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FTX: Customers who trusted the crypto giant may be left with nothing

New York
CNN Business

As the dust settles from one of the most shocking financial implosions in history, one of the key unknowns is how much customers who don’t have access to their money expect to get back from FTX, the crypto exchange that filed for bankruptcy last week.

The answer, according to legal experts, could be zero.

Before the dissolution, marketed itself as a safe destination for beginners to buy and sell cryptocurrencies. But a liquidity crisis last week forced FTX to halt withdrawals, leaving customers and investors in limbo. FTX allegedly used client funds to support its sister hedge fund’s high-risk trading without permission, according to the Wall Street Journal.

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

Federal prosecutors in New York are now investigating the stock exchange’s collapse, a person familiar with the matter told CNN. And the authorities in the Bahamas, where FTX is based, launched a criminal investigation into the firm over the weekend.

The legal ramifications for FTX and its founder, Sam Bankman-Fried, remain unclear. But as the stock market, once valued at more than $30 billion, collapses, it looks increasingly likely that customers who handed over their money to FTX could be left in the bag.

“We just don’t know the extent of 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 the people who had assets held in FTX … They’re probably not going to be made whole, or close to it.”

There are a few reasons for this.

In a traditional US bank failure, the government insures customer deposits, making them whole up to $250,000. But there is simply no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies.

In theory, FTX’s customers should get a cut of what is left of the company’s assets at the end of the bankruptcy process. But for now, it is at least not clear how much remains to be paid out.

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

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

“The numerator is the assets, the denominator is the liability. You share one in the other, and [result] is what everyone gets, he said. “But if people pull out all the assets, then it won’t count much.”

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

Of course, the suddenness of FTX’s fall makes it a difficult case to assess this early, lawyers say.

Normally, companies will have weeks to prepare bankruptcy documents that reveal, among other things, an explanation of why the company sought Chapter 11 protection and what it aims to achieve in bankruptcy court.

Dan Besikof, a partner at Loeb & Loeb who specializes in bankruptcies, says it’s too early to say whether customers will get their money back.

“All you can really do is guess from tweets where things are,” he said. “And how customers get their money back can depend on a lot of different things, including what device they’re holding the money through, how much of the coins are still left.”

The FTX fallout has rattled the entire crypto industry, raising serious questions about the future of digital assets and the lack of global regulation.

On Monday, Changpeng Zhao, CEO of FTX competitor Binance, sought to reassure his audience of the sector’s legitimacy.

“It’s obvious that people are nervous,” Zhao, widely known as CZ, said in a question-and-answer session on Twitter. “I would say that in the short term it’s painful. But I think this is actually good for the industry in the long term.”

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

Zhao, whose tweet announcing Binance’s divestment in FTX helped fuel the smaller firm’s liquidity crisis, has denied having a “master plan” to expose FTX. Still, critics note that the biggest, and perhaps only, winner in the downfall of FTX is none other than Zhao, now arguably the richest and most influential player in digital asset trading.

“As much as some people blame me for whistleblowing or popping the bubble, I’m sorry for that … I’m sorry for any upset I’ve caused. But I think anytime, if there’s a problem, the sooner we disclose it, 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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