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FTX’s Free Fall Into Bankruptcy – Will Crypto Investors and Crypto Creditors Lose Again?

On November 11, 2022, cryptocurrency giant FTX and 130 affiliated companies that make up the FTX Group filed chapter 11 petitions in the United States Bankruptcy Court in Delaware. FTX had been one of the five largest crypto exchanges by volume and was recently valued at $30 billion. FTX’s bankruptcy filing was a free fall, not accompanied by the traditional motions and filings that explain the need and purpose of the filing and attempt to ensure a smooth transition into chapter 11. Without these traditional filings, the bankruptcy cases are playing out more slowly and opaquely than typical, and creditors of FTX, which likely exceed one million in number, await to hear the fate of their claims and the proposed path that will be taken by the companies in their bankruptcy cases. People collectively will likely lose billions of dollars, and the ripple effect of the filing will be felt across other crypto companies and financial markets.

Crypto Crises in 2022

The crypto environment has fallen into a degree of disarray. Unfortunately, big crypto losses have become a familiar story in 2022. Earlier this year, cryptocurrency lenders and brokers like Celsius Network and Voyager Digital filed for bankruptcy. Three Arrows Capital, a cryptocurrency hedge fund, filed for bankruptcy. Algorithmic stablecoins Tron, Terra-Luna, DEI, MIM and Tether all lost their pegs to the U.S. dollar. Companies with exposure to FTX, such as cryptocurrency lender BlockFi, which halted customer withdrawals after FTX’s filing, may have to consider and file bankruptcy as well. FTX will likely be the largest crypto-related bankruptcy yet.  

Investigations and Litigation

FTX’s scandalous, abrupt business collapse has rightly drawn scrutiny by criminal and regulatory investigators and will likewise be the subject of intense investigations by fiduciaries and parties in interest in its bankruptcy case. In the 72 hours following the bankruptcy, dozens of federal, state and international regulatory agencies have been in contact with FTX’s representatives. Similarly, bankruptcy court-appointed fiduciaries will certainly scrutinize the intertwined nature of FTX and businesses connected to founder and insider Sam Bankman-Fried, who resigned as CEO prior to the bankruptcy filing, such as with trading company Alameda Research. One would expect that an examiner and other fiduciaries in the FTX bankruptcy proceeding would explore and pursue breach of fiduciary duty claims, fraudulent transfers claims, preference actions, and any other claims as potential avenues of recovery for distributions to creditors as occurred in the notorious Madoff bankruptcy case. 

Unsettled Bankruptcy Law and Challenges

In addition to identifying the impact of intercompany transactions and avoidable transfers that may arise in the FTX case, crypto-related bankruptcies typically present unique challenges to creditors and customers. Once a crypto company such as FTX is in bankruptcy, the bankruptcy process will determine, among other things, (a) the ownership of the assets, (b) the relative priority of the creditors and other interest holders, and (c) the value of the subject assets – all novel tasks in the crypto world. In crypto-custodian bankruptcy proceedings, one open issue is whether digital assets held by a crypto exchange on behalf of platform users may be viewed as the exchange’s corporate assets in the proceeding rather than the users’. If so, those assets could be used to satisfy debts of the exchange’s creditors. As for valuing assets, even outside the crypto world, such disputes are challenging and often heavily litigated. The volatility of digital assets, which typically are not tied to any external fixed standard or reference, makes the task of determining value much harder. 

Experience to Address the Crypto Challenges

Faced with these unknowns, creditors and customers with claims in crypto bankruptcies, such as FTX, face many challenges and generally benefit from experienced legal counsel. Attorneys in Calfee’s longstanding Information Technology Law practice group work with sophisticated clients in complex matters in the Web3 and blockchain arena, including crypto and other digital assets. Calfee’s Business Restructuring and Insolvency practice group members advise and represent in major, complex cases official and ad hoc committees of creditors as well as significant creditors to protect and assert their claims to maximize their recoveries regardless of the complexities and difficulties encountered. In doing so in landmark cases such as FTX, Calfee’s multidisciplinary team understands the underlying technologies and business practices in these markets and, with over 40 years of experience in mega chapter 11 bankruptcy cases, has the expertise to bring about extraordinarily successful client outcomes.    

To discuss creditors' rights or other legal needs related to business restructuring and insolvency, please contact one of our team members:

Dan McMullen, Information Technology Law Practice Leader

Jeffrey Schwartz, Business Restructuring and Insolvency Practice Co-Chair


Calfee Connections blogs, vlogs, and other educational content are intended to inform and educate readers about legal developments and are not intended as legal advice for any specific individual or specific situation. Please consult with your attorney regarding any legal questions you may have. With regard to all content including case studies or descriptions, past outcomes do not predict future results. The opinions expressed may not necessarily reflect the viewpoints of all attorneys and professionals of Calfee, Halter & Griswold LLP or its subsidiary, Calfee Strategic Solutions, LLC.

Non-legal business services are provided by Calfee Strategic Solutions, LLC, a wholly owned subsidiary of Calfee, Halter & Griswold. Calfee Strategic Solutions is not a law firm and does not provide legal services to clients. Although many of the professionals in Calfee’s Government Relations and Legislation group and Investment Management group are attorneys, the non-licensed professionals in this group are not authorized to engage in the practice of law. Accordingly, our non-licensed professionals’ advice should not be regarded as legal advice, and their services should not be considered the practice of law.

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