FTX expects to return all customer money; clawbacks may go away

post by Mikhail Samin (mikhail-samin) · 2024-02-14T03:43:13.218Z · LW · GW · 1 comments

This is a link post for https://www.nytimes.com/2024/02/03/business/dealbook/what-happens-to-ftx-clawback-cases-if-the-company-repays-its-creditors.html?unlocked_article_code=1.VU0.QBLc.h36dKm_EgU8L&smid=url-share

Contents

1 comment

1 comments

Comments sorted by top scores.

comment by aphyer · 2024-02-14T15:43:39.116Z · LW(p) · GW(p)

The 'full repayment' part is only sort of true, in a similar way to what happened with MTGOX, due to bankruptcy claims being USD-denominated.

Suppose that:

  • You owe customers 100 Bitcoin and $1M.
  • You have only half of that, 50 Bitcoins and $500k. 
  • The current price of Bitcoin is $20k.

You are clearly insolvent.  You will enter bankruptcy, and the bankruptcy estate will say 'you have $3M in liabilities', since you owe $1M in cash and $2M in bitcoin.

Suppose that the price of bitcoin then recovers to $50k.  You now have $3M in assets, since you have $500k in cash and $2.5M in bitcoin!  You can 'fully repay' everyone!  Hooray!

Of course, anyone who held a Bitcoin with you is getting back much less than a bitcoin in value, but since the bankruptcy court is evaluating your claims as USD liabilities you don't need to care about that.

This 'full repayment' is plausibly still important from a legal or a PR perspective, but e.g. this part:

there is typically a legal fight over whether a company was insolvent at the time of the investment or that the investment led to insolvency. If every FTX creditor stands to get 100 cents on the dollar, the clawback cases that don’t involve fraud wouldn’t serve much of a financial purpose and may be more difficult to argue, some lawyers say

is better thought of as 'our legal system may get confused by exchange rates and pretend FTX was always solvent' rather than as 'FTX was actually always solvent'.