If you have been paying attention to financial news recently, you have probably heard that FTX, one of the world’s largest cryptocurrency exchanges, has declared bankruptcy. Its founder and former CEO, Sam Bankman-Fried has been indicted by the U.S. Department of Justice and is awaiting extradition from The Bahamas. The firm’s rapid collapse has left many people wondering what is going to happen to investors’ money.

 

The answer depends on two main factors. They are:

 

1. The Amount of Money FTX Currently Has

 

Surprising as it may seem, we do not currently know how much money FTX has on hand. That’s largely because the company’s financials are in such a mess.

 

John J. Ray, the man who was named CEO of FTX after Bankman-Fried’s resignation, has said he has never seen “such a complete absence of trustworthy financial information.”

 

Ray also says he believes a “substantial portion” of FTX’s assets “may be missing or stolen.”

 

A team of experienced cybersecurity experts and forensic accountants is currently trying to track down the missing assets. Once they work through this process, they should be able to figure out exactly how much money FTX can feasibly return to its investors.

 

2. How Investors Are Treated in the Chapter 11 Bankruptcy Proceedings

When a business files for chapter 11 bankruptcy, all its assets and debts are gathered and reorganized and creditors are generally paid in the following order:

 

● Secured Claims: Claims where the creditor holds a lien on some collateral.

● Priority Unsecured Claims: Unsecured tax claims and administrative expenses.

● Nonpriority Unsecured Claims: Lines of credit, credit card debts, and private loans.

 

In the past, when crypto exchanges collapsed, investors generally found themselves at the back of the line when it came time to divide up the company assets. This may or not be the case when it comes to FTX. That’s because FTX had a provision in its terms and conditions which stated that the investor, and not FTX, was the owner of any digital assets in the account.

 

Courts may rule that this provision means investors should be treated as secured creditors. If they do, investors may be able to the front of the line and will likely be able to recover more of their money.

 

At the moment, there remains a great deal of uncertainty about the fate of investors’ money. It is possible that everyone will get their entire investment back. It’s also possible that people will get pennies on the dollar – or nothing at all.

 

Finally, regardless of whether the crypto investor-customers are treated as secured or unsecured creditors, if FTX doesn’t have sufficient assets, there will be scores of creditors who will not receive much of anything in the way of repayment. Either way, it’s likely to be several years before there is a resolution to this case.

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