FTX, the bankrupt cryptocurrency exchange, has received US Court approval to invest and sell down its crypto asset holdings. The "coin monetarization" strategy is intended to minimize risks related to price volatility, maximize sales value and increase cash distributions to creditors.
At a hearing on 13 September in the Bankruptcy Court in Delaware, Judge John Dorsey approved FTX's proposal allowing the company's bankruptcy advisors to sell up to $100 million in cryptocurrency per week (which can be increased to up to $200 million per week, subject to conditions) and enter into hedging and staking agreements that will allow FTX to minimize price volatility and earn passive income on some of the crypto assets like bitcoin and ether.
The Judge dismissed concerns raised about the monetarization plan including:
claims raised by two FTX customers who said the sales could cause crypto prices to crash and that FTX may not own all of the crypto assets that it holds;
claims previously raised by the Ad Hoc Committee of FTX's non-US customers in an adversary proceeding that the crypto assets are customer property, not property of FTX's estate; and
similar claims raised by some customers of FTX in a US class action.
Ultimately, FTX's Official Committee of Unsecured Creditors, the Ad Hoc Committee and the class action plaintiffs all supported the plan despite some reservations.
The bankruptcy advisors to FTX noted the plan will increase the "overall net benefit of the estate" and enable the dollarisation of claims in order to maximise distributions.
Further, FTX said that the parties advancing the trust claims have not provided any evidence to demonstrate their property interest in specific crypto assets held by FTX:
so absent a very specific assertion by customers, there is no way for us to trace individual cryptocurrency to individual customers. It's all part of one pool.
FTX emphasized that it is the claimant's burden to:
show an interest in property or to specify with particularity what property of ours is theirs actually...we don't see an allegation of specificity that we can respond to...
The Ad Hoc Committee's noted:
we don't necessarily agree with everything the debtor said about the traceability of property interest.
However, the Committee nevertheless supported the motion, due to the need to dollarize the assets and liquidate them in a market favourable way over an appropriate period, with the assistance and expertise of experts in the area.
In court filings, FTX said it was aware that its attempt to liquidate coins could move the crypto market. To mitigate this risk, the exchange has hired the US crypto firm Galaxy as an investment advisor to manage the risk of "information leakage" potentially triggering short-selling activities and causing abrupt crypto price declines. But keeping FTX's current crypto portfolio also carries risks, potentially locking FTX into holding certain assets as their prices drop.
FTX said in a document filed ahead of the hearing that its estate has recovered US$3.4 billion in so-called "Category A" crypto assets so far, including US$1.16 billion worth of Solana, US$560 million in bitcoin, and US$192 million in ether. Category A assets are tokens with a market capitalization of at least US$15 million and an average daily trading volume of at least US$1 million during the past 30 days. The exchange's top holdings of Category A assets are shown in the table at the beginning of this article.
Last month, FTX filed a draft plan of reorganization with the intention of seeking agreement on the plan by Q2 2024. The parties indicated at last week's hearing that they will strive to speed up that process. FTX Customers must file their claims in the Chapter 11 bankruptcy by 29 September 2023.
By Jake Huang and Steven Pettigrove