FTX clients are competing for priority payments in a US bankruptcy case

A group of FTX clients will attempt to secure faster repayment of people with money trapped on the defunct exchange by convincing a US court that the clients’ crypto assets remain theirs.

Lawyers representing a group of FTX clients whose $1.6 billion was stuck in the stock exchange when it crashed last month say they plan to argue that the money is held by FTX as “custodial” assets, meaning it should be paid off quickly rather than being paid off. Rolled into the sprawling bankruptcy proceedings of Sam Bankman-Fried’s crypto empire.

The status of customer deposits has emerged as a major legal issue in a wave of cryptocurrency company bankruptcies this year, including the collapse of lenders Celsius Network and Voyager Digital. Customers face the possibility of being included in the category of “general unsecured creditors,” which means they may wait too long for a refund and may receive a few pennies for every dollar owed to them.

FTX faces up to 1 million creditors in Delaware’s Chapter 11 bankruptcy proceedings, including customers, suppliers and lenders, who will have to compete with each other for priority to receive payment from the company’s remaining assets. The action taken by FTX clients is to avoid clients being last in line to pay.

“If the assets belong to the client, there is no line. It’s just their assets,” said Erin Broderick, an attorney at law firm Eversheds Sutherland, which represents the FTX client group.

FTX, founded by Bankman-Fried, froze customer withdrawals in November after a wave of customers rushed out. Broderick argues that the exchange’s collapsed terms of service support customers who have “ownership rights” over the funds remaining in their accounts. She said the company intends to submit an application to the court early in the new year at the latest to find out the situation of customers.

FTX did not respond to a request for comment.

Earlier this month, a judge overseeing the US bankruptcy of collapsing cryptocurrency lender Celsius ordered that a small number of clients must be repaid for assets that were never mixed with other money in the company. The judge in the case is still balancing the difficult question of how to handle other clients’ money.

Celsius has asked the court to treat customer funds held as owned by customers, with assets pledged to receive high interest payments in the lender’s “earn” program shown as property of the company.

Lender BlockFi on Monday asked a US court to allow it to reopen customer withdrawals for certain crypto assets, which would allow “customers to access digital assets owned by them and held in their wallet accounts on the BlockFi platform,” the company said in the filing. .

The path to recovering FTX clients is further complicated by allegations that up to $10 billion of the roughly $16 billion the exchange held was either loaned or transferred to Alameda Research, a private trading company also owned by Bankman-Fried.

The 30-year-old former billionaire has denied any willful wrongdoing. He was arrested in the Bahamas last week after US federal prosecutors charged him with fraud.

Eversheds Sutherland will argue that if some of a client’s assets are no longer available for recovery, clients should still receive priority over other groups of creditors.

“We think it’s pretty clear that in terms of terms of service, clients have ownership of their assets,” said Sarah Paul, partner and joint global head of corporate crime cases and investigations at the law firm. “I consider it one of the first issues to be addressed.”

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