On January 5th Sam Bankman-Fried turned up at the funeral of his own crypto empire. He lodged a complaint against ftx’s bankruptcy proceedings, demanding $ 500m in frozen assets earmarked for creditors. Mr Bankman-Fried wants the money in order to pay legal fees for his criminal trial, in which he is accused of sucking billions of dollars of customer deposits from the crypto exchange for his own use (he has pled not guilty).
The demand is an opening salvo in what will be a long, chaotic battle. America’s bankruptcy laws have evolved over centuries to pick apart regular businesses. Now, on the fly, lawyers must work out how to apply them to crypto companies. In November ftx filed for bankruptcy under Chapter 11, which allows a bankrupt firm to re-organise rather than liquidate. The process usually plays out as a legally refereed tussle between a company and its creditors. The firm, told by a court what it owes, tries to convince lenders to accept stakes in the business rather than cash. If successful, it emerges with less borrowing and a shiny new growth plan. If unsuccessful, it shuts up shop. A big restructuring might have 100 creditors. A long one lasts a year. A complex one takes at least a couple.
Counting investors and depositors, ftx has over a million creditors—making it, by this measure, the ugliest corporate carcass ever seen. The empire’s implosion has left 134 insolvent entities in 27 jurisdictions. They range from ftx Zuma, an exchange in rural Nigeria, to Good Luck Games, an online card-game developer. The proceedings could take a decade, and may turn up more allegations of wrongdoing. As he sorts the mess, John Ray III, Mr Bankman-Fried’s successor as boss of ftx, has become a de facto federal investigator. At a recent congressional hearing he promised to recommend more suspects for criminal charges if he stumbles across candidates.
The bankruptcy court’s first task is to find those owed money. Creditors are usually keen to come forward. Not in bankruptcies dealing with crypto. For many, the attraction of storing wealth this way is its facelessness. Lodging a claim requires an id check, so creditors must decide quite how deep their desire for privacy runs. Investors, who include some of tech’s most illustrious funders, are also reluctant to fess up to their involvement. To coax them out of hiding, the court has—in a highly unusual move—agreed to keep FTX’s 50 biggest creditors under wraps.
At the same time, Mr Ray is scrambling to locate assets. This involves constructing corporate accounts from what he calls the worst record-keeping he has ever seen. ftx did not even keep note of how much customers deposited. Billions of dollars were lost by Alameda, a sister trading firm. Until November 29th lawyers thought that at least there were very few external loans. Then BlockFi, another bankrupt exchange, demanded $ 500m in shares that ftx held in Robinhood, a share-trading platform, insisting ftx had put them up as collateral for borrowing.
So far, Mr Ray has pieced together just a few billion dollars of assets. And finding assets is only half the battle—getting at them is harder still. In an early fracas, American and Bahamian authorities spent months sniping at one another, before agreeing to bring tokens worth at least $ 3.5bn into American proceedings. Mr Ray is also hunting ftx’s donations. Mr Bankman-Fried gave freely to politicians and effective-altruist charities. ftx’s new boss has said he will sue for the money.
American courts are yet to complete a significant crypto restructuring. This poses problems. Crypto has been around for 15 years, but nobody can agree on what it is. Token swaps are recorded on virtual ledgers by software on a blockchain, which no single person controls. This does not fit with property law, which assumes people own things because the law says they do or they physically have them in hand. Stocks have certificates of ownership; chairs are sat on by their owners. In contrast, the law does not enforce crypto ledgers and recording something on a blockchain does not conjure a physical coin.
Thus even creditors that do come forward may not be compensated. When an exchange trading stocks goes under, customers are protected by the Uniform Commercial Code, a law that governs commercial transactions in America. ftx’s terms of use explicitly disregard this law. On January 4th the judge in another crypto bankruptcy ruled that some of the customers lack ownership rights over their deposits. ftx’s customers may have to wait years to find out what they will receive.
If a settlement is agreed upon, depositors face a final danger. Most of ftx’s recoverable value will probably be in crypto tokens. The one thing such tokens are not—lawyers and politicians agree—is currency, since money must be backed by a government. It seems that when the time comes to carve up ftx’s assets the court will have to dish out claims in dollars. This raises the question of which day’s exchange rate to use. ftx’s estate holds so many tokens that auctioning them could spark a firesale, burning the tokens’ market value.
Another route would be to sell accounts to a solvent exchange. That would avoid the need to squeeze cash out of tokens no one wants, but would keep debris from the worst embarrassment in crypto’s history floating around the industry for years to come—and require a buyer to be found. On January 5th American regulators intervened to stall a deal that would have seen Binance, the world’s largest exchange, take on $ 1bn in assets from Voyager, another bankrupt firm. There is one certainty from the proceedings to come. ftx will go down as it lived: in breathtaking chaos. ?
