FTX creditors discuss plans and lessons learned as repayments begin
The start of FTX’s payments to creditors on February 18 marks the beginning of the end of a saga that once shook the cryptocurrency community to its core. Creditors were among those who felt the brunt of the platform’s collapse, some of whom saw their life savings, earmarked for home purchases and children’s education, vanish overnight as the cryptocurrency empire collapsed.
The nightmare for some of these creditors will come with the start of the payments. Those who lost up to $50,000, also known as the “convenience class,” are expected to receive 100% of their claim amount plus 9% annual interest, based on the value of their holdings on November 11, 2022, the day the cryptocurrency exchange platform declared bankruptcy.
The damage, however, goes beyond a reimbursement for financial losses. “Our lifetime savings were stolen overnight. [...] We had set aside [funds] to buy houses, for children's education. Many were depressed, suicidal, and had panic attacks. [...] I heard of at least three suicides,” said Sunil Kavuri, one of the exchange creditors, to Cointelegraph. “Many FTX creditors were left with large debts, taking out loans to cover living costs.”
Kavuri is one of many FTX customers who, amid the damage, came together to support each other and help other victims through the complex bankruptcy process.
“I experienced similar mental difficulties, but after a week, I felt I had to do something and reached out to FTX creditors and formed a community that I supported,” added Kavuri. “Others also joined, and we helped FTX creditors through the opaque bankruptcy process and supported each other mentally.”
Creditors seek liquidity, bankruptcy creates uncertainty
The collapse of FTX put centralized cryptocurrency exchanges under the microscope, prompting a more stringent regulatory landscape for cryptocurrency companies in the U.S. This change included the de-banking of crypto businesses, with federal agencies like the Securities and Exchange Commission pushing what became known colloquially as “Operation Chokepoint 2.0.”
As the industry struggled to survive under stricter regulatory control, many creditors found themselves in limbo. In search of liquidity, some decided to sell their claims in the past two years, with over 10,000 claims listed in the markets by the end of 2022.
“Approximately 50% of creditors have sold their claims. In addition to liquidity needs, many needed to close the ongoing torment of the bankruptcy process and be locked out of their funds,” said Kavuri.
Alongside liquidity issues, creditors faced significant uncertainty in the early months following the exchange's collapse. Once again, the community played a crucial role in supporting those struggling with legal proceedings and a lack of information.
“I have helped countless creditors of all sizes of claims (from less than $1,000 to tens of millions of dollars). That has been advising/guidance, explaining how everything works in bankruptcy, what things have been questionable,” said a member of the crypto community who goes by “Mr. Purple” on X to Cointelegraph. “I also know that the debtor's attorneys have done things in this case that are both contrary to the Bankruptcy Code and, in some respects, illegal in general.”
The challenges with FTX's equity and legal team marked another contentious chapter in this saga, leading to disputes over the millions in legal fees charged by law firms.
The law firm Sullivan & Cromwell, for example, obtained at least $215 million as counsel for the FTX debtors. The firm charged over $10 million a month until February 2024, subsequently reducing its fees to $7 million.
The way the reimbursement to creditors would be carried out was another hurdle, with heated debates over whether it should be in crypto tokens or fiat currency. Since November 2022, cryptocurrency prices have recovered, and the lost tokens would be worth much more at current prices.
To put this into perspective, the price of Bitcoin (BTC) was approximately $16,000 at the time of bankruptcy, but it is trading at over $95,000 at the time of writing.
Mr. Purple believes there are several lessons to be learned from the collapse of the exchange, including that self-preservation “is the only sure way to ensure that your property rights are respected.”
“CEX operational structures with hot wallets create a counterparty risk for you as an individual while [the exchanges] hold your funds,” he said.
For many creditors, FTX closed the door to cryptocurrency trading. “Many creditors intend to resume investment in digital assets, but there are many who will not for multiple reasons,” said Mr. Purple. “People have been without their funds for almost two and a half years, so some people need that liquidity. Others fear investing in crypto again given that their experience with bankruptcy has been traumatic, understandably.”
FTX founder Sam “SBF” Bankman-Fried was sentenced to 25 years in federal prison on March 28, 2024, for orchestrating multiple fraudulent schemes that defrauded customers and investors of his cryptocurrency exchange.
FTX reimbursements are planned to continue later in 2025 for creditors with claims over $50,000. Overall, FTX plans to distribute more than $17 billion in reimbursements, with exchanges Kraken and Bitgo assisting in the process.