FTX Clients Will Dispute Priority Payments in US Bankruptcy

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A group of FTX customers will try to secure a faster refund for people who have money stuck with the defunct exchange, convincing a US court that customers’ crypto assets remain their property.

Lawyers representing a group of FTX clients who had a total of $1.6 billion sitting on the exchange when it crashed last month say they plan to argue that those funds are held by FTX as “custodial” assets, meaning that should be returned quickly, rather than rolled into the sprawling bankruptcy process of Sam Bankman-Fried’s crypto empire.

The status of customer deposits has emerged as a key legal issue in the wave of cryptocurrency company bankruptcies this year, including the collapse of lenders Celsius Network and Voyager Digital. Customers are at risk of being lumped into the “general unsecured creditors” category, meaning they would likely have a long wait to get their money back and may only receive pennies on every dollar owed.

FTX faces up to 1 million creditors in the Chapter 11 bankruptcy process in Delaware, including customers, suppliers and creditors, who will have to compete with each other for priority in receiving repayment of the company’s remaining assets. The action taken by FTX customers is aimed at preventing customers from being the last in line for a refund.

“If the asset belongs to the customer, there is no queue. It’s just your assets,” said Erin Broderick, a consultant at law firm Eversheds Sutherland, who represents the FTX client group.

FTX, founded by Bankman-Fried, froze customer withdrawals in November after a wave of customers rushed to exits. Broderick argues that the collapsing exchange’s terms of service support customers with “property rights” over funds left in their accounts. She said the company plans to file an application with the court at the beginning of the new year at the latest to recognize the status of customers.

FTX did not respond to a request for comment.

Earlier this month, a judge overseeing the US bankruptcy of collapsing crypto lender Celsius ordered a small number of customers to take back assets that were never mixed with other money in the company. The judge in the case is still weighing the difficult issue of how to handle other clients’ funds.

Celsius has asked the court to treat customer funds held in escrow as the property of the customers, while considering assets pledged to receive high interest payments under the lender’s “earn” program as property of the company.

Lender BlockFi on Monday asked a US court to allow the reopening of withdrawals from some crypto assets, which would allow “customers to access digital assets that are owned by them and held in their wallet accounts on the BlockFi platform,” it said. the company in a statement. archive.

The road to recovery for FTX clients is further complicated by allegations that up to $10 billion of the roughly $16 billion the exchange held was loaned or transferred to Alameda Research, a private trading firm also owned by FTX. by Bankman-Fried.

The 30-year-old former billionaire has denied intentional wrongdoing. He was arrested in the Bahamas last week after US federal prosecutors charged him with fraud.

Eversheds Sutherland will argue that if some client assets are no longer available for repayment, clients should still be given priority compared to other groups of creditors.

“We think it’s pretty clear in the terms of service that clients retain title to their assets,” said Sarah Paul, partner and global head of corporate crime and investigations at the law firm. “I see this as one of the first issues that must be addressed.”

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