FTX compensation is imminent, what are the key information worth noting?

Original title: "Ten Questions and Ten Answers, Clarifying Key Information About FTX's Compensation"

Original author: Azuma, Odaily Planet Daily

On October 7, local time in the United States, Judge John Dorsey of the Delaware Bankruptcy Court formally decided to approve FTX's bankruptcy plan at a hearing, which means that FTX's compensation process has finally made qualitative progress. Next, FTX will use the maximum $16.5 billion in assets recovered since the bankruptcy application to compensate its creditors.

Considering that there is still a lot of confusion and even rumors about FTX's compensation process in the current market, most readers do not yet understand the full picture of the incident, and thus cannot actively assess the potential impact of the incident on the market. In order to eliminate these doubts, Odaily Planet Daily will combine official information and public speeches by professionals to clarify this information in the form of questions and answers.

Q1: What exactly is FTX's bankruptcy plan?

The so-called bankruptcy plan is a liquidation plan formally proposed by the FTX liquidation team headed by John J. Ray III on May 7 this year. The plan was approved by Judge Dorsey to enter the voting stage on June 25 this year, and was formally approved by Judge Dorsey last night.

From the user's perspective, the most important content of the bankruptcy plan is that FTX will first use its recovered assets to compensate its customers, and then pay potential competing claims made by government regulators.

Q2: What does the approval of the plan mean?

With the formal approval of the plan, FTX will compensate 98% of its users within 60 days after the bankruptcy plan takes effect.

Q3: When will the bankruptcy plan take effect?

It should be clarified that the approval of the plan does not mean that the plan will take effect, and the specific effective date has not yet been determined.

According to Mr. Purple, a well-known FTX creditor, the expected effective date will be October 31, which means that 98% of FTX users have a certain probability of receiving FTX compensation before the end of the year.

However, Mr. Purple also cited another statement from the Claims Market, which believes that compensation may be postponed until early 2025, because the Wind Down Board motion to set up compensation reserves will be submitted as early as November, but it may also be postponed to December.

Q4: Which users will be compensated first?

According to FTX's bankruptcy plan, 98% is actually a reversed user ratio, covering customers who held $50,000 or less in the exchange at the time of FTX's bankruptcy.

Q5: What is the total amount of funds available for compensation?

FTX had estimated in its bankruptcy plan that the total value of assets recovered, converted into cash and available for distribution since the bankruptcy filing would be between $14.5 billion and $16.3 billion.

Q6: Will FTX pay the full amount at one time?

Alex Thorn, head of Galaxy research, mentioned that even if compensation begins, it will not be paid off in one go.

Thorn said that FTX expects to pay approximately $1.1 billion in advance to 98% of users (i.e. users with claims less than $50,000) within the year, and the remaining amount is expected to be paid between the first and second quarters of 2025.

Q7: What is the compensation standard?

According to the bankruptcy plan, FTX will first compensate 98% of creditors in cash based on the dollar value of their claims at the time of bankruptcy in November 2022, with an estimated compensation ratio of 118%; the remaining creditors will also receive a 100% compensation ratio, plus a total of billions of dollars in time value compensation.

Q8: What is the attitude of the creditor group towards the compensation plan?

Last night's hearing revealed that approximately 94.48% of creditors voted in favor of the bankruptcy plan, and the total value of their claims was approximately US$6.83 billion.

However, some creditors, including Sunil Kavuri, the representative of FTX's largest creditor group, have clearly expressed their opposition, arguing that FTX should directly compensate cryptocurrencies in "kind form" rather than in 2022 dollar value - the price of Bitcoin has risen from $16,000 in November 2022 to $63,000. Compensation in dollar value means a significant reduction in the currency standard, and the so-called "118% compensation rate" is not worth mentioning at all compared to the increase in currency prices.

David Adler, a lawyer representing some creditors, also mentioned another issue in court, if creditors are compensated in cash instead of in kind, they may face huge taxes.

Q9: Why not use in-kind compensation (direct currency return)?

FTX's attitude towards the claim of some creditors for compensation in kind is "impossible".

FTX's liquidation team said that many users believed that FTX always kept the cryptocurrencies in their accounts, but the actual situation was that when the team took over FTX, they found that there was a huge asset gap in the exchange's books - BTC only had 0.1% of the book value, and ETH only had 1.2% of the book value.

Steve Coverick, a financial advisor to FTX, testified that if physical compensation was to be made, FTX would need to purchase crypto assets on the open market, and the cost would be "ridiculously high".

Judge Dorsey also opposed physical compensation at the hearing.

Q10: Will the compensation funds flow back to the market?

For more investors who have not used FTX, this may be the most noteworthy issue - whether the funds of up to US$16.5 billion can flow back to inject more liquidity into the market, thereby driving the market up.

However, considering that FTX-related claims have been circulating in the market for a long time, a large number of original creditors have traded their claims to institutions specializing in bankruptcy claims in order to realize them as soon as possible, and this part of the funds is expected to be difficult to flow back again.

There is no clear figure for the proportion of such claims that have been sold. The well-known creditor Mr. Purple estimates that the proportion may reach about half.

Su Zhu, who once helped boost the last bull market with SBF in a "sacrificial form", said that even if these funds cannot return to the crypto market in full, it is still a large number and may boost the market.

Original link