A hundred billion dollars back to the market? Ten questions and answers to clarify key information about FTX compensation

Author: Azuma, Odaily Planet Daily

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

Given the current market confusion and even rumors regarding FTX's compensation process, most readers are still unaware of the full scope of the event and are unable to actively assess its potential impact on the market. To clarify these doubts, Odaily Planet Daily will combine official information and public statements from professionals in a Q&A format to clarify this information.

Q1: What exactly is FTX's bankruptcy plan?

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

From the user's perspective, the most important aspect of this bankruptcy plan is ------ FTX will first use its recovered assets to compensate its customers, and then pay any potential competing claims raised by government regulatory agencies.

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 equate to the plan taking effect; 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 starting to receive FTX compensation before the end of the year.

However, Mr. Purple also cited another perspective from the claims trading market, suggesting that compensation may be delayed until early 2025, as the motion to set up the compensation reserve by the Wind Down Board will be proposed no earlier than November, but it could also be postponed to December.

Q4: Which users will receive compensation first?

According to FTX's bankruptcy plan, the 98% figure is actually a retroactive calculation of the 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 previously estimated in its bankruptcy plan that the total value of assets recovered and convertible to cash for distribution since the bankruptcy filing will be between $14.5 billion and $16.3 billion.

Q6: Will FTX compensate in full at once?

Galaxy Research Director Alex Thorn mentioned that even if compensation begins, it will not be a one-time settlement.

Thorn stated that FTX expects to compensate about $1.1 billion to 98% of users (those with claims under $50,000) within the year, with the remaining amount expected to be paid between the first and second quarters of 2025.

Q7: What are the compensation standards?

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

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

The hearing last night revealed that about 94.48% of creditors voted in favor of the bankruptcy plan, with a total claim value of approximately $6.83 billion.

However, some creditors, including Sunil Kavuri, the representative of FTX's largest creditor group, explicitly opposed it, arguing that FTX should compensate in "physical form" directly in cryptocurrency rather than based on the dollar value from 2022 ------ the price of Bitcoin has risen from $16,000 in November 2022 to $63,000, and compensating based on dollar value means a significant depreciation in terms of cryptocurrency value; the so-called "118% compensation rate" is negligible compared to the increase in cryptocurrency prices.

David Adler, a lawyer representing some creditors, also mentioned another issue in court, that if creditors receive compensation in cash rather than in physical form, they may face substantial taxes.

Q9: Why not use physical compensation (directly returning cryptocurrency)?

In response to some creditors' demands for physical compensation, FTX's stance is "impossible."

FTX's liquidation team stated that many users believe FTX always held their cryptocurrencies in their accounts, but the reality is that when the team took over FTX, they found a significant asset shortfall on the exchange's books ------ only 0.1% of BTC and 1.2% of ETH remained on the books.

FTX financial advisor Steve Coverick testified that if physical compensation were to be made, FTX would need to purchase cryptocurrency assets on the open market, which would incur "outrageous" costs.

Judge Dorsey also opposed physical compensation during the hearing.

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

For many investors who have not used FTX, this may be the most concerning question ------ whether the up to $16.5 billion in funds can flow back to inject more liquidity into the market and thus drive prices up.

However, considering that FTX-related claims have been circulating in the market for a long time, many original creditors, due to the need for early liquidation, have sold their claims to institutions specializing in bankruptcy claims, making it unlikely that this portion of funds will flow back again.

There is no specific figure for the proportion of claims that have been sold, but well-known creditor Mr. Purple estimates that this proportion could reach around half.

Su Zhu, who previously helped boost the last bull market alongside SBF in a "sacrificial" manner, stated that even if these funds cannot fully return to the crypto market, it is still a significant amount that may help drive the market.