Nearly all customers of FTX will allegedly get their money back, plus interest. How is that possible?
Billions went down the drain when Sam Bankman-Fried’s cryptocurrency exchange collapsed in November, 2022, with an estimated one million customers losing funds. Reportedly, they’re set to get their cash back, and then some…
Words: Tom Ward
One of the biggest fraud cases of the century seems to finally have some resolution for the many victims of Sam Bankman-Fried’s reckless and criminal actions. With the 32-year-old currently serving a 25-year prison sentence, FTX investors should now be able to rest fairly easy, knowing the culprit is behind bars. What’s more, they have now been promised that their investments will be returned.
According to Sky News, FTX has promised that 98 per cent of investors will get 118 per cent of their money back within 60 days of the company’s proposed plan coming into effect. Why this doesn’t work out at 100 per cent of investors getting 100 per cent of their money back is unknown.
For now, let’s recap how we got here and take a look at what the next steps look like.
The background: bankruptcy and the biggest crypto heist in history
Image: Getty
Once valued at $32bn, Bankman-Fried’s cryptocurrency exchange, FTX, filed for bankruptcy in late 2022 amid a crypto downswing.
FTX had been having trouble for a while, with Bankman-Fried resorting to using customer funds for investments, via the affiliated Alameda Research hedge fund, with the aim of generating enough profits to rescue the company.
That’s problematic on its own, never mind the fact that Bankman-Fried was also using this money to purchase expensive cars and luxury properties in the Bahamas, as well as donating to political parties.
Image: Getty
Naturally, customers demanded their money back. Naturally, FTX couldn’t pay, and Bankman-Fried was arrested, although he denied any intention to commit fraud.
A jury in New York found him guilty of fraud and money laundering, in what prosecutors have described as “one of the biggest financial frauds in American history”.
The view from jail: Bankman-Fried’s remorse
Bankman-Fried was convicted of stealing $8bn, receiving a quarter of a century in jail – a relatively light spell compared to the possible 110-year sentence he was facing.
“My useful life is probably over. It’s been over for a while now, from before my arrest,” Bankman-Fried said just before his sentencing.
In his first interview from jail, he told ABC News that he is “haunted, every day, by what was lost”, adding that “It’s most of what I think about each day.”
Image: Getty
“I never intended to hurt anyone or take anyone’s money,” he said. “But I was the CEO of FTX, I was responsible for what happened to the company, and when you’re responsible it doesn’t matter why it goes bad… I’d give anything to be able to help repair even part of the damage. I’m doing what I can from prison, but it’s deeply frustrating not to be able to do more.”
As for the anger felt by his former customers, Bankman-Fried said: “I’ve heard and seen the despair, frustration and sense of betrayal from thousands of customers; they deserve to be paid in full, at current price.”
The plan for reparations
FTX recently announced that between $14.5bn and $16.3bn would be available for distribution to those wronged.
“We are pleased to be in a position to propose a chapter 11 plan that contemplates the return of 100 percent of bankruptcy claim amounts plus interest for non-governmental creditors,” new CEO John Ray III, a bankruptcy litigator, said.
John Ray III. Image: Getty
FTX had tried to recuperate some cash by asking for donations made to politicians and charities to be returned, with interest, and had said that as of April, 2023, $7.3bn had been recovered in liquid assets. This amount seems to have doubled over the past year.
According to the L.A. Times, the cash required to repay defrauded customers will come from assets currently under the control of FTX debtors, the U.S. Department of Justice, authorities in Australia and the Bahamas, and “dozens of private parties”.
FTX’s official line is that it has recovered this money by monetising “an extraordinarily diverse collection of assets, most of which were proprietary investments held by the Alameda or FTX Ventures businesses, or litigation claims.”
Though the reimbursement plan is still to be finalised in the U.S. Bankruptcy Court, the scheme would see most creditors owed $50,000 or less – amounting to about 98 per cent of customers – which is roughly 118 per cent of their claim.
Image: Getty
Once this has been paid, FTX aims to provide additional interest payments until funds are exhausted.
The interest rate for most creditors is reportedly set at 9 per cent – however, though customers will regain the cash value of their assets at the time of FTX’s collapse, the price of Bitcoin today is around three times what it was in November, 2022, meaning customers have still (likely) lost out on profit, despite the extra 18 per cent ‘bonus’ and promises of further payments.
Of course, until the cash hits bank accounts, this is all talk. Thankfully, customers won’t have long to wait; the Bankruptcy Court is set to hold a hearing on the dispersion of FTX assets on 25 June.
The future: will FTX battle on?
Bankman-Fried might be toast, his investors out of pocket and his customers down a heck of a lot of cash, but FTX is technically still an operational company, albeit one with an unclear future.
Amazingly, John Ray said last year that he had commissioned a task force to explore reviving FTX.com. While doing so might be the best way to get customers the rest of their money, it is incredibly difficult to imagine new customers flocking to FTX with their cash.
After all, no amount of reparations can quite undo the ‘financial crime of the century’ aspect of it all…
Want more on Bankman-Fried? We take a look at what life in prison might look like for the FTX founder…
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