FTX debtors have proposed reimbursing customers for their lost cryptocurrency holdings at dramatically discounted prices. It has sparked outrage and concerns about fairness within the troubled exchange’s bankruptcy proceedings.
While security breaches and hacks are prevalent concerns, overlooking the risk of exchange insolvency, as seen with FTX, can lead to devastating consequences. Nick Neuman, CEO of Casa, a self-custody wallet provider, aptly captured the core issue at hand:
The FTX bankruptcy is a stark reminder of the two main risks associated with storing crypto on an exchange: security risk and entity risk.
A proposal was submitted on December 27, 2022, to the US Bankruptcy Court for the District of Delaware. The proposal includes a valuation table that will convert digital assets held by FTX customers into cash based on prices at the time of the exchange’s collapse in November 2022. This means that regardless of current market valuations, customers would receive significantly less than the actual worth of their lost crypto.
Bitcoin (BTC), currently trading around $42,800, would be reimbursed at a mere $16,871 per coin, a staggering 61% discount. Similarly, Ethereum (ETH) holders would receive only $1,258 per ETH compared to its current market price of $2,396, representing a devaluation of about 48%.
FTX is justifying its discounted valuation by citing precedents from other bankruptcies in the crypto industry. The company claims that this ensures a “fair and reasonable value” for user claims. However, critics argue that this approach unfairly penalizes customers and ignores the current market value of their holdings.
Adding to the controversy, the proposed valuation table excludes FTX’s native token, FTT, whose price plummeted alongside the exchange’s downfall. The lack of clarity on FTT’s potential role in the reimbursement plan further fuels anxieties among affected customers.
The bankruptcy court will hold a hearing on January 25th to consider FTX’s proposed valuation method. Until then, objections from parties involved in the case can be filed. The ultimate decision on the reimbursement scheme will have a significant impact on thousands of FTX customers, potentially determining whether they receive a fraction or a substantial portion of their lost crypto assets.
According to Bitcoin Expert Simon Dixon, FTX has been trapped in a “rug pull”, claiming to have been locked in at the market’s bottom. The FTX 2.0 Customer Coalition has since shed light on the situation, revealing that FTX submitted an Estimation Motion to dollarize customer claims as of November 11, 2022.
