As FTX enters Bankruptcy, A Prior Crypto Upheaval May Point to What Lies Ahead

With FTX, the cryptocurrency exchange, in bankruptcy, various key constituencies, including creditors, investors and account holders of the platform, may be in for a long wait to receive any recoveries.

FTX faces the potential of years of bankruptcy litigation as well as probes by the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission.  Any parties with claims against the exchange or seeking to recover funds from it will be required to navigate FTX’s complex restructuring process.  Generally, creditors of the exchange stand at the head of the line to receive any assets included as part of its bankruptcy estate.  Investors—FTX has raised approximately $2 billion in venture funding–come next.  Holders of FTX accounts, who could use their funds to trade digital assets like bitcoin and other cryptocurrencies, would be the last in line to receive any recoveries.

FTX is not the first crypto exchange to implode.  In 2014, Mt. Gox, another digital asset trading platform, filed for bankruptcy after succumbing to a massive hacking effort.   Last month (after eight years of delays), the bankruptcy trustee in that case permitted former users of the exchange to seek to regain possession of their trading funds.

The customers of FTX, at best, may recover only a portion of their deposits.  If such trading funds are denominated in a cryptocurrency like bitcoin, the value of such position would fluctuate with the market value of the digital asset in question.  During 2022, the value of many digital assets plummeted precipitously.

The crypto community as a whole has been rattled by FTX’s sudden plunge into acute financial distress.  Once seen as a stable and responsible company, the speed of the exchange’s demise shocked many crypto insiders.

Problems facing FTX came to light last week when investors were told the exchange needed about $8 billion to back up its users’ crypto assets. What ensued was the digital assets version of a bank run as depositors rushed to withdraw about $5 billion in a single day amid rising concerns about FTX’s solvency.  The exchange’s bankruptcy filing followed in quick succession.