the Bahamas, where FTX is based, opened criminal proceedings against the firm over the weekend.

The legal ramifications for FTX and its founder, Sam Bankman-Fried, are unclear. But as the once-worth more than $30 billion stock market collapses, it’s increasingly likely that customers who put their money into FTX could end up holding the bag.

“We just don’t know the extent of the contagion,” said Howard Fischer, a partner at the Moses Singer law firm and a former Securities and Exchange Commission attorney. “The first ring of victims are people who have assets in FTX… They probably won’t be liquidated or anywhere near it.”

There are several reasons for this.

In a traditional US bank failure, the government insures customers’ deposits and makes them whole up to $250,000. But in the largely unregulated world of cryptocurrencies, there is simply no mechanism to insure depositors.

In theory, FTX’s clients should receive the rest of the company’s assets at the end of the bankruptcy process. But for now, at least, it is not clear how much will be left to pay.

“As far as I know, they have two assets – the goodwill value of the stock and the value of the FTT coins,” said Eric Snyder, head of bankruptcy at law firm Wilk Auslander. (Goodwill value refers to intangible assets such as brand reputation and intellectual property. And FTT coins, the cryptotoken issued by FTX, have lost more than 90% of their value in the past week.)

In bankruptcies, Snyder explains, there’s a fairly simple formula for figuring out how much creditors — in this case, FTX depositors — will get.

“The numerator is the assets, the denominator is the liability. You divide one by the other and [result] it’s what everybody gets,” he said. “But if people pull out all the assets, then there won’t be much.”

He added: “It is very conceivable that the backlash will be minimal at best.”

Of course, the sudden collapse of the FTX makes it difficult to assess this early, lawyers say.

It typically took weeks for companies to prepare their bankruptcy filings, which explain, among other things, why the company is seeking Chapter 11 protection and what it aims to achieve in bankruptcy court.

Dan Besikoff, a partner at Loeb & Loeb, which specializes in bankruptcy, says it’s too early to tell if clients will get their money back.

“All you can really do is guess where things are from the tweets,” he said. “How customers get their money back can depend on many different things, including which institution they held the money with, how many coins they still have.”

The FTX crisis has shaken the entire cryptocurrency industry, raising serious questions about the future of digital assets and the lack of global regulation.

On Monday, Changpeng Zhao, CEO of FTX rival Binance, tried to convince his audience of the legitimacy of the sector.

“Obviously, people are upset,” Zhao, known as CZ, said during a question-and-answer session. on Twitter. “I mean, short-term, painful. But I think it’s really good for the industry in the long run.

The giant cryptocurrency exchange briefly appeared as a lifeline for FTX before reversing course last week.

Zhao, whose tweet announcing Binance’s exit from FTX helped fuel the small firm’s liquidity crisis, denied having a “master plan” to expose FTX. Still, critics point out that the biggest and perhaps only winner of FTX’s collapse is none other than Zhao, arguably the richest and most influential player in digital asset trading.

“Even though some people accused me of being seditious or blowing bubbles, I’m sorry for that… I’m sorry for any confusion I may have caused. But I think that if there is any problem, the sooner we find out, the better.”

—CNN Business’ Matt Egan and Kara Scannell contributed to this article.

Correction: An earlier version of this article misstated the name of the law firm Loeb & Loeb.

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