The bankruptcy saga of the once-mighty FTX crypto exchange took another twist this week. The exchange’s administrators have publicly criticised traders and market makers on a key creditor panel. The bone of contention? Allegations that these traders are more interested in controlling FTX’s assets than considering the broader implications for all stakeholders involved.
This dispute comes on the heels of a draft reorganisation plan proposed last month by FTX’s new management team, led by Chief Restructuring Officer John J. Ray III. The official committee of unsecured creditors has taken issue with this plan, claiming they were not adequately consulted. They argue that FTX could be capitalising better on its significant cash and token assets.
However, in a counter-argument filed this Wednesday, FTX’s legal team stated that there had been ample discussions between both parties. They further insinuated that the objections raised by the creditor panel might be driven by individual interests rather than a collective concern for all stakeholders.
Concerns Over ‘Unrestricted’ Traders
FTX’s legal representatives have expressed concerns about the creditor panel’s intentions. They believe the panel’s approach hints at a desire to control the billions in liquid assets that FTX holds. This control, they fear, would be handed over to “unrestricted crypto traders and market makers.”
For context, the FTX empire, founded by Sam Bankman-Fried, crumbled last November in a scandal that prosecutors have described as one of the largest financial frauds in US history. When FTX.com filed for bankruptcy, it owed its customers a staggering $8.7 billion. Since then, about $7 billion in liquid assets have been recovered.
The official committee of unsecured creditors has made several suggestions to FTX. One of these is to invest a portion of the nearly $2.6 billion cash reserve in short-term Treasuries. This could generate more income for the bankruptcy estate, especially considering the professional fees already exceeding $330 million in just eight months.
Portfolio Management and Staking
Another significant point of contention between FTX and the creditor panel revolves around managing FTX’s crypto holdings. In a filing from July 31, the panel suggested that FTX should adopt a more structured approach to managing its crypto assets. This includes staking, which involves pledging tokens to support the operation of a blockchain, potentially earning rewards in the process.
However, FTX’s advisers have countered this suggestion. They claim that the creditor panel has been against asset sales that could provide much-needed liquidity to the estate. Instead, they accuse the panel of favouring a strategy that involves holding onto significant crypto assets for the long term.
The idea of investing in Treasuries, as proposed by the creditor panel, would need the green light from the bankruptcy court. FTX’s advisers have pointed out that such an investment has risks. They argue that while the creditor panel might be willing to gamble in hopes of higher returns, FTX’s independent board believes there are better courses of action than this.
FTX’s filing has also highlighted other issues they’ve faced with the creditor panel. For instance, they’ve expressed frustration over the panel’s reluctance to meet in person, with some members even choosing to remain anonymous during Zoom calls. There have also been allegations of “unprofessional conduct” by certain members. One of the more sensitive issues in this bankruptcy case is managing access to confidential information regarding potential token sales. This becomes especially tricky when market makers and traders on the creditor committee are allowed to trade and have expressed no desire to be.