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May 8, 2024 - Economy

FTX plans to repay customers "in full." Here’s why they still lose

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Illustrated collage of the FTX logo, money and rectangles.

Illustration: Shoshana Gordon/Axios

FTX took a significant step in its bankruptcy case, filing a reorganization plan that touts to repay customers in full, plus interest.

Why it matters: Customers still don't stand to recover what they lost in the cryptocurrency exchange's collapse — not even close.

Between the lines: Bankruptcy lawyers for FTX announced a plan Tuesday night in which customers with $50,000 or less worth of assets on the platform (which they say is 98% of users) would get 118% of the value of their assets at the time of the company's bankruptcy filing.

  • If someone had a bitcoin on FTX at that time in November 2022, it was worth $18,562. The recovery outlined in the plan works out to something like $21,903.
  • That's cold comfort for many investors, however. If they still had that bitcoin, it would be worth $61,923 today.

The big picture: The recoveries outlined in the plan vs. the "what could have been" portfolio valuations for FTX customers are not even kind of the same thing in an environment where crypto assets are charting new all-time highs.

  • This outcome follows the convention in bankruptcies, that customers of a failed company get back the cash value of whatever they had entrusted it with (not the equivalent of the actual asset they entrusted it with).
  • This is an emerging issue in crypto industry bankruptcies, where high price volatility can create big swings in asset valuations.

What we're watching: Look for the 118% recovery to come up as FTX founder Sam Bankman-Fried appeals his fraud conviction and 25-year prison sentence.

  • It's a point his lawyers pushed at trial, but the anticipated recovery wasn't relevant to the man who gave him that sentence.
  • The fraud, Judge Lewis Kaplan said, was misappropriating customer funds, so it doesn't matter that they happened to be spent on a winning lottery ticket.

As Kaplan said at Bankman-Fried's sentencing, "He knew it was wrong, he knew it was criminal, he regrets he made a very bad bet about the likelihood of getting caught."

  • (Bankman-Fried, known as SBF, did buy a winning lottery ticket: a venture stake in the hot AI startup Anthropic. FTX was able to sell a piece of that stake for $884 million.)

State of play: For many customers, the recovery terms in the FTX plan have long been a moot point.

  • Many have already cashed out their claims, sometimes for pennies on the dollar — there's been a hot market for buying up FTX bankruptcy claims ahead of the deal.
  • According to Thomas Braziel, a distressed assets investor, about $4 to $4.5 billion worth of claims have already been sold.

The bottom line: There's a meme among bitcoiners: 1 BTC = 1 BTC. Except, unfortunately, for anyone who tucked that bitcoin away on FTX.

  • In their case, 1 BTC = 1/3 BTC.
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