Mankiw Research | How to protect the rights and interests of Chinese creditors on FTX exchange?

What's going on with the FTX thunderstorm? Some friends may still be confused about the "FTX thunderstorm", don't worry, I'll briefly sort out the background first, and Lao Tie, who is familiar with the incident, can jump directly to the next paragraph 👇. In November 2022, there was a shocking drama in the cryptocurrency world: FTX, the world's second-largest exchange, declared bankruptcy without warning. The platform, built by the genius Sam Bankman-Fried (SBF), was once a shining star in the industry, with a valuation of up to $32 billion, but it collapsed overnight due to misappropriation and management chaos, leaving hundreds of thousands of users and a black hole of more than $10 billion in debt. SBF was eventually sentenced to 25 years in prison by a U.S. court, while the FTX liquidation team staged a "Jedi counterattack", miraculously recovering $14.5 billion to $16.3 billion, promising to compensate customers as much as possible. This "thunderstorm" farce shocked the world and put 8% of Chinese users in an embarrassment - they were blocked from paying out due to regulatory restrictions.

Will Chinese creditors still be paid? According to PANews, Chinese customers have been excluded from the compensation program due to China's regulatory environment. In its 2017 and 2021 notices, China declared virtual currency trading to be an illegal financial activity that is not protected by law, which poses a compliance risk for FTX to pay compensation to Chinese customers. Although Chinese customers account for 8% of FTX's total users (according to South China Morning Post), they are still considered ineligible for compensation in the current U.S. bankruptcy proceedings. FTX's post-bankruptcy payouts have entered the stage of small debt distribution, but Chinese users are currently excluded due to jurisdictional hurdles and compliance risks. Does this mean that Chinese creditors are completely hopeless? We don't think so. The situation is far more complicated than it seems, and there is still hope. The issue of compensation for Chinese users may be delayed, and it is likely that it will not be completely excluded. How to do the declaration of creditor's rights? The FTX bankruptcy case involved two parallel legal proceedings: Chapter 11 bankruptcy proceedings in the United States and liquidation proceedings in the Bahamas. The former was presided over by FTX in the U.S. Court of Delaware, while the latter involved its Bahamian subsidiary, FTX Digital Markets Ltd. Which procedure you choose to declare your claims directly determines whether you can successfully get back your rights and interests. For Chinese creditors, the Bahamas liquidation process may be preferred. The settlement teams of the two countries reached a settlement in December 2023, committing to coordinate the distribution of assets and ensure that the amount and timing of the payout are consistent (including principal and 9% per annum). Compared with the U.S. process, the legal framework of the Bahamas provides better protection for foreign creditors when dealing with cross-border insolvencies, which may better suit the actual situation of Chinese creditors and minimize compliance conflicts in U.S. proceedings. In the declaration process, there are some points that we need to pay attention to: according to the nature of their own creditor's rights, creditor's rights disputes, etc., make the most beneficial choice for themselves, and do not act recklessly. At the same time, if you have a large amount of debt (such as more than hundreds of thousands of dollars) or limited English skills, it is highly recommended to hire a professional lawyer. Not only can a lawyer save time by preparing the application on your behalf, but they can also provide the best advice based on your specific situation and avoid missing opportunities due to operational errors. Why is FTX able to pay? Looking back at the history of crypto exchanges after the crash, such as Mentougou (Mt. Gox), FTX was able to achieve a higher percentage of payouts after bankruptcy, which is also an overall improvement. This involves differences in a number of factors such as asset management, liquidation efficiency, legal framework, and market environment. Assets are added. Although FTX founder SBF (Sam Bankman-Fried) was convicted of misappropriating client funds, the funds were not completely depleted, and many were invested in realizable assets rather than disappearing completely. As of March 11, 2025, the clearing team has recovered between $14.5 billion and $16.3 billion, which is sufficient to cover all client principal (at dollar value at the time of bankruptcy in November 2022) with 9% interest. These assets include cash, cryptocurrencies, and equity investments (such as Anthropic's shares, which will be sold in 2024 for a profit of about $1 billion). The efficient liquidation mechanism of the U.S. Bankruptcy Code (Chapter 11) also provides strong support for asset addition. The timing of the market is right. FTX crashed in November 2022, at a low point in the crypto market (Bitcoin is around $16,000). The liquidation team sells assets during the market recovery period in 2024-2025 (when the price of Bitcoin rises significantly), significantly increasing the recovery value. Mentougou missed a similar opportunity, resulting in a stretched payout. Modern regulatory and technical support. At the time of FTX's bankruptcy, blockchain tracking technology, such as Chainalysis, had matured to help the clearing team lock in the flow of funds. At the same time, strict regulatory and judicial oversight in the United States (11 U.S.C. §1123 Principle of Equality of Creditors) ensures that the interests of customers take precedence. However, due to the serious loss of assets (850,000 bitcoins were stolen), the delay in liquidation for nearly ten years and the backward technology, Mentougou can only pay 15%-20% of the loss. Web3 advocates decentralization, but in practice, it still relies on centralized entities. A mature regulatory environment can provide effective protection for investors. FTX's ability to pay is the embodiment of this logic. Mankiw's lawyer concluded Chinese creditors are not completely hopeless, with FTX's relatively ample pool of funds and ongoing liquidation providing the basis for payouts. Choosing the Bahamian process, relying on professional assistance and keeping a close eye on developments are key to protecting your rights. Although the decentralization ideal of Web3 is beautiful, in reality, the need for a centralized legal framework is the last line of defense for investors. If you need support from a professional lawyer during this process, you can contact a Mankiw lawyer.

/ END. Authors of this article: Niu Xiaojing, Liu Honglin