What to do to clients of bankrupt exchanges and how to get their money back

What to do to clients of bankrupt exchanges and how to get their money back

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What to do to clients of bankrupt exchanges and how to get their money back

The collapse of crypto exchange FTX resulted in losses for more than a million investors. It has more than $10 billion in liabilities and an estimated $900 million in liquid assets and $8.5 billion in less liquid assets, including various cryptocurrencies, but rates have fallen since Sam Bankman-Fried, then head of FTX, told investors those numbers.

The procedure for repayment of creditors' funds
The law of any state has provisions for bankruptcy of a legal person and the order of creditors in this procedure, reminded the head of corporate law and fintech practice of law firm DRC.

By filing a claim against the debtor within the prescribed period of time the creditor gets some chances to get his funds back, the lawyer explains. He says that the sooner the claim is filed, the higher the chances are.

In practice, the likelihood of the return of funds will depend on the number of creditors, the amount of their claims and the amount of assets remaining with the cryptocurrency exchange. According to the expert, the bigger the "hole" in the capital of the exchange, the lower the chances to get the money back.

The procedure itself depends on the bankruptcy law in the jurisdiction in which the case is considered. For example, FTX group has more than 100 subsidiaries registered in different countries but the case was filed in the United States where the laws of some states may differ significantly from the laws of other states.

FTX managers have already begun to establish creditor lists. The usual practice is to set up a bankruptcy committee, appoint a bankruptcy trustee and develop a reorganization plan after that. But the new exchange team is still working to make sense of the accounts of the FTX group and is bringing in outside lawyers and experts to do so.

For creditors, the procedure consists of filing claims for refunds to all necessary addressees and participating in a meeting of creditors. The addressees of the claims can be the debtor, the interim manager and the court.

The timing of refunds also varies from jurisdiction to jurisdiction, the lawyer explained. In the U.S., he said, creditors usually receive their money within 6-8 weeks from the date the receiver gives notice and accounting.

The likelihood of a refund to FTX clients
Creditors will not be able to fully recover their money, says the managing partner of GMT Legal. The fact is, explained the lawyer that FTX did not just act as an intermediary between buyers and sellers of assets and took a commission for their services, she also actively used customer funds for other purposes. For example, it loaned money to Sam Bankman-Frieda's company Alameda against FTT's own tokens, the lawyer said.

However, lenders will likely be able to get some of their funds back, Tugarin said. He pointed out that the company's new CEO, John Ray III, a lawyer previously hired by oil company Enron during the scandalous bankruptcy, claims FTX has "valuable assets."

FTX also filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the lawyer added. He explained that application of that chapter involves reorganizing the company to preserve the business. However, the lawyer noted that it is still difficult to say exactly how much of customers' lost money FTX assets will be able to cover after the restructuring.

What an FTX client needs to do to get its funds back
It makes sense for an FTX client to follow up on class action suits filed against the exchange in order to get his or her assets back. According to him, if there is such a lawsuit by exchange clients, you can join it and try to recover at least some of your funds.

In the event of a lawsuit, it may be necessary to prove ownership of assets on the FTX exchange, lawyers working with crypto investors from Taiwan suggest. To do so, they recommend not relying solely on screenshots of their accounts: the court may not accept them due to the high likelihood of forgery.

Instead, attorneys advise submitting a regular withdrawal request from the FTX platform and then saving the withdrawal request letter, which should arrive in an email as the withdrawal is discontinued. In addition, it is advisable to save emails about previous deposits and withdrawals.

FTX Group has filed for bankruptcy in Delaware Bankruptcy Court in the United States. Under U.S. law, citizens of other countries are not prohibited from participating in class action suits in the U.S.


The lawyer clarified that the procedure for returning the crypto-assets after the hacking consists of several steps: filing a complaint to law enforcement agencies, search for crypto-assets, blocking them by the decision of the authorized body, the completion of the criminal investigation and the return of funds. If necessary, a civil lawsuit can also be filed for the return of funds and compensation for losses and damages, the expert added.

17.11.22 by Robert Strickland

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