Written by: Tuo Luo Finance
While the industry environment improves and the market eagerly anticipates interest rate cuts, the hearts of FTX's creditors remain hard to calm.
After three years of twists and turns, countless disputes, the compensation process for FTX has finally started, entering the second phase. The market has not seen significant fluctuations due to selling pressure, and everything seems to be on track. However, a statement from the creditor representative completely shattered the hopes of the Chinese.
On July 4, FTX creditor representative Sunil posted on platform X, stating that creditors from 49 jurisdictions, including China, might lose their claim rights, with these regions accounting for 5% of the total funds. On July 7, he reiterated that the total amount of claims from restricted jurisdictions was 470 million USD, with Chinese investors being the largest group holding FTX debt, holding 380 million USD in claims, accounting for 82% of restricted claims.
Once this matter surfaced, the market was in an uproar. Chinese creditors, who had waited for years and invested substantial time and effort, were left with the outcome of lawful confiscation, which is clearly unacceptable to anyone.
Since FTX announced bankruptcy liquidation in November 2022, creditors have experienced several waves of news about restarting, acquiring, and reorganizing, during which FTT has also become a meme coin. Finally, on January 3 of this year, FTX's debtor reorganization plan officially took effect. The first batch of debts began to be compensated within 60 days after January 3, prioritizing users with claims of 50,000 USD or less, with BitGo and Kraken assisting FTX in the compensation process.
On February 9, Kraken announced that it had completed the first fund distribution from the FTX estate, compensating over 46,000 creditors. More than three months later, the second round of compensation was launched, with FTX creditor representative Sunil stating that the payment date for FTX repayments is May 30, with users having claims over 50,000 USD receiving 72.5% of compensation. The remaining compensation (up to 100%) and interest will be distributed subsequently, with an expected payout of over 5 billion USD to creditors.
It was initially thought that creditors only needed to wait for compensation to arrive, but a piece of news on July 4 disrupted everyone's rhythm. Sunil tweeted that FTX would initiate a motion to seek legal advice; if distribution to restricted foreign jurisdictions is possible, it would continue to be executed. If it is determined that residents belong to restricted foreign jurisdictions, claims will generate disputes, and users may lose their claim rights. The trust has established foreign jurisdictions that include 49 countries, such as Russia, Ukraine, Pakistan, and Saudi Arabia, with China also prominently listed. The deadline for creditors to oppose this motion is July 15. At the same time, creditors have a 45-day objection period for the distribution of claims.
This news hit like a hammer on the heads of the Chinese. Chinese creditors hold a significant proportion of the bonds, accounting for as much as 82% of the total claims from restricted jurisdictions, holding 380 million USD in claims. Faced with the prospect of substantial compensation being seized, creditors clearly find it hard to accept. The key question is, why should their rightful claims be confiscated for the benefit of the US? Whose law is this?
Theoretically, FTX's segmented compensation may have certain issues. First, the compensating entity FTX is an American company, following local laws, and under US Bankruptcy Code Section 1123(a)(4), there is a clear requirement for 'equal treatment of creditors within the same class.' Initially, FTX's bankruptcy liquidation team did not mention nationality but clearly informed that simply submitting claims and voting to support the reorganization plan would allow for distribution. Secondly, consistent with traditional compensation processes, all claims are compensated in USD, meaning that cryptocurrency need not be involved during the process, and Chinese residents can receive compensation via wire transfer and traditional collection methods. Even if paid in stablecoins, according to current Chinese law, the law in our country recognizes the property nature of virtual currencies and does not prohibit residents from holding virtual currencies. To take it a step further, according to the current policies in Hong Kong, a one-size-fits-all approach should not be adopted. In other bankruptcy compensation cases, Chinese creditors have also not been given extra attention; for example, in the Celsius case, a US court successfully paid compensation in USD to Chinese creditors via international wire transfer.
From the perspective of the Chinese, it is hard not to suspect that this is a premeditated 'legal robbery.' In fact, as early as February, there were signs of this news when creditor representatives tweeted that FTX's bankruptcy claims did not include jurisdictions such as Russia and China, but at that time, creditors had not yet felt this.
Looking at the operations of the FTX bankruptcy liquidation team, it seems to follow a more traceable pattern. In terms of composition, the liquidation team is extraordinarily experienced and has significant backgrounds. John J. Ray III is the CEO of the team, who previously led the bankruptcy liquidation of Enron, earning over 700 million USD in profits from it. In this liquidation, he is also accompanied by the original team from the well-known law firm Sullivan & Cromwell to share the remaining value of FTX.
Ordinary creditors may need to consider prices when selling assets, while professional liquidation teams clearly care only about the speed of cashing out. As early as the end of August 2023, the shareholder report disclosed FTX's cryptocurrency assets, with the top ten currencies accounting for 72% of FTX's total cryptocurrency holdings, valued at approximately 3.2 billion USD at that time. Among them, the largest holding was SOL, with 55 million coins, followed by approximately 21,000 BTC and 113,000 ETH. In addition to cryptocurrency assets, due to previous extensive investments, FTX also has a large equity portfolio, including very high-quality assets such as Cursor, Mysten Labs, and Anthropic.
Such an excellent asset portfolio has ignited hope among creditors and filled the pockets of the liquidation team. Almost all these assets have been sold off by the liquidation team at bargain prices; Cursor, bought for 200,000 USD, was sold at its original price, even though its valuation reached 9 billion USD. The 890 million USD SUI token subscription rights were sold off for 96 million USD, despite its peak value reaching 4.6 billion USD. An 8% stake in Anthropic was sold for 1.3 billion USD, which initially seemed reasonable, but a year later, Anthropic's valuation of 61.5 billion USD delivered a harsh slap to the market. Furthermore, the SOL tokens that the team plans to auction off at a low price in 2024 have skyrocketed to 151 USD, making a fortune for those who purchased the debt at that time.
The liquidation team's disregard is predicated on the exorbitant consulting fees it has already collected. Court records show that as of January 2 of this year, FTX had paid nearly 948 million USD to over a dozen companies hired to handle its bankruptcy case, with court-approved fees exceeding 952 million USD. FTX's chief law firm Sullivan & Cromwell LLP has received over 248.6 million USD in fees, and financial advisor Alvarez & Marsal has received approximately 306 million USD, while consultants representing FTX clients and other creditors received about 110.3 million USD in fees. From the surface amounts alone, this is already one of the most expensive bankruptcy cases in US history, not to mention the hidden profits resulting from nepotism in asset liquidation.
This also seems to explain what SBF mentioned in his testimony, which was hardly believed at the time: that he was severely threatened by the liquidation team, forcing FTX to quickly initiate bankruptcy proceedings. More frighteningly, in the new plan submitted by the FTX team to the bankruptcy court, there are hidden clauses that exempt advisors from liability, meaning that regardless of how matters are handled later, the liquidation team bears no legal responsibility. Liquidation has completely become a tool for the team to amass wealth, while other creditors are merely the least important part outside this tool.
Currently, the situation for Chinese creditors is indeed difficult to be optimistic about. Firstly, multinational recovery does have complexities; the deadline for opposing the motion on July 15 is very tight. If the motion passes and enters the stage where the liquidator appoints lawyers, it will be very unfavorable for creditors. Secondly, the motion adopts a voting system, and while Chinese creditors have a high proportion in restricted jurisdictions, they account for less than 5% of the total debt claims, with over 95% being other creditors. To expedite debt distribution, other creditors, who are unaffected, may more easily vote in favor.
Even so, Chinese creditors will not remain passive; methods such as forming groups and protests have emerged, making self-rescue critical. On July 9, according to Cryptoslate, over 500 Chinese creditors raised questions in a US court regarding the payment freeze by FTX. A Chinese creditor using the alias Will stated in an interview that he has hired a US lawyer, and over 500 Chinese creditors are organizing a response to FTX's decision. This creditor also urged other creditors to seek professional legal assistance or send letters of opposition to the court individually.
In addition to taking legal action, many debt transfer solutions have emerged in the market, which involve packaging debts for sale to eligible debt purchasers under the compensation plan for quick capital recovery. The motion has actually induced this method in a paradoxical way. According to Wil, a clause in the motion states, 'If a third-party institution buys your debt, your original country of holding will no longer be considered when determining compensation eligibility.'
As for why some people want to buy debt claims in bulk, the core essence lies in profit. In the compensation from FTX, the debt is calculated at an annual interest rate of 9%. With nearly 3 years passed, it will continue to accrue over time. Besides guaranteed interest income, FTX is also in the process of recovering other assets, which may lead to additional distributions in the future. Overall, FTX's debt claims undoubtedly belong to the high-quality debt category, not only favored by individual purchasers but also highly sought after in the institutional market. Furthermore, established financial institutions can even package this as underlying assets and use derivative forms for arbitrage.
Market sales are a reasonable exit strategy, but being forced to sell clearly changes the nature of the whole affair. Whether the efforts of Chinese creditors have paid off, and whether they can recover their rightful claims, remains uncertain at this point. As previously mentioned, even if it complies with legal regulations, the liquidation team has begun to exploit the topic of 'jurisdiction' extensively, attempting to withhold the assets of Chinese investors, which raises even stronger questions about the meaning of compliance: is the purpose of compliance to protect investors' assets or to provide an unavoidable reason for confiscation?
This unresolved debt collection may tear apart the last shroud of compliance.
