The original article “FTX Found the Money ” was translated by Odaily Planet Daily jk.
Matt Levine is a Bloomberg Opinion columnist covering finance. He was previously an editor at Dealbreaker, worked in Goldman Sachs’ investment banking division, was an MA lawyer at Wachtell, Lipton, Rosen Katz, and served as an associate judge on the U.S. Court of Appeals for the Third Circuit.
The situation today is that FTX is… insolvent but still solvent? This is shocking:
Cryptocurrency exchange FTX has amassed billions more in customer funds than it lost in its November 2022 collapse, allowing customers to be fully compensated plus interest, a highly rare outcome in U.S. bankruptcy proceedings.
Recommended reading: FTX submits revised restructuring plan: 98% of creditors are expected to receive 118% compensation for recognized claims
Junior creditors typically receive only a fraction of their holdings, but FTX has benefited from a strong rally in cryptocurrencies including Solana. The company has also sold off a number of other assets, including various ventures such as its stake in artificial intelligence company Anthropic.
“This is an incredible outcome in any bankruptcy case,” said John Ray, current FTX CEO, who took over the company as it collapsed.
Yesterday, Ray’s restructuring team filed its latest draft bankruptcy plan and disclosure statement, estimating that “customers and digital asset loan creditors will recover between 118% and 142% of the value of their claims as of the petition date.” An extremely simplified but intuitively useful summary of FTX would be:
When FTX went bankrupt in November 2022, customers on its platform had a total of about $8 billion in cash and cryptocurrencies. Meanwhile, its assets consisted primarily of a number of crypto tokens associated with FTX and Bankman-Fried that were very valuable just two weeks ago but have since plummeted in value. Selling all of these tokens would not recover enough funds to repay customers, who wanted their money back immediately.
Filing for bankruptcy prevents customers from getting their funds back immediately. That’s what bankruptcy is for. Pre-bankruptcy FTX was a cryptocurrency exchange that nominally allowed customers to withdraw funds on demand. Bankruptcy turned all customer demand deposits into long-term loans: you can’t take out your funds on demand, but have to wait for bankruptcy proceedings to play out. That process is still ongoing. So FTX had about a year and a half of access to customer funds without having to meet withdrawal demands.
Long-term money is more valuable than short-term money. For example: In November 2022, FTX held a lot of Solana tokens. Solana was trading at around $136 per token in April 2022, but by mid-November, the price was around $12 per token. These Solana tokens are no longer enough to pay off all of your customers, especially if you had to sell them all at once. But if you wait until March 2024, the price of Solana reaches $200.
FTX did wait, perhaps in part for strategic reasons but also because bankruptcy is slow to begin with. A new management team that wasn’t particularly good at crypto took over FTX. They conducted a lengthy investigation to get a handle on the company and find all of FTX’s tokens. It eventually decided to sell the tokens, but needed court approval to do so. It didn’t get that approval until September 2023, 10 months after the bankruptcy filing. It then hired an investment manager to “sell, hedge, and pledge” its crypto tokens. The strategy worked well: As of March 31, FTX had raised about $5 billion from selling tokens, and it expected to raise another $4.4 billion in the coming months. By freezing everything — assets, liabilities — for about a year, FTX secured more money for its crypto tokens than it would have if it had to sell them off in November 2022 to meet customer withdrawals.
That’s not the whole story: FTX also recovered funds by selling businesses, selling parts of its venture portfolio, seizing real estate and Robinhood Markets Inc. stock purchased by SBF and others, and clawing back donations and investments. But the basic form of “FTX made long-term investments with customer funds that were foolish, those investments lost value, customers demanded their funds back, so FTX declared bankruptcy and went into a year-long hibernation before those investments earned enough returns to repay customers” looks largely correct.
Indeed, the situation at FTX is a challenge for customers: funds they thought they could withdraw at any time may actually be locked up for two or three years. FTX is sympathetic to this complaint and wants to pay interest to customers. The interest rate is set at 9%, which is roughly how to come up with a recovery rate of 118% or 127%, which is the result of a two- to three-year bankruptcy process. Normally, bankruptcy does not work like this, but FTX is well-funded. From the disclosure statement:
The Debtors are not solvent, and bankruptcy laws generally prevent the payment of post-petition interest to customers and other unsecured creditors. However, the Debtors recognize that these Chapter 11 cases have deprived creditors of funds since November 2022, and that this situation will continue until distributions are paid. In effect, all of the Debtors customers and creditors were forced to provide loans to the Debtors during these Chapter 11 cases and, in the Joint Boards opinion, deserve a fair rate of return.
This is a positive step. If no interest is paid, where does the money go? The obvious answer is “if there is any money left after all claims in bankruptcy are paid, it goes to shareholders”, but after everything that has happened, it would seem a little weird for FTX shareholders (whose largest shareholder is probably still SBF) to get any return of funds.
The situation here is not the problem: in addition to customer claims, there are billions of dollars in somewhat nebulous tax and penalty claims from the Internal Revenue Service and the Commodity Futures Trading Commission. They are actually the residual claimants here: if there are any funds left after paying off customers, the US government will find a way to get them. FTX contacted the government and politely asked if it could also pay customers with interest, and the government agreed.
Also, in terms of cryptocurrency exchanges, its been really tough on customers. If you had $100 in your FTX account in November 2022, your money was locked up for two to three years, but you would have gotten about $118 in the end, which is some return. But if you had 10 Solana tokens in your account when FTX filed for bankruptcy, they were worth about $143 at the time, and you would have gotten about $170. Meanwhile, 10 Solana tokens are worth about $1,480 today. If you had one Bitcoin in FTX, you would have gotten about $19,600; and one Bitcoin is now worth more than $62,000. The way FTX got enough funds to repay its customers was in part by freezing its liabilities while letting its assets appreciate at the low point of the crypto market on November 14, 2022. After the crypto market recovered, the assets rose in value, while the liabilities remained frozen.
I’m not sure how big of a problem this is; SBF lists about $8.9 billion in liabilities in FTX’s last accounting, of which about $6 billion is denominated in dollars, euros, or USDT (the USD Tether stablecoin), which will indeed earn returns above 118 cents. But there are at least $2 billion in Ethereum and Bitcoin liabilities that will earn returns far below that when denominated in those currencies.
This is exactly how bankruptcy works; from the disclosure statement:
The Plan allocates value among creditors in accordance with the relative value of their claims as of the petition date, as required by the Bankruptcy Code. Allocating among creditors in this manner is not a discretionary exercise of the debtor but a cornerstone of bankruptcy law, as recognized by the Bankruptcy Court and the Supreme Court of the Bahamas, as well as by the Ad Hoc Committee, the Official Committee, and the Bahamas JOLs. In the factual context of the FTX case, no other way to share the recovered investment would be equitable.
While some creditors may disagree, it’s really hard to come up with an alternative system. FTX doesn’t happen to own enough Solana/Bitcoin/other assets to pay off all Solana/Bitcoin/other claimants — that’s the whole point of bankruptcy! Therefore, selling all assets and distributing the proceeds in USD is probably the best course of action.
Indeed, it’s entirely possible that the opposite could have happened. In November 2022, as FTX collapsed, it felt like all crypto investments associated with FTX — and perhaps the entire crypto market — could go to zero. If you learned in November 2022 that your funds would be locked up at FTX for two to three years, and that getting any of your funds back depended on a rebound in crypto prices, you might have reasonably given up hope. Bloomberg noted that shortly after the bankruptcy, many of FTX’s “claims were trading for as little as three cents on the dollar.”
However, doesn’t this seem like a trade? For a crypto exchange to go bankrupt, (1) convert all your customer deposits into USD at that day’s price, and (2) give you a few years to pay them back. If you think that crypto prices are cyclical, very volatile, but generally go up over time, then this option seems very valuable. Crypto prices go down, you say “oops, we’re bankrupt,” you freeze your customers’ USD deposits, and then you have two years to see if prices recover. If prices recover, you sell your crypto, pay everyone back, and then keep the rest. This wasn’t an option for FTX, but it was a possibility in the Mt. Gox bankruptcy a decade ago. Eventually, someone will figure out how to do this. Not getting arrested is a big part of this trade, and so far no one has been able to do it.
Finally, what about Sam Bankman-Fried? He was sentenced to 25 years in prison for causing FTX customers to lose billions of dollars. He argued for a reduced sentence on the basis that he had not caused any losses, which was wrong both factually (Bitcoin customers lost funds) and legally (if you use customers’ money to buy yourself a house, and then the bankruptcy estate repossesses the house, you still can’t take the money). But more broadly, he argued from the moment FTX collapsed that FTX faced a liquidity problem rather than a solvency problem, and that there was enough money there to pay back all the customers if everyone had given him another week or two to fix the problem. They didn’t give him time. But John Ray had another 18 months to find the funds, and he did.
