If you lost access to your money when the crypto firm holding your assets filed for bankruptcy, then you’re probably out of luck getting it back.
As Chapter 11 bankruptcy proceedings move forward for several big-name crypto companies, those who lost funds are surely hoping to get all — or at least some — of their money back. Lawyers and experts shared their thoughts with TechCrunch on what these cases could mean for creditors and what may happen to those who saw their money disappear overnight.
Earlier this month, Genesis Global Trading, a subsidiary of the crypto conglomerate Digital Currency Group (DCG), filed for Chapter 11 bankruptcy. Genesis is the latest crypto-focused entity to join the Chapter 11 bankruptcy club alongside FTX, BlockFi, Three Arrows Capital, Celsius Network and Voyager — all of which filed mid- to late 2022.
For the most recent Chapter 11 filers, Genesis owes more than $3.6 billion to its top 50 unsecured creditors, while FTX owes its top 50 unsecured creditors over $3 billion. The bankruptcy filings have redacted the majority — if not all — of the identifying information for the parties involved.
One of FTX’s biggest unsecured creditors is owed more than $226 million, and the company could have over 1 million creditors, according to earlier bankruptcy filings.
“If I were an FTX creditor, I’d hope for the best but expect to face reality. If I get more than 2 cents on the dollar, I’d consider myself lucky.” Terrence Yang, managing director, Swan Bitcoin
So it’s safe to say that a lot of people are heavily invested in the outcome of these bankruptcy cases, as their funds, ranging from small amounts to millions of dollars, are involved. But it’s not certain if they’ll ever see the deposited funds again.
What will happen to creditors “really depends on the mix of assets and liabilities of the company as well as the prospects of the same company exiting bankruptcy,” Jason Allegrante, chief legal and compliance officer at Fireblocks, said to TechCrunch. “If the business is otherwise healthy but has experienced a liquidity shock, for example, there is still a chance that the business can recover and generate revenue,” meaning creditors may be reunited with some of their funds.
Secured creditors will have priority “if and when assets are distributed,” Joel Telpner, chief legal officer at Input Output Global and special counsel at Sullivan & Worcester, said to TechCrunch. “All other creditors stand in line after the secured creditors are first paid. If it’s a company with shareholders, then if there’s anything left, it’ll go to shareholders.”
“Shit out of luck”
Every bankruptcy filing has its own unique characteristics, but in the case of FTX, the exchange misused over $7 billion, the company’s new CEO, John J. Ray III, said mid-December, so the outcome for creditors may be rather unsavory.
In the meantime, these bankruptcy filings freeze the entities so the companies can “find assets that are hidden or claw them back in an orderly process to distribute them to those entitled to them,” Telpner said.
In the case of FTX, the asset recovery process will be a critical determinant of how much is available to distribute to creditors, Allegrante said. As for other recent Chapter 11 crypto cases, where there may be an operating business exiting bankruptcy, “creditors will be more able to consider a variety of options, such as delayed claims against future earnings or an equity stake in the restructured entity,” he added.
“If I were an FTX creditor, I’d hope for the best but expect to face reality. If I get more than 2 cents on the dollar, I’d consider myself lucky,” Terrence Yang, managing director at Swan Bitcoin, said to TechCrunch. (Yang was a lawyer who worked as a senior counsel in global markets and investment banking at Merrill Lynch, among other roles.)
“For Genesis, they seem a bit better off because of DCG, so maybe 20 cents on the dollar, but I wouldn’t bet on it. It really depends on the facts that come out; we’re just guessing based on what we know,” Yang added.
In general, there’s “usually never enough assets to pay out everyone for 100 cents on the dollar,” Telpner said. “There’s usually a pro rata distribution, to recover a piece of what people are owed, but not all of what they’re owed.”
There is a range of outcomes along a spectrum, Allegrante said. “On one end, creditors do very well, and on the other, they recover cents on the dollar. It is impossible to say with any certainty in individual cases.”
Bottom line: You do not want to be an unsecured creditor in a bankruptcy proceeding, Allegrante said. “By having this role, if you were to receive anything at all, it would only be a percentage share of whatever is left over after the secured and other priority creditors’ claims are satisfied.”
Put bluntly, Yang said, “you’re ‘SOL’ or shit out of luck” for unsecured claims.”
“Even secured, in the case of FTX, there was so much fraud and the collateral that was supposed to collateralize your claims are either worthless because they’re shitcoins that basically went to zero or the collateral got rehypothecated a thousand times and there’s so many links in the chain that it’ll be hard to get back.”
For small creditors, it’s “basically a loss” right now, Yang noted.
“If you’re a retail person with an account with Celsius or FTX, other than waiting, there’s very little you can do,” Telpner said.
As for bigger creditors — like ultra-high-net-worth individuals, family offices and small to medium-sized hedge funds — they can get experienced “big lawyers” who are already representing others in committees, Yang added.
“If there is money going to FTX creditors at all, secured creditors are supposed to be paid in full first,” Yang said. “It’s very possible that secured creditors may be lucky to get 5 cents on the dollar, but who knows; it’s just massive amounts of criminality and fraud.”
The fine print
In early January, a federal bankruptcy judge ruled cryptocurrencies deposited into interest-bearing accounts at Celsius actually belong to the firm — thanks to the fine print. The verdict gives Celsius ownership of the $4.2 billion in cryptocurrency that users deposited into its high-interest Earn program, according to a 45-page filing from the U.S. Bankruptcy Court in the Southern District of New York.
“One of the interesting issues and use cases for FTX, Genesis, Celsius and so on are whether or not certain assets are a part of the bankruptcy estate or not,” Telpner said. “This is where it gets interesting because in all cases they had customers that sent money.”
But is the money still users’ funds, or are they now bankrupt companies’ assets, like what we saw with the Celsius ruling?
“Right or wrong, the outcome is a major transfer of value from the lending customers to the rest of the unsecured creditors,” Allegrante said.
While these bankruptcy proceedings take time, many are cynical about the potential outcomes.
Some of these Chapter 11 filings can convert to Chapter 7 bankruptcies if it becomes “infeasible” and the companies decide to liquidate “whatever assets are left,” like Lehman Brothers did “when nothing was left,” Telpner said.
But on the other end of the spectrum, there could be “determination made for a viable future business to emerge from the bankruptcy proceedings to restructure the business,” he added.
All the crypto entities that filed for bankruptcy are “basically trying to buy time so they can reorganize, restructure and hopefully capture a bull market,” Yang said. “Instead of raising a white flag like Chapter 7 bankruptcy filings, which is like giving up, they’re trying to figure out a way with creditors and stakeholders to find a path forward.”
Bankruptcy proceedings can take years — some can be resolved quickly, but all these cases are extremely complicated, Telpner said. “I expect them to be multiyear cases based on what I know now.”
Unless you’re an institution with “major interest” in the proceedings, there’s very little individual creditors can do right now aside from remaining “patient,” Allegrante said.
“I want people to live in reality,” Yang said. “Maybe they’ll be pleasantly surprised if it’s more than 40 or 20 cents on the dollar in the case of Genesis or 2 to 3 cents in the case of FTX. Secured creditors may get more, but it’s very hard to tell.”