The Balance Sheet

What's left of FTX

Hey there,

My timeline looks happy again after a long time. Chat rooms on Telegram that have been dead are hearing the sounds of a million retail users coming back to bang on the ‘buy’ button. Terra and FTT are trading as though gravity is imaginary. But things were not always this way. Around this time a year back, FTX filed for bankruptcy. Close to 140 firms were shut along with it.

I wanted to study the FTX estate’s books and see how they have performed over the last year. Today’s post is an analytical ode to the user deposits and creditor balances in the estate. The timeline below should act as a quick refresher on what played out over the year. 

A recurring question pops up when one discusses the FTX bankruptcy. Much of the assets owed to customers were liquid assets like BTC, ETH, SOL, and USDC. These assets could be liquidated and returned to the customers. Why is there such a fuss in giving it back? Couldn’t these assets be simply returned to the customers?

After all, liquidations make sense when assets are in illiquid form, like land or buildings; breaking them into pieces to hand over to investors/claimers is almost impossible. So, you sell the asset to the highest bidder and pass on the dollar amounts. But it appears that matters are a bit more complicated than that. 

As I looked into documents, I realised how naïve I was. 

1. Firstly, there were 102 debtors (companies that owe things to creditors), out of which 3 have been dismissed. So, there are 99 debtors now.

2. Secondly, except for 36,075 customers who filed for claims worth $16 billion, $65 billion are filed across 2300+ filings. These entities include Genesis, Celsius, Voyager, and the Internal Revenue Services (IRS). 

Since the creditors extend beyond customers, it’s difficult to distribute assets as they are. The situation necessitates liquidating assets, which will then be distributed pro rata. 

One of the parallels we have is Mt. Gox. About a decade ago, around 850,000 BTC (then $460 million, ~6.5% of the circulating supply) was stolen from the exchange. The exchange recovered ~20% or 170,000 BTC (now $6.12 billion, assuming BTC at $36,000). Creditors still await their repayment. 

In this case, creditors could choose how they want their payout – either 90% in September 2023 (now delayed to October 2024) or an unknown amount at the end of civil litigation. The two largest creditors, representing 20% of the total payout, chose the first option.

Another example of large-scale bankruptcy proceedings is Enron, which took about a decade to conclude. Investors had sued Enron for over $42 billion in losses and received over $7.2 billion. With all that context out of the way, let’s dig in.

Liabilities or Claims

As in any bankruptcy proceeding, the burning question is how much FTX creditors could end up with. The answer lies in the value of assets FTX holds and how much the claims are. Note that claims can be disputed. Not every claim made is considered at the time of distribution of liquidated assets. For example, when you arrange claims in descending values, you’ll find a claim worth $1.7 trillion. Very likely, this won’t be entertained in the final proceedings. 

According to the debtor presentation submitted to the bankruptcy court on September 11, 2023, the total claims are $81 billion. Out of this, $65 billion are non-customer, and $25 billion are customer claims. 

Of the $65 billion non-customer claims  

• $9.2 billion are assumed invalid or redundant.

• $43.5 billion by the IRS is assumed to be subordinated. This means that the IRS claim falls below other claims. Therefore, these claims will be paid only after other claims are fulfilled.

• The remaining $12.3 billion worth of claims will likely be considered at the same priority as customer claims.

Out of the $25 billion customer claims: 

• $10.9 billion in claims are scheduled. That is, the bankruptcy court will consider them.

• $16.6 billion in claims are disputed, although some disputed claims have been scheduled.

So, if we consider $12.3 billion from non-customers plus $10.9 billion from customers, the total liability is $23.2 billion. Please note that not all of this will be agreed to. Some of the claims will be disputed. But let’s assume this to be the starting point.

How much of this will be paid? Well, there’s no straightforward answer. It is a function of the asset mix and how the assets can be liquidated. I looked at the organisation’s books to come up with a guesstimate. 

Assets

The following table shows the assets of FTX debtors. Digital assets in category A are more liquid assets, like BTC and ETH, while category B tokens are almost illiquid or largely controlled by the estate (tokens like SRM, MAPS, OXY, etc.). The values of all these assets are calculated based on their closing prices on August 31, 2023.

$529 million was held in brokerage accounts across Grayscale, Bitwise, and Blackrock Equity. Real estate includes 38 properties in the Bahamas with $222 million book value appraised at $199 million. 

Out of the assets mentioned above, ~$7 billion in assets are marshalled. Marshalling is a legal principle the bankruptcy court uses to ensure creditors are treated fairly. It means that a creditor with a secured claim can require the debtor to use specific assets to repay the debt, even if the debtor has other assets that are not involved.

The bankruptcy court will sell the assets subject to liens or security interests first to pay off the creditors with those claims. Close to half of the marshalled assets are liquid tokens whose values have surged since the day of the bankruptcy filing.