FTX Customers Protest Bankruptcy Plan, Claiming Violation of Property Rights
Several FTX customers are expressing their opposition to the proposed bankruptcy plan put forth by the troubled exchange on December 16. They argue that the plan infringes upon their property rights by using their assets to pay off third-party creditors, including the United States government.
In an interview with Cointelegraph on June 19, a representative of the FTX customers stated their desire to have their cryptocurrency returned to them instead of receiving a cash balance. They emphasized that they never entrusted their coins to FTX. A previous report by the Los Angeles Times on May 9 had suggested that FTX customers would receive their money back, plus interest, if the bankruptcy plan was approved.
The objection to the plan is being raised by the FTX Customers Ad Hoc Committee, a group formed to advocate for the interests of FTX customers in the bankruptcy case.
One of the committee board members, Sunil Kavuri, argued that the bankruptcy plan violates the property rights of creditors. He pointed out that while the FTX case is often compared to that of Celsius, a crypto lending firm that went bankrupt, there is a key difference. Celsius customers had agreed to the terms of service, which involved transferring the title of their crypto to Celsius. In contrast, FTX customers never agreed to such terms, meaning the funds remain their property. Kavuri asserted, “We never gave our coins to FTX. If we don’t give the title of our coins to FTX, FTX is obligated to return those coins.”
Kavuri further claimed that FTX is attempting to sell customer assets to repay its unsecured creditors, which include the U.S. government. He questioned why victims should be responsible for paying fines imposed on FTX by the IRS and CFTC. He also alleged that FTX used customer funds to repay Alameda lenders such as Genesis and Binance, with Binance allegedly benefiting from around $1.2 billion in customer deposits that FTX used to pay for a stake in the company.
Kavuri’s perspective contradicts the view of the FTX estate, which reportedly stated that the bankruptcy plan would ensure customers receive everything they are owed. The Los Angeles Times report from May 9 claimed that nearly all FTX customers would receive their money back, plus interest, if the plan was approved. Customers owed less than $50,000 would receive approximately 118% of their claim.
Kavuri disputed this assertion, arguing that the exchange lacks a legal basis to repay customers using cash and must instead return their property, the cryptocurrency itself. He opposed the idea of selling the crypto at a profit and retaining some of the profits for FTX or third parties.
On June 5, Kavuri and other customers filed a motion to halt the bankruptcy plan from being put to a vote. The motion argues that the plan assumes customers’ cryptocurrency belongs to the FTX estate and fails to address whether the assets the debtors seek to distribute are actually the property of the debtors’ estates.
The motion requests the court to reject the plan’s disclosure statement on the grounds that it is legally unconfirmable. Rejection of the disclosure statement would mean rejection of the current version of the plan.
The FTX estate filed a proposed order to approve the disclosure statement for the bankruptcy plan on December 16, 2023. The plan itself was disclosed on May 7, and a hearing to approve the statement is scheduled for June 25.
If the plan proceeds, the deadline for voting in favor or against it is set for August 16 at 8:00 pm UTC, according to a revised version of the proposed order.
While some FTX customers support the bankruptcy plan, arguing that it will expedite the return of at least some of their funds, others maintain that their property cannot be returned. They contend that FTX did not possess the necessary resources to return crypto on a 1:1 basis, as there were not even 1% of BTC deposits available in BTC. These customers predict that the plan will be approved, as a majority of creditors are expected to vote in favor.
Apart from property rights, the FTX bankruptcy case involves additional disputes. In February, FTX customer Edwin Garrison filed a lawsuit against the exchange’s legal representatives, Sullivan & Cromwell, alleging that the law firm profited from the exchange’s fraudulent activities. An independent examiner concluded on May 24 that there was insufficient evidence to prove that the law firm had knowledge of the fraud. However, a second investigation into the law firm’s activities has been ordered.
The Customer Ad-Hoc Committee and the FTX estate are also embroiled in a dispute over assets seized by former CEO Sam Bankman-Fried during his criminal trial.
The collapse of FTX was one of the most significant failures in the history of crypto exchanges, resulting in an estimated loss of $8 billion in cryptocurrency when the exchange ceased processing withdrawals. Bankman-Fried was subsequently convicted of fraud and received a 25-year prison sentence for his involvement in the exchange’s bankruptcy.