FTX's bankruptcy case highlights the importance of depositors

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FTX's bankruptcy case highlights the importance of depositors

As the world awaits the trial of Sam Bankman-Fried, DL News took a closer look at FTX's bankruptcy case.

The FTX estate is suing Bankman-Fried's mom and dad for millions they allegedly misappropriated.

It paints a picture of two opportunistic Svengalis, closely advising the college grads running FTX while treating it as their piggy bank - funding luxury homes, lavish travel, and campaign donations.

The depositors behind the juicy details and general media frenzy are FTX's Depositors.

I'm not talking about big firms like BlackRock or Sequoia - somehow, I think they'll be fine - but rather the million-odd ordinary people screwed out of $8 billion.

They were not gullible fools, they said in a statement. They saw the fawning media attention, celebrity endorsements, appearances at prestigious conferences, and the disregard for professional dress codes that appeared to be an iconoclastic boy genius.

They were just trying to get into what the cognoscenti thought was a good thing.

And now the creditors of FTX - including those of Celsius Network, Voyager Digital, Gemini Trust, BlockFi and so on - can only wait for the decisions of courts or restructuring teams.

Bankruptcy under chapter 11 of the U.S. tax code is never easy, but it is a well-worn path with precedent and clear laws facilitating the orderly winding down or restructuring of a business.

Debtors can keep control of their assets, protected against asset grabs from creditors. But creditors may have to wait to get what they're owed, but they have a better chance of reclaiming it.

Cryptocurrencies are hard to understand and are difficult to invest in. There is no firm decision whether to treat them as commodities or securities. It's not always clear who owns crypto - the failed lender/exchange or the user.

There are various factors that impact whether a depositor can receive their crypto back, even in part.

The debtors are often treated as unsecured, meaning they're in the queue when the bankruptcy estate finally distributes assets.

And distributions in unsecured claims are often pennies on the dollar.

In January, a federal judge ruled that Celsius, rather than some of its depositors, owned most of the crypto on its platform, classifying the depositors as unsecured creditors.

Celsius creditors recently approved a restructuring plan that will see a new company formed. Investors will receive $2 billion worth of Bitcoin and Ether back, as well as equity in the new company.

FTX has accumulated $7.3 billion in assets. A court in Delaware has ruled that customers can claim these assets from the restructuring plan.

So these are happy endings.

It's worth remembering, though, that for many people who trust Bankman-Fried and another seemingly legit founder, Celsius CEO Alex Mashinsky, it's too little too late.

Have you ever been burned in a crypto chapter 11 case? How will crypto lawyers counterattack the SEC after Grayscale and Ripple court wins?

The Securities and Exchange Commission has been pursuing a significant number of crypto industry players, including small and medium-sized companies. But lawyers for associations like the DeFi Education Fund said they are planning a counteroffensive. Procurred administrative laws and challenges to enforcement actions.

Pearse Os, the department for Communications Networks, content and technology, said it was preparing to speak at a summit last week. To build an EU-wide blockchain, O'Donohue said the industry must provide the knowledge-how.