Two years after its dramatic collapse, FTX received court approval for its $16.5 billion bankruptcy liquidation plan, offering long-awaited relief to its thousands of creditors. The approval marks a significant step toward resolving one of the largest bankruptcies in cryptocurrency history. However, the repayment plan is not without its controversies. Many creditors argue that receiving a cash payout from FTX rather than cryptocurrency could result in hefty tax liabilities. As FTX prepares to return funds to 98% of its customers, questions linger about the structure of the repayments and their broader implications.
FTX’s collapse in 2022 sent shockwaves through the cryptocurrency market. One of the world’s largest crypto exchanges unraveled due to the mismanagement of funds by its founder, Sam Bankman-Fried. Following the exposure of its fraudulent operations and the ensuing bankruptcy, creditors were left in limbo. It remained uncertain when or if they would see their assets again. This uncertainty began to dissipate with a U.S. court’s recent approval of FTX’s liquidation plan. It sets in motion the process of repaying customers and creditors with the $16.5 billion in assets recovered thus far.
The Repayment Plan
Under the approved plan, FTX is set to repay 98% of its customers, particularly those with holdings under $50,000. These creditors should receive a minimum of 118% of the value held in their accounts as of November 2022. According to court documents, the first transfers will happen within 60 days of the plan’s official activation. This aspect of the plan found wide support, with over 94% of FTX Dotcom customers endorsing the proposed payout.
Cash vs. Crypto: The Controversy surrounding FTX payout
However, not all creditors are satisfied with the structure of the repayments. The plan’s stipulation that creditors will receive their payout in cash, based on the U.S. dollar value of their holdings at the time of the FTX bankruptcy filing, has sparked criticism. Some argue that repayments in cryptocurrency, rather than fiat currency, would be more appropriate given the nature of the assets involved. Additionally, many creditors are concerned about the potential tax consequences of receiving cash payments.
Sunil Kavuri, a representative for the largest creditor group, has been particularly vocal in his opposition to the planned FTX cash payout. Kavuri and other creditors argue that paying out in cash could subject recipients to significant tax burdens, depending on their jurisdictions. That would not necessarily occur if they received in-kind settlements in cryptocurrency. David Adler, a lawyer representing other creditors, echoed these concerns. He pointed out that the tax implications could significantly reduce the actual value of the repayments.
FTX’s Response
FTX, led by CEO John Ray, has defended the cash repayment structure. They argue that the complexity of the bankruptcy case necessitates a uniform approach. Liquidators have sold off substantial crypto holdings, including $3.5 billion in assets, to raise cash for the repayments. Moreover, FTX has argued that the distribution of funds in cash provides greater clarity and certainty, especially in light of the volatility in the cryptocurrency market.
To maximize recovery, FTX has also recalled donations made by Sam Bankman-Fried and liquidated investments, including a stake in the AI company Anthropic. These efforts have been key to building the $16.5 billion fund to repay creditors.
Legal Battles and Future Implications
While the court’s approval of the liquidation plan is a significant milestone, several legal challenges remain. Creditors who oppose the plan’s structure are likely to continue pushing for in-kind repayments, which could delay the process further. Additionally, there are ongoing talks with U.S. regulators over approximately $1 billion in assets. Authorities seized these assets during the investigation into FTX’s fraudulent activities.
The debate surrounding FTX’s future is another lingering issue. Some creditors have expressed interest in reviving the exchange through a relaunch (commonly referred to as FTX 2.0). Others, however, remain staunchly opposed, citing the damaged reputation of the brand and the potential risks of restarting the platform. Notably, Kraken co-founder Jesse Powell has publicly opposed relaunch efforts, arguing that it would be detrimental to the industry.
>>> Read more: FTX Creditors Outraged by Post-Vote Changes
As FTX moves toward repaying its creditors, the case highlights the challenges of resolving large-scale crypto bankruptcies in a rapidly evolving regulatory landscape. While the liquidation plan offers hope to those affected by the exchange’s collapse, the ongoing disputes over payment structure underscore the complexity of such cases. The FTX saga is far from over. With billions of dollars at stake and unresolved legal challenges, its outcome could set a precedent for future cryptocurrency bankruptcies.
Readers’ frequently asked questions
Why are some creditors pushing for FTX payout in cryptocurrency instead of cash?
Creditors who held cryptocurrency assets in their FTX accounts argue that receiving a cash payout instead of cryptocurrency could lead to significant tax consequences. Paying out assets in cash based on their value at the time of FTX’s bankruptcy could trigger capital gains taxes, depending on the laws in the jurisdiction where the creditor resides. Receiving payments in cryptocurrency, on the other hand, could mitigate or defer these tax liabilities, as the transaction would be classified differently for tax purposes. This is especially relevant for creditors in countries with higher capital gains tax rates. It could result in substantial reductions in the actual value of their recovery. FTX argues that cash payments provide more certainty and avoid the volatility of the crypto market. Creditors believe that in-kind repayments would offer a fairer resolution, preserving the original form of their assets.
What efforts did the FTX estate make to recover the $16.5 billion in assets for creditors?
To assemble the $16.5 billion recovery fund, FTX has undertaken several steps. One of the major initiatives was the sale of the company’s cryptocurrency assets. FTX liquidated $3.5 billion worth of crypto through an over-the-counter (OTC) sale, allowing it to convert its holdings into cash. Additionally, FTX unstaked other assets, such as Solana (SOL), and liquidated non-crypto investments like its stake in Anthropic, an artificial intelligence firm. On top of this, FTX pursued the recovery of donations and other funds disbursed during Sam Bankman-Fried’s leadership. These measures have been crucial in building the liquidity necessary to fund the creditor repayments. FTX has also benefited from the expertise of its reorganization team. It rebuilt the company’s financial records from scratch to identify and reclaim available assets
Is there any chance of FTX relaunching, and what are the arguments for and against it?
There has been talk about reviving FTX, with some creditors showing interest in a potential relaunch, often referred to as FTX 2.0. Proponents believe restarting the exchange could bring additional value to creditors by turning FTX into a functional platform once again, potentially recapturing some of its lost market share. However, others, including industry figures like Kraken co-founder Jesse Powell, are firmly against this idea. The opposition argues that the scandal surrounding its collapse irreparably damaged the FTX brand, and any attempt to relaunch the platform could do more harm than good. Critics fear that the revived exchange would face regulatory hurdles and a significant loss of customer trust, making it highly unlikely to succeed. So far, no definitive decision has been made, and discussions about the future of the exchange are ongoing.
What Is In It For You? Action Items You Might Want to Consider
Evaluate Tax Implications of Cash Payouts
If you’re a creditor or have assets stuck in FTX, it’s important to consult a tax advisor about the potential consequences of receiving your payout in cash rather than cryptocurrency. Depending on your location, these cash payments could trigger capital gains taxes that reduce the overall value of your recovery. Stay informed about your options and consider how this might affect your broader portfolio before accepting any payments.
Monitor FTX’s Payment Schedule
FTX should begin repaying 98% of customers within 60 days of the bankruptcy plan’s official activation. As a trader, keeping an eye on the timeline is crucial, especially if you are expecting repayments. This will help you plan liquidity needs or reinvest the funds efficiently when they arrive. Stay tuned for updates from the bankruptcy court and FTX’s official communications to avoid missing important deadlines.
Prepare for Market Impact on Crypto Prices
FTX has liquidated a significant amount of crypto assets to fund its repayment plan, with billions in holdings like Solana (SOL) sold off. While the market absorbed much of this already, further sales or any potential market-moving news – such as an FTX relaunch -could impact crypto prices. If you’re actively trading, especially in the assets that FTX has sold, be ready to adjust your positions based on market movements and potential volatility tied to these developments.
