Creditors or Asset Owners? The Answer Can Decide Who Gets Money

  • Some FTX clients with money on the exchange want to be seen as asset holders, the Financial Times reported.
  • Lawyers plan to argue that the funds FTX still holds are “custodial” assets that belong to users and should be repaid more quickly.
  • Otherwise, being seen as unsecured creditors may mean waiting longer and only getting some of their money back.

According to the Financial Times, a group of FTX customers with $1.6 billion trapped in the bankrupt stock market want to be seen as asset holders rather than unsecured creditors.

According to the report, lawyers plan to argue that the funds FTX still holds are “custodial” assets held by users and should be repaid more quickly.

Otherwise, being seen as unsecured creditors may mean waiting longer and getting only a small portion of their money back.

There is some precedent for classifying certain funds as assets, as a judge presiding over Celsius Network’s bankruptcy earlier this month ruled that in this case a small proportion of users should be reimbursed for assets not mixed with other money in the company. FT said.

FTX must weed out up to 1 million creditors, including customers, suppliers and lenders, competing to prove they deserve repayment before others.

As FTX faces a huge gap between what it owns and what it owes, determining who has priority during bankruptcy proceedings will be key.

FTX’s new management, led by John Ray III, has over $1 billion in assets and $1.2 billion in cash against roughly $10 billion in liabilities.

Currently, client funds that are still on the exchange are diverted into lengthy bankruptcy proceedings that involve tracing funds and locating accounts before the funds are repaid.

Meanwhile, some FTX users may prefer not to wait to see what happens. Major players in distressed investing are following the claims of FTX clients whose assets are stuck on the bankrupt crypto exchange, sources told Bloomberg.

According to the report, prominent figures such as Baupost Group and Oaktree Capital Management are among those who have expressed interest, making potentially risky bets that they will eventually be paid in bankruptcy proceedings.

Valuations for the dollar hover between 5 and 13 cents, and customers must decide whether to receive limited cash now or expect something better in the future, which is not a sure thing.

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