FTX Customers Look Forward to Full Repayment as Bankman-Fried Awaits Sentencing

The crypto world was shaken when FTX, a major crypto exchange, spiraled into bankruptcy in late 2022. The collapse came as a surprise to many, leaving thousands of customers with billions of dollars in losses. However, as former FTX CEO Sam Bankman-Fried prepares to face sentencing for his criminal fraud conviction, there is a glimmer of hope for those affected. According to bankruptcy lawyers for the FTX estate, they expect to fully repay all customers and creditors with legitimate claims.

The optimism stems largely from the rebound of the crypto market and the appreciating value of FTX’s venture investments. Despite the criminal charges against Bankman-Fried, who could spend the rest of his life behind bars, the value of the investments made with customer funds has significantly increased.

The bankruptcy team, led by John Ray III and his team of restructuring advisors, has been working tirelessly to claw back cash, luxury property, and crypto, as well as tracking down missing assets. They have already collected over $7 billion, and that doesn’t include valuables like $26 million in gifts and property to Bankman-Fried’s parents or the $700 million handed over to K5 Global and founder Michael Kives, who invested FTX cash in companies like SpaceX. Some of these investments have seen a precipitous rise in value.

FTX had been negotiating with bidders about a potential reboot of the company, but those efforts were scrapped last month. Instead, the focus has shifted to liquidating assets to make customers whole. Braden Perry, a former senior trial lawyer for the Commodity Futures Trading Commission, FTX’s only official U.S. regulator, told CNBC that the decision to repay users in full came after the abandonment of efforts to restart the FTX crypto exchange.

However, getting actual money back in the hands of customers remains a challenge. While a lot of the value has been recouped and more is to come, divvying up large amounts of cash is a complex process in bankruptcies, particularly when so much of the money is in non-traditional and illiquid assets. Even Ray was doubtful at the beginning of the process, noting that at the end of the day, they wouldn’t be able to recover all the losses.

But the market rebound has been a game-changer. When Ray made those remarks, crypto was mired in a bear market, with bitcoin trading at around $16,000. It’s now above $47,000. In September, the bankruptcy team released a status report showing that FTX had $3.4 billion worth of digital assets, with over $1.1 billion coming from its Solana investment. Solana fits into a category of so-called “Sam coins,” a group that also includes Serum, a token created and promoted by FTX and sister hedge fund Alameda Research. After the dust settled from FTX’s bankruptcy, Solana saw a huge run-up in its price, and it continued to rally after the September report. Since the end of that month, it’s spiked fivefold. Meanwhile, FTX’s bitcoin stash, which was worth $560 million at the time of the September report, is today valued north of $1 billion.

Bankman-Fried’s investments weren’t limited to crypto. He also used client money to back startups like Anthropic, the artificial intelligence company founded by ex-OpenAI employees. FTX invested $500 million in Anthropic in 2021, before the generative AI boom. Anthropic’s valuation hit $18 billion in December 2023, which would value FTX’s roughly 8% stake at about $1.4 billion. During Bankman-Fried’s criminal trial in New York, Judge Lewis Kaplan denied the defense’s request that it be permitted to say that FTX’s investment in Anthropic was a smart bet. The bankruptcy estate of FTX has been looking to sell its Anthropic stake, according to a court filing this month.

For FTX customers, being made whole means getting the cash equivalent of what their crypto was worth in November 2022. In other words, they’re not seeing any of the upside of FTX’s investments or being given virtual coins that would allow them to cash out at higher valuations. However, some investors have found a way to participate in FTX’s ongoing odyssey. The market for FTX IOUs lit up last year as it became clear that the bankruptcy estate was cobbling together a lucrative portfolio. One financial firm that had lost around $100 million initially sold its FTX debt for 6 cents on the dollar in a new secondary market out of concern that they may never get a better deal. As of December, those claims were going for more than 70 cents on the dollar.

If customers are eventually made whole, that could play a big role in Bankman-Fried’s appeal, likely following his sentencing, which is set to take place in Brooklyn on March 28. Perry said it could also affect how the judge handles sentencing in the first place. Under the federal sentencing guidelines, and even assuming no monetary loss, Bankman-Fried still faces at least 70 months in prison based on his base level offense, number of victims, sophisticated means, and leadership role. The massive losses that were originally expected would suggest 30 to years to life. However, if customers are made whole, that could significantly reduce the sentence.

Renato Mariotti, a former prosecutor in the U.S. Justice Department’s Securities and Commodities Fraud Section, told CNBC that judges typically consider the amount of restitution paid to victims at sentencing. If the victim is made whole, that is a big plus for the defendant. However, the extent of the fraud, coupled with Bankman-Fried’s false testimony and violation of bond conditions, could limit the reduction. I usually advise clients to pay restitution before sentencing if at all possible.

In conclusion, the FTX bankruptcy case has been a rollercoaster ride for all involved. With Bankman-Fried facing sentencing and the possibility of spending the rest of his life in prison, there is a glimmer of hope for FTX customers. The value of the investments made with customer funds has significantly increased, and bankruptcy lawyers expect to fully repay all customers and creditors with legitimate claims. However, the process of getting actual money back in the hands of customers remains complex, and the sentencing of Bankman-Fried is still uncertain. Only time will tell how this story unfolds.