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

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

New York
CNN Business

As dust settles from one of the more shocks Financial meltdowns in historyOne of the main unknowns is the number of clients who cannot access their funds expecting a return from FTX, the cryptocurrency exchange that filed for bankruptcy last week.

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

Before its disintegration, FTX.com marketed itself as a safe destination for beginners to buy and sell cryptocurrencies. But last week’s liquidity crunch forced FTX to halt withdrawals, leaving clients and investors in limbo. FTX It is said that he used customer money To support the sister hedge fund’s high-risk trading operation without permission, according to the Wall Street Journal.

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

A person familiar with the matter told CNN that federal prosecutors in New York are now investigating the stock market crash. And authorities launched in the Bahamas, where FTX . is headquartered criminal investigation In company over the weekend.

The legal ramifications of FTX and its founder, Sam Bankman-Fried, remain unclear. But with the collapse of the exchange, which was once valued at more than $30 billion, it seems increasingly likely that customers who handed over their money to FTX could be left with the bag.

“We don’t know the extent of the infection,” said Howard Fisher, partner at law firm Moses Singer and a former attorney with the Securities and Exchange Commission. “The first episode of victims are people with assets held in FTX… they probably won’t become full or anywhere close to it.”

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There are several reasons for this.

In the event of the failure of a conventional American bank, the government insures customer deposits, bringing them to the full amount of 250 thousand dollars. But there is simply There is no mechanism to secure the depositor In the highly unregulated world of cryptocurrency.

In theory, FTX clients should receive a portion of the remainder of the company’s assets at the end of the bankruptcy process. But so far, at least, it is not clear how much will be spent.

“As far as I know, they have two assets — the reputable value of the stock exchange and the value of their coins from FTT,” said Eric Snyder, head of bankruptcy at law firm Wilke Oslander. (Goodwill refers to intangible assets such as brand reputation and intellectual property. FTT coins, the crypto token issued by FTX, have lost more than 90% of their value over the past week.)

Snyder explains that in bankruptcies, there’s a fairly simple formula for figuring out how much creditors will get — in this case, FTX depositors.

“The numerator is the assets, the responsibility for the denominator. You divide one into the other, and [result] It’s what everyone gets.” “But if people pull out all the assets, there won’t be much of a numerator.”

“It is very plausible that the return will be minimal at best,” he added.

Of course, the surprise of FTX’s downfall makes it difficult to assess this early on, lawyers say.

Typically, companies have weeks to prepare bankruptcy filings that reveal, among other things, an explanation for why the company is seeking Chapter 11 protection and what it aims to achieve in bankruptcy court.

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Dan Beshekoff, a partner at Loeb & Loeb who specializes in bankruptcy, says it’s too early to say if clients will ever get any money back.

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

The fallout from FTX has shaken 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 rival Binance, sought to reassure his audience about the legitimacy of the sector.

“People are obviously nervous,” Zhao, widely known as CZ, said in a question-and-answer session. on Twitter. “I want to say, in the short term, it hurts. But I think this is really good for the industry in the long term.”

Giant Cryptocurrency Exchange It briefly appeared as a lifeline for FTX before reversing last week.

Zhao, whose tweet announcing Binance’s withdrawal of its FTX investment helped fuel the smaller company’s liquidity crunch, denied there was a “master plan” to expose FTX. However, critics note that the biggest, and perhaps the only, winner in the downfall of FTX is none other than Zhao, who is now undoubtedly the richest and most influential player in digital asset trading.

“As much as some people blame me for whistleblowing or bubble piercing, I apologize for that… I apologize for any disruption I caused. But I think anytime, if there is a problem, the sooner we uncover it, the better.”

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– Matt Egan and Kara Scannell of CNN Business contributed to this article.

Correction: An earlier version of this article misspelled the name of the law firm Loeb & Loeb.

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