FTX Repayments: When Will Creditors Get Their Cash Back? Latest Details

The FTX collapse was one of the most compelling and shocking incidents in both the crypto and overall financial industry. Even after two years of its bankruptcy proceeding and nearly a year into the sentencing of its notorious founder, Sam Bankman-Fried, the FTX saga is far from over.

The once-leading exchange has yet to begin repayment to its creditors, and regulators are closely monitoring its announced repayment plans. As repayments are expected to start by the end of this year, here are the latest details on this ongoing story.

Key takeaways 

• FTX collapsed in November 2022 after misusing customer funds for risky investments via Alameda Research, leading to a $12.7billion debt to creditors.
• Creditors include retail investors, institutional clients like Sequoia Capital and SoftBank, and corporate partners.
• FTX aims to begin repayments in phases starting Q4 2024, targeting $16bn in disbursements by the end of the year.
• Regulatory hurdles, particularly objections from the SEC over the use of stablecoins, continue to complicate and potentially delay the repayment process.

What happened to FTX? A brief summary 

FTX was one of the largest cryptocurrency exchanges between 2020 and 2022. So much so that the iconic American Airlines Arena was named the ‘FTX Arena’ in 2021. However, the exchange collapsed in November 2022, leading to a high-profile bankruptcy. The company and its founder, Sam Bankman-Fried, faced allegations of misappropriating customer funds, using them for risky investments through its sister firm, Alameda Research. This left FTX holding only a fraction of the assets it claimed to have.
 

The FTX estate has since been engaged in complex bankruptcy proceedings. A US court recently ordered FTX to pay $12.7bn to its former customers and victims of the fraud. The plan involves recovering funds by selling off assets and securities rather than relying on cryptocurrency holdings, which had been significantly depleted at the time of FTX's collapse. As of mid-2024, the bankruptcy estate is expected to hold between $14.5bn and $16.3bn in proceeds.​

• Misappropriation of customer funds

Bankman-Fried, along with executives at Alameda Research (FTX's sister trading firm), funneled billions of dollars in customer deposits from FTX to Alameda. Instead of safeguarding customer assets, FTX allowed Alameda to use these funds for risky trading strategies, investments, and personal expenses. This direct misuse of customer money violated FTX’s own terms of service, which stated that customer funds would be kept separate.

• Leverage and risky investments

Alameda Research, run by Bankman-Fried and other close associates, used the funds it received from FTX for highly leveraged trades and illiquid investments in cryptocurrency and other ventures. Alameda's risky trading practices were sustained by the access to customer deposits, which were treated like a personal line of credit without the customers’ knowledge. This essentially turned FTX into a hidden bank for Alameda. 

• Backdoor transfers

One of the more technical aspects of the fraud involved a 'backdoor' that allowed Alameda to withdraw customer funds from FTX without triggering any alarms in the company’s standard systems. This backdoor was reportedly coded into FTX’s platform under Bankman-Fried’s direction, allowing massive unreported transfers of money between the two entities.

• Cover-up and collapse

FTX’s downfall began when discrepancies in its financial health were exposed, particularly when CoinDesk published a report revealing that a large portion of Alameda’s balance sheet was propped up by FTX’s native token, FTT. When this came to light, a massive sell-off of FTT ensued, leading to a liquidity crisis for both FTX and Alameda. Unable to cover withdrawal demands, FTX collapsed, revealing the extent of the fraudulent activities.
 

How much does FTX owe its creditors? 

FTX owes approximately $12.7bn to its creditors, a figure that includes claims from former customers and various institutional investors. Here's a detailed breakdown:

Major creditors

1. Retail investors: FTX had millions of individual users who deposited cryptocurrencies and fiat currencies into the platform. These retail investors represent a large portion of the creditors, and they are seeking compensation for funds lost when FTX collapsed. Claims from these individuals account for a substantial part of the total debt.
2. Institutional investors: Many large institutional investors, including hedge funds, venture capital firms, and corporate clients, were involved with FTX. Some of the known institutional creditors include:
3. Sequoia Capital: A prominent venture capital firm that invested heavily in FTX and lost millions during its downfall.
4. SoftBank: Another major venture capitalist that was involved in the platform's operations and investments.
5. Genesis Global Trading: A crypto lending platform with exposure to FTX. It filed claims in the aftermath of FTX's collapse.
6. FTX's largest unsecured creditors: According to court filings, the top 50 unsecured creditors are owed around $3.1bn collectively. The identities of these creditors have not been fully disclosed, but they are largely institutions that conducted business with FTX or had significant amounts of assets locked in the exchange​.
7. Corporate clients and partners: Various corporate clients that used FTX’s services are also listed as creditors. These include companies that handled crypto transactions, liquidity providers, and tech firms that supported FTX’s infrastructure.
8. Governmental bodies: FTX owes money to tax authorities and regulators. For instance, in the Bahamas, where FTX was headquartered, the local regulatory bodies are involved in the claims process.

Asset liquidation

FTX has been attempting to recover funds through asset liquidation. The estate has already liquidated large amounts of securities, stakes in various companies, and digital assets to raise the $14.5bn to $16.3bn estimated to be available by the end of 2024​. However, this is still short of what is owed to creditors, which complicates the full repayment process.

Litigation claims

Additionally, legal fees for the bankruptcy process and ongoing litigation against FTX executives also consume a part of the funds. Law firms involved in the FTX bankruptcy have requested over $700m in fees​.

In summary, FTX's creditors include a broad range of stakeholders, from individual investors to large institutions, with the total amount owed reaching staggering figures. While some recoveries have been made through asset liquidation, the payout process is still ongoing.

When will the creditors be repaid? 

FTX plans to start repaying creditors by the end of 2024, with a target of disbursing approximately $16bn. This process is expected to unfold in phases, beginning in the fourth quarter of 2024, likely during November and December. The funds available for repayment are primarily sourced from the liquidation of FTX’s assets, including securities and other holdings, with cash forming a major portion of the recovery pool.

Creditors include a wide range of stakeholders such as retail investors, institutional clients, and corporate partners who had assets on the FTX platform before its collapse. Notably, some institutional creditors like Sequoia Capital and SoftBank are among the affected parties. The repayment process will prioritize different classes of creditors based on the bankruptcy court’s rulings, with payments being distributed based on the value of claims as of November 2022.

The repayment plan has faced regulatory scrutiny, particularly from the SEC, which has expressed concerns about the use of stablecoins for settling some claims. However, FTX is moving forward with a plan that will distribute the funds, potentially impacting the broader cryptocurrency market as large sums are returned to creditors.​

The SEC’s scrutiny of the repayment plan 

The SEC has raised concerns regarding FTX’s proposal to repay its creditors using stablecoins as part of its bankruptcy plan. FTX, which has been embroiled in bankruptcy proceedings, suggested using dollar-pegged stablecoins to compensate creditors. The SEC, while not directly ruling on the legality of these payments, has reserved the right to challenge this approach.

The SEC’s objection centers around two key issues. First, the regulator is cautious about crypto assets being used in such transactions, especially considering its broader stance on cryptocurrency regulations. The SEC has expressed discomfort with digital assets being used to settle debts, which it might argue fall under securities law. Second, the SEC has taken issue with certain protections and discharge provisions in FTX's plan, which it believes might grant too much immunity to the estate administrators and third parties. 

This pushback could complicate FTX’s plans and extend the already lengthy bankruptcy process. With other parties, including US trustees and groups of creditors, voicing objections to different aspects of the proposal, the situation remains contentious​. 

Final thoughts 

FTX’s repayment process faces several challenges that complicate the path forward. First, the 'commingled' nature of its financial records between FTX and its subsidiaries, such as FTX Digital in the Bahamas, has led to complex parallel bankruptcy proceedings. Regulatory hurdles, particularly objections from the SEC concerning the use of stablecoins for creditor repayments, further delay the process​.

Additionally, the sheer size of claims, including billions owed to institutional investors, retail users, and corporate clients, adds another layer of complexity. Legal battles over the priority of creditors, operational adjustments, and asset liquidations also contribute to the delays​. These challenges mean that while repayments are planned for late 2024, the process is likely to be drawn out and dependent on ongoing legal and regulatory developments.