Written by: FinTax
On July 3, 2025, FTX creditor representative Sunil stated on social media platform X that FTX applied to the court for approval to implement a new 'Restricted Jurisdiction Procedures' in 49 jurisdictions that restrict cryptocurrency activities (hereinafter referred to as 'restricted jurisdictions'), no longer compensating claims of users in 'restricted jurisdictions'. According to the proposed framework by the FTX bankruptcy trust (FTX Recovery Trust), affected creditors who do not respond within the deadline will completely lose their rights to compensation.
FTX blocks Chinese creditors from compensation under the so-called 'restricted jurisdictions'; what is the official reason they provide? Does this basis for refusing compensation hold water? The following will briefly review the FTX bankruptcy incident and analyze the official reasons.
Review of the FTX bankruptcy incident
From glory to bankruptcy
In May 2019, FTX was founded by Sam Bankman-Fried (SBF) and Gary Wang, rapidly rising to become the world's second-largest cryptocurrency exchange with over 1 million users, relying on high-leverage derivative trading. Top institutions like Sequoia Capital, SoftBank, and Temasek competed to invest, raising $900 million in Series B financing in 2021 and $400 million in Series C financing in 2022. SBF's personal wealth once soared to $24 billion, earning him the title of 'the next Buffett'.
However, on November 2, 2022, a major news story turned the fate of FTX and SBF around. The well-known cryptocurrency media CoinDesk revealed the balance sheet of FTX's hedge fund Alameda Research, showing that 60% of its $14.6 billion in assets were FTX's own token FTT, lacking real value support. On November 6, 2022, Binance CEO Changpeng Zhao announced on Twitter the liquidation of all FTT tokens held, valued at up to $580 million. Although Binance initially expressed intent to acquire FTX, it ultimately withdrew. In just ten days, this cryptocurrency exchange, once valued higher than Credit Suisse, collapsed and filed for bankruptcy in the U.S. on November 11.
Initiate bankruptcy liquidation process
On February 18, 2025, FTX officially initiated the asset liquidation process for users. According to the compensation plan, creditors with losses of up to $50,000 enjoy priority compensation rights, with their recovery amount calculated at approximately 119% cash compensation based on the price of the currency on the day of bankruptcy. However, the regional restrictions on FTX's compensation have already begun to emerge, as FTX creditor representative Sunil posted on social media platform X on February 21, 2025, stating that users from China, Russia, Egypt, Nigeria, and Ukraine were temporarily excluded from this round of compensation. FTX did not specify the exact reasons for the compensation restrictions, but it is widely believed in the cryptocurrency circle that the restrictions on cryptocurrency-related business activities in mainland China make FTX particularly cautious in compensating creditors from mainland China.
Officially submitted 'Restricted Procedures'
On July 2, 2025, the FTX bankruptcy trust officially submitted a motion to the Delaware bankruptcy court in the United States (motion of the FTX recovery trust for entry of an order in support of the confirmed plan authorizing the FTX recovery trust to implement the restricted jurisdiction procedures in potentially restricted foreign jurisdictions). This motion was initiated by the FTX bankruptcy trust, seeking court authorization under sections 105(a), 1142(b) of the Bankruptcy Code and Rule 3020(d) of the Federal Rules of Bankruptcy Procedure to implement 'restricted procedures' in specific countries and regions.
In the context of U.S. bankruptcy law, a motion is a 'motion for authorization' filed by a trustee to the court, aiming to request the court to authorize the trustee to execute a procedure for managing the bankruptcy estate. According to section 105(a) of the U.S. Bankruptcy Code, the court may issue any orders, procedures, or judgments necessary or appropriate to enforce the provisions of the Bankruptcy Code. Even if a party does not raise the issue, the court may act sua sponte to take action or make a ruling to enforce or implement court orders or rules or prevent abuse of the process.
The term 'restricted jurisdictions' in the document refers to countries and regions where the FTX bankruptcy trust has investigated applicable laws and regulations globally and has not confirmed whether the 'FTX bankruptcy trust and its distribution service providers' can legally make payments to creditors in that region. According to the motion's annex, there are currently 49 jurisdictions listed as 'potential restricted jurisdictions', involving a total creditor amount of about 5%, with the value of Chinese creditors accounting for as high as 82%. Affected creditors in 'restricted jurisdictions' have the opportunity to raise objections to their restricted status within 45 days, and if no affected creditors raise objections or if the court dismisses the creditors' objections, the FTX recovery trust will no longer make distributions to creditors in 'restricted jurisdictions', and any rights to the distribution funds will revert to the FTX bankruptcy trust.
FinTax Brief Commentary
From the wording disclosed in the motion documents, the restricted procedures proposed by FTX appear to be a compliance and prudential measure following the cryptocurrency regulatory laws of various countries in cross-border bankruptcy distribution, but in essence, it is hard to hide the suspicion of evading compensation obligations for the following reasons:
Firstly, the reason given by the FTX bankruptcy trust for proposing the special mechanism of 'restricted jurisdictions' is hard to believe. In the motion document, the FTX bankruptcy trust emphasizes that the regulations in each 'restricted jurisdiction' vary, but generally prohibit individuals or entities from engaging in any activities related to digital assets, including trading cryptocurrencies or paying cryptocurrency profits to residents of the region (for example, in Macau, 'financial institutions and non-bank payment institutions are explicitly prohibited by authorities in mainland China from providing services for these tokens and virtual currencies.' In Moldova, 'providing virtual asset services is considered a crime, whether within the territory of the Republic of Moldova or as a primary or supplementary activity.'). The original document claims: 'If the FTX bankruptcy trust violates local laws in making distributions, it may incur fines, personal liability for management, or even criminal penalties, thereby harming all stakeholders; but at the same time, they cannot indefinitely withhold these distributions.' 'The FTX bankruptcy trust must not violate relevant laws by making distributions to residents of jurisdictions where its activities are not permitted or to accounts in prohibited areas. It is reasonable to reintegrate the funds intended for residents of these regions back into the FTX bankruptcy trust and distribute them through the planned distribution process, which is also an effective exercise of the authorization granted to the FTX bankruptcy trust.'
However, although mainland China does not support cryptocurrency trading activities and financial institutions providing related services, it has never been legally prohibited for Chinese residents to hold virtual currencies and their derivative claims. Chinese courts have repeatedly recognized the property attributes of virtual assets. Moreover, FTX's compensation plan for users is essentially priced and settled in USD, and the compensation users receive should also be in USD, which does not directly conflict with engaging in cryptocurrency trading. More critically, there are no legal barriers for Chinese residents to legally hold and receive overseas USD assets within the foreign exchange quota, and bank wire transfers are fully feasible. In fact, Celsius, another cryptocurrency platform under U.S. bankruptcy proceedings, successfully paid compensation to users, including those in China, via bank wire transfer without refusing payment due to so-called 'regulatory restrictions'. It is evident that FTX's compliance rationale for its restricted procedures is difficult to justify and seems more like a way to evade compensation responsibilities to Chinese creditors under the guise of excessive caution.
Secondly, on a procedural level, the standard of 'restricted jurisdictions' is also not fair. In the motion, FTX determines whether a jurisdiction is a 'restricted jurisdiction' by stating that 'if there are still doubts regarding a potential restricted jurisdiction, the FTX recovery trust will hire qualified lawyers in that region to provide formal legal opinions on whether distributions can be legally made to residents or trust accounts in that region'. The FTX bankruptcy trust emphasizes hiring local lawyers for compliance due diligence but has not provided any guarantees regarding the independence and fairness of those lawyers, leaving the determination of 'compliance risk' to lawyers they employ, which lacks a mechanism for neutral oversight. This approach to due diligence raises suspicions of discrimination against Chinese creditors and does not fully align with the principle of maximizing creditor interests under U.S. bankruptcy law. Furthermore, while the 'restricted procedures' do provide creditors the opportunity to raise written objections and prove their legitimacy through court remedies within 45 days, this mechanism is virtually a formality for retail investors. For most scattered overseas individual creditors, hiring professional lawyers, translating local laws, preparing evidence, and coping with U.S. court jurisdiction and evidence disclosure procedures within such a short time frame incurs extremely high time and monetary costs.
Overall, FTX excludes some creditors, especially Chinese creditors, from normal compensation on the grounds of 'restricted jurisdictions', which has serious flaws in terms of factual basis, substantive fairness, and procedural fairness. For cross-border bankruptcy distribution, maximizing the legitimate rights and interests of all creditors should be a priority principle, and any compliant arrangement should not come at the expense of the rights of a minority. Moreover, in the decentralized world of cryptocurrency, equal rights are a common pursuit, and nationality and identity should not serve as reasons for 'you have what I lack'.
