Creditors of the defunct crypto exchanges, FTX Trading Ltd and Celsius Network, finally saw some light at the end of the tunnel this week with the promise of creditor distributions now on the horizon. However, legal challenges and contention remain over the calculation of creditor claims in FTX and the prospect of potential preference actions against Celsius creditors who made net withdrawals from Celsius greater than USD$100,000 in the 90 days prior to the petition date -13 July 2022.
FTX
The bankrupt Bahamas based crypto exchange received US Bankruptcy Court approval to liquidate its crypto holdings in September 2023. Under the so called "coin monetarization" strategy, the firm sought to minimize risks of price volatility while maximizing sales value and creditor distributions. At a Court hearing in Delaware on Wednesday, the exchange's lawyers confirmed that eligible customers could be repaid in full, provided they can prove that they held and subsequently lost assets on the platform. FTX's lawyer stated:
I would like the court and stakeholders to understand this not as a guarantee, but as an objective...There is still a great amount of work, and risk, between us and that result. But we believe the objective is within reach, and we have a strategy to achieve it.
The bankruptcy administrators' method for calculating claims remains contentious as the US Bankruptcy Judge John Dorsey ruled that the claim value will be calculated based on what creditors were owed on the filing date of FTX’s bankruptcy in November 2022. This sparked controversy for its failure to take into account the surge in prices over time, which saw Bitcoin’s price rebound approximately 110% from the time of collapse.
In response, the FTX Creditor Committee lawyer stated during the Wednesday hearing:
Many of those claims are premised upon currencies which declined dramatically in value in that tumultuous period leading up to the petition date
The exchange has also abandoned its plans to relaunch due to lack of interested buyers and will shift its focus to repaying customers.
Celsius Network
Following the approval of Celsius’ reorganization plan by the US Bankruptcy Court in November 2023, Celsius circulated notices to customers who have large preference exposure in the firm’s bankruptcy offering settlements with the bankrupt estate. The settlement offers have proved controversial, with creditors given only a short period of time to consider the offer and requiring creditors to pay in funds into the bankrupt estate in order to become eligible for distributions.
In a January 31 statement, Celsius officially confirmed that it would exit bankruptcy and being distributions to creditors:
Today, over 18 months after Celsius paused withdrawals, we began distributing over $3 billion of cryptocurrency, fiat, and stock in Ionic Digital to Celsius creditors
Ionic Digital Inc is a newly established Bitcoin mining company which is expected to become publicly traded, following requisite approvals. In a court filing, Celsius also clarified that PayPal, Venmo and Coinbase will be used for creditor distributions as the debtors’ mobile and web applications are scheduled to be taken down in late February. The firm is currently taking final steps to wind down its operations:
Our exit from bankruptcy is the culmination of an extraordinary team effort and extensive collaboration…we are proud of the preservation and distribution of cryptocurrency assets and enhanced recovery for customers and claim holders
Separately, the firm’s former CEO, Alex Mashinsky, is pending his trial in September 2024, on charges of fraud, price manipulation and misleading conduct. He has denied all allegations to date and is currently released on a USD$40M bond. FTX's former CEO, Sam Bankman-Fried was convicted on fraud charges following a high profile trial in New York last November.
Written by Kelly Kim and Steven Pettigrove