Good day everyone,

I hope you are all well and having a great day, welcome to CryptoGod-1's blog on all things crypto. This is a follow on from a previous post I made, called FTX will Attempt to Recover Finances. It continues to look at the ramifications of the bankruptcy case, and while that post focused more on how it has gone so far and the impact on charities and politicians, this post will look more at the retail investors side of things.

As mentioned in the previous article, U.S. allows for any transfer which were made up to 90 days of the bankruptcy can be recovered as part of a clawback. These transactions can be considered preferential if they result in a creditor getting more than it would have been entitled to at the end of the bankruptcy process, allowing the courts to demand a recovery in the difference in payment and interest can be incurred from the date any action is commenced by the court.

In the case of FTX, there was a reported withdrawal of more than $8bn from customers in a matter of days leading up to the company declaring its bankruptcy in early November 2022, and the courts could decide there are billions of dollars which were distributed unfairly. FTX co-founder, Sam Bankman-Fried, said the platform had around $5 billion of withdrawals on the 6th of November alone, which was just five days before its Chapter 11 filing. This could have a major impact on retail investors, many of whom are yet to get their funds back from FTX, and some of whom did manage to withdraw before it was too late. Something that will work on the side of the retail investors in the fact within the terms of service in FTX, it stated that: 

"depositors didn’t hand over ownership of their deposits"

This has led to some arguments on whether or not the crypto in the exchange can be treated as an asset which can be used to pay to outstanding bills of the exchange.

A lot will depend on the outcome of another U.S. bankruptcy case of a cryptocurrency firm, BlockFi. They went bust soon after FTX and recently filed a motion with the New Jersey bankruptcy court arguing:

“The BlockFi Wallet terms of service are clear. They provide that ‘title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi. The debtors have no legal or equitable interest in cryptocurrency that was present in the Wallet accounts as of platform pause, and clients should be able to withdraw such assets from the platform if they choose.”

This would lead many to conclude that the normal everyday retail depositors should be allowed to withdraw their assets, as it is clearly stated in the terms of service that the company has no underlying ownership of such assets. A lot will depend on the ruling of the courts, but the law in terms of bankruptcy is quite clear, and there could be lawsuits looking to claw back billions of dollars in assets that customers and insiders withdrew. 

These recovery efforts wont be simple, as the existing web of financial information available to the company's new CEO, John J. Ray III, and the team working on the bankruptcy filing is far from reliable. A lot like its former CEO Sam Bankman-Fried, the books of FTX are littered with discrepancies. The sheer amount of payments made to creditors in the days leading up the the bankruptcy, which are known as the preferences, could be a major resolution in paying off FTX's wider debts. The company is also able to go after transfers of assets and property designed to defraud creditors or made without receiving adequate value in return, which are known as fraudulent transfers, and can even try to claw back its payments without court permission after the bankruptcy filing.

These are the customers who managed to get their digital assets out of the FTX exchanges in the days leading up to the bankruptcy. As part of proceedings, a judge could rule that the withdrawals were not within the "normal and ordinary course of business," meaning the amount withdrawn may need to be returned in full. This can go back to a maximum of 90 days prior to the filing of bankruptcy, and any customer who is forced to return a payment they took out of the exchange in those 90 days would hold an unsecured claim against the estate for that amount.

A worrying thought for anybody, who at the time, thought of themselves as one of the lucky few who managed to get their assets away from FTX. When looking back at the fiasco that was the FTX bankruptcy filing and the collapse, it would be conceivable to believe a judge could view the actions not in line with the "ordinary course of business." Looking at what we do know, as I am sure there is plenty yet to be uncovered, the following events could easily sway the ruling opinion of a judge:

• The initial withdrawal chaos with some able to withdraw and other not.

• Alameda / FTX apparently dumping 100 million FTT tokens once prices began to crash.

• Binance announcing its decision to sell all its FTT tokens.

• The FTX exchange website being inaccessible due to freezing and overuse.

• The publicly announced lies by SBF to distract customers from the truth of what was happening to the exchange.

• Residents of the Bahamas being able to withdraw while residents elsewhere were not, something which implicated the Bahamas Securities Commission.

• Withdrawals which were only allowed via Justin-Sun/Tron-owned tokens which led to prices going above 4600% the regular market price.

This is not a definitive list, merely a token of some of the unusual and out of the ordinary activities which happened during the period in question. This also fails to take into consideration how FTX was violating its own terms on service towards its customers by allocating customer funds for their own activities including funnelling money into Alameda. According to Adam Levitin, a law professor at Georgetown University:

"There’s a possibility of preference actions being brought against everyone who withdrew funds from the exchange in the lead up to the bankruptcy.”

However, there are further complications to the procedures, which could have a large impact on any outcome of a judge. Securities and commodities transactions are considered 'safe harbours' which means in the case of a bankruptcy filing, these 'safe harbours' are allowed to be traded on an exchange without any risk of a claw back. Another claim could be anybody requested for a claw back could argue they their their own property off the exchange and were in no way paid by the company as a creditor.

This will of course be impact by the results of BlockFi, as noted above, but with over $5 billion of reported withdrawals by customers on the eve of the bankruptcy filing, there is a serious risk of preferential and fraudulent transfer actions having taken place against customers, especially those who were unable to access their funds. As stated by Joseph Cioffi, a partner at Davis+Gilbert:

“Customers would likely have defences based on their expectations and also lack of knowledge of FTX’s scheme”

FTX have also made claims, which they state are backed up by credible evidence, that the Bahamian government “is responsible for directing unauthorized access to the Debtors’ systems for the purpose of obtaining FTX’s digital assets.” All of this is claimed to have taken place after the Chapter 11 filings was made, which means any transfer of those asset's are entitled to be part of any claw back efforts. Any company in bankruptcy is forced to operate under a strict and limited base of operations, as determined by the bankruptcy court. All of this is monitored by the U.S. Justice Department’s watchdog, the US Trustee. It outlines that a debtor in bankruptcy is unable to make transfers that go beyond the normal and ordinary scope of business without first getting the approval of the court. According to new FTC CEO John J. Ray III:

"there was at least $372 million of “unauthorized transfers” on the bankruptcy filing date."

It will not be an overnight process, and it will take time for FTX’s new executives time to determine how much property was transferred by the company that wasn’t for reasonably equivalent value. Included within these will be things like homes and other personal items which were purchased for FTX employees and its advisors. With those transactions not documented as loans, it outlines that FTX executives used the company funds as their own private money, and that would indicated that those transfers can be recovered as fraudulent transfers. Some are listed on the court filings as real estate which has been been recorded in the names of employees and advisors.

The efforts are likely to take years given the sheer size of FTX's operations, but as John J. Ray III said in court filings that among his goals are to "maximize value for FTX stakeholders and investigate claims against FTX’s co-founders." A partner from law firm O’Melveny & Myers, Daniel Shamah, stated:

“Bankruptcy court is a fishbowl. Every decision FTX made in recent weeks will be highly scrutinized by a litany of players; committees, potentially an examiner or a trustee, other investors, with a range of tools at their disposal. Expect this to be a long, expensive process that will take years to play out.”

Should retail investors who withdrew their funds in the days and weeks leading up to the bankruptcy filings be worried? Certainly there is the risk of a claw back being applied against them, but likely the courts will consider the fact it was the customers digital assets which were withdrawn, according to the terms of services by FTX. However, with so many fraudulent activities happening, there is always a risk of the court requiring all assets and funds to be returned before allocating them to customers based of the overall remaining amount at the company's disposal. Either way for now all anyone can do is await the court procedures and once a decision has been made, whether it is good or bad for the retail customers, there will likely be plenty of assistance available in fighting the court decisions. 

Have a great day.

Peace. CryptoGod-1.

Referral links:

Publish0x - https://www.publish0x.com/?a=olejZqrzej

Binance - https://accounts.binance.com/en/register?ref=143611368

Medium - https://medium.com/@1r3n9project

NFT Market Sales

OpenSea - https://opensea.io/RNabc

Follow Me :)

Twitter - @RNabc123

Good day everyone,

I hope you are all well and having a great day, welcome to CryptoGod-1's blog on all things crypto. This is a follow on from a previous post I made, called FTX will Attempt to Recover Finances. It continues to look at the ramifications of the bankruptcy case, and while that post focused more on how it has gone so far and the impact on charities and politicians, this post will look more at the retail investors side of things.

As mentioned in the previous article, U.S. allows for any transfer which were made up to 90 days of the bankruptcy can be recovered as part of a clawback. These transactions can be considered preferential if they result in a creditor getting more than it would have been entitled to at the end of the bankruptcy process, allowing the courts to demand a recovery in the difference in payment and interest can be incurred from the date any action is commenced by the court.

In the case of FTX, there was a reported withdrawal of more than $8bn from customers in a matter of days leading up to the company declaring its bankruptcy in early November 2022, and the courts could decide there are billions of dollars which were distributed unfairly. FTX co-founder, Sam Bankman-Fried, said the platform had around $5 billion of withdrawals on the 6th of November alone, which was just five days before its Chapter 11 filing. This could have a major impact on retail investors, many of whom are yet to get their funds back from FTX, and some of whom did manage to withdraw before it was too late. Something that will work on the side of the retail investors in the fact within the terms of service in FTX, it stated that: 

"depositors didn’t hand over ownership of their deposits"

This has led to some arguments on whether or not the crypto in the exchange can be treated as an asset which can be used to pay to outstanding bills of the exchange.

A lot will depend on the outcome of another U.S. bankruptcy case of a cryptocurrency firm, BlockFi. They went bust soon after FTX and recently filed a motion with the New Jersey bankruptcy court arguing:

“The BlockFi Wallet terms of service are clear. They provide that ‘title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi. The debtors have no legal or equitable interest in cryptocurrency that was present in the Wallet accounts as of platform pause, and clients should be able to withdraw such assets from the platform if they choose.”

This would lead many to conclude that the normal everyday retail depositors should be allowed to withdraw their assets, as it is clearly stated in the terms of service that the company has no underlying ownership of such assets. A lot will depend on the ruling of the courts, but the law in terms of bankruptcy is quite clear, and there could be lawsuits looking to claw back billions of dollars in assets that customers and insiders withdrew. 

These recovery efforts wont be simple, as the existing web of financial information available to the company's new CEO, John J. Ray III, and the team working on the bankruptcy filing is far from reliable. A lot like its former CEO Sam Bankman-Fried, the books of FTX are littered with discrepancies. The sheer amount of payments made to creditors in the days leading up the the bankruptcy, which are known as the preferences, could be a major resolution in paying off FTX's wider debts. The company is also able to go after transfers of assets and property designed to defraud creditors or made without receiving adequate value in return, which are known as fraudulent transfers, and can even try to claw back its payments without court permission after the bankruptcy filing.

These are the customers who managed to get their digital assets out of the FTX exchanges in the days leading up to the bankruptcy. As part of proceedings, a judge could rule that the withdrawals were not within the "normal and ordinary course of business," meaning the amount withdrawn may need to be returned in full. This can go back to a maximum of 90 days prior to the filing of bankruptcy, and any customer who is forced to return a payment they took out of the exchange in those 90 days would hold an unsecured claim against the estate for that amount.

A worrying thought for anybody, who at the time, thought of themselves as one of the lucky few who managed to get their assets away from FTX. When looking back at the fiasco that was the FTX bankruptcy filing and the collapse, it would be conceivable to believe a judge could view the actions not in line with the "ordinary course of business." Looking at what we do know, as I am sure there is plenty yet to be uncovered, the following events could easily sway the ruling opinion of a judge:

• The initial withdrawal chaos with some able to withdraw and other not.

• Alameda / FTX apparently dumping 100 million FTT tokens once prices began to crash.

• Binance announcing its decision to sell all its FTT tokens.

• The FTX exchange website being inaccessible due to freezing and overuse.

• The publicly announced lies by SBF to distract customers from the truth of what was happening to the exchange.

• Residents of the Bahamas being able to withdraw while residents elsewhere were not, something which implicated the Bahamas Securities Commission.

• Withdrawals which were only allowed via Justin-Sun/Tron-owned tokens which led to prices going above 4600% the regular market price.

This is not a definitive list, merely a token of some of the unusual and out of the ordinary activities which happened during the period in question. This also fails to take into consideration how FTX was violating its own terms on service towards its customers by allocating customer funds for their own activities including funnelling money into Alameda. According to Adam Levitin, a law professor at Georgetown University:

"There’s a possibility of preference actions being brought against everyone who withdrew funds from the exchange in the lead up to the bankruptcy.”

However, there are further complications to the procedures, which could have a large impact on any outcome of a judge. Securities and commodities transactions are considered 'safe harbours' which means in the case of a bankruptcy filing, these 'safe harbours' are allowed to be traded on an exchange without any risk of a claw back. Another claim could be anybody requested for a claw back could argue they their their own property off the exchange and were in no way paid by the company as a creditor.

This will of course be impact by the results of BlockFi, as noted above, but with over $5 billion of reported withdrawals by customers on the eve of the bankruptcy filing, there is a serious risk of preferential and fraudulent transfer actions having taken place against customers, especially those who were unable to access their funds. As stated by Joseph Cioffi, a partner at Davis+Gilbert:

“Customers would likely have defences based on their expectations and also lack of knowledge of FTX’s scheme”

FTX have also made claims, which they state are backed up by credible evidence, that the Bahamian government “is responsible for directing unauthorized access to the Debtors’ systems for the purpose of obtaining FTX’s digital assets.” All of this is claimed to have taken place after the Chapter 11 filings was made, which means any transfer of those asset's are entitled to be part of any claw back efforts. Any company in bankruptcy is forced to operate under a strict and limited base of operations, as determined by the bankruptcy court. All of this is monitored by the U.S. Justice Department’s watchdog, the US Trustee. It outlines that a debtor in bankruptcy is unable to make transfers that go beyond the normal and ordinary scope of business without first getting the approval of the court. According to new FTC CEO John J. Ray III:

"there was at least $372 million of “unauthorized transfers” on the bankruptcy filing date."

It will not be an overnight process, and it will take time for FTX’s new executives time to determine how much property was transferred by the company that wasn’t for reasonably equivalent value. Included within these will be things like homes and other personal items which were purchased for FTX employees and its advisors. With those transactions not documented as loans, it outlines that FTX executives used the company funds as their own private money, and that would indicated that those transfers can be recovered as fraudulent transfers. Some are listed on the court filings as real estate which has been been recorded in the names of employees and advisors.

The efforts are likely to take years given the sheer size of FTX's operations, but as John J. Ray III said in court filings that among his goals are to "maximize value for FTX stakeholders and investigate claims against FTX’s co-founders." A partner from law firm O’Melveny & Myers, Daniel Shamah, stated:

“Bankruptcy court is a fishbowl. Every decision FTX made in recent weeks will be highly scrutinized by a litany of players; committees, potentially an examiner or a trustee, other investors, with a range of tools at their disposal. Expect this to be a long, expensive process that will take years to play out.”

Should retail investors who withdrew their funds in the days and weeks leading up to the bankruptcy filings be worried? Certainly there is the risk of a claw back being applied against them, but likely the courts will consider the fact it was the customers digital assets which were withdrawn, according to the terms of services by FTX. However, with so many fraudulent activities happening, there is always a risk of the court requiring all assets and funds to be returned before allocating them to customers based of the overall remaining amount at the company's disposal. Either way for now all anyone can do is await the court procedures and once a decision has been made, whether it is good or bad for the retail customers, there will likely be plenty of assistance available in fighting the court decisions. 

Have a great day.

Peace. CryptoGod-1.

Referral links:

Publish0x - https://www.publish0x.com/?a=olejZqrzej

Binance - https://accounts.binance.com/en/register?ref=143611368

Medium - https://medium.com/@1r3n9project

NFT Market Sales

OpenSea - https://opensea.io/RNabc

Follow Me :)

Twitter - @RNabc123