FTX repayments to creditors could be a liquidity catalyst for the crypto market

U.S. bankruptcy judge John Dorsey gave FTX the green light to repay 98% of its customers using $16.5 billion in assets recovered after the exchange filed for bankruptcy. 

The settlement plan, dubbed the “wind-down,” involves a series of settlements with FTX customers, U.S. government agencies, creditors, and liquidators appointed to wind down FTX’s operations outside the U.S. The settlement process is expected to be completed within sixty days after the plan goes into action. 

FTX’s distribution process to creditors could begin soon

The plan highlights creditors who held a balance of $50,000 or less in digital assets on the exchange when the company went under. Although the proposal was approved, the effective date of execution remains unknown.

The exchange collapsed due to mismanagement of funds by the company executives. According to court documents, FTX founder and former CEO Sam Bankman-Fried channeled customer deposits to his trading firm Alameda Research to cover over-leveraged positions. The court found Sam guilty of looting depositors’ funds and sentenced him to 25 years. 

The U.S. Department of Justice confiscated $1 billion during Sam Bankman-Fried’s criminal prosecution. FTX has been in talks with the government department over the seized funds, which include proceeds from a $626 million liquidation of Robinhood Inc. stock, previously purchased by Sam Bankman-Fried and FTX co-founder Gary Wang. 

From the proceeds, about $230 million of seized funds could potentially be used to repay FTX shareholders, who would normally receive no compensation after a bankruptcy filing. 

FTX also went after former Alameda Research CEO Caroline Ellison for her assets. The exchange filed a motion on October 7th asking the court to approve a settlement agreement with the executive. The agreement obliged Ellison to transfer all her remaining assets, excluding physical property. Ellison concurred with the settlement and consented to collaborate with the investigators. The motion did not, however, specify the value of the assets that Caroline would forfeit.

FTX liquidation proceeds could flow back to the crypto market

FTX estimates it will have between $14.7 billion and $16.5 billion available to refund creditors. The funds are enough to pay customers between 118% and 142% of the value of digital assets in their accounts as of November 2022, when the company filed for bankruptcy. 

Benjamin Celermajer, co-chief investment officer at Magnet Capital, noted that some of the funds will flow back into the crypto market, bringing a new liquidity catalyst to the market.

FTX creditors will not gain access to their funds immediately. The reimbursement process will involve the insolvent exchange establishing a trust and bringing in a third-party company to manage the distribution process. There’s a speculation that smaller creditors may begin to receive their refunds before the year ends, while larger creditors may see a settlement in the first half of next year.