The Failure of ‘FTX 2.0’

Wed Mar 27 2024
Mark Cooper (3147 articles)
The Failure of ‘FTX 2.0’

For almost six months and millions of dollars, the bankruptcy counsel and attorneys overseeing FTX investigated the possibility of reviving Sam Bankman-Fried’s defunct bitcoin exchange. They ultimately concluded it was not worthwhile.

Following its collapse with a $8 billion hole in its financial sheet and the subsequent charges of fraud against its senior executives, the prospect of FTX’s revival may appear remote to those on the outside looking in. However, key creditors rallied around the plan to restart the exchange in some way, which they called FTX 2.0. A large number of potential purchasers showed interest.

The billions of dollars worth of cryptocurrency that FTX still had on hand increased in value as crypto prices recovered towards the end of last year, making it possible for the company to refund its clients in whole or nearly so. If the management team guiding FTX through bankruptcy could simply return one dollar for every user, they could call it a day and avoid having to relaunch the exchange.

Claims by creditors indicate that the bankruptcy estate failed to capitalize on a chance to build something worthwhile out of the remnants of FTX, which was once a leading cryptocurrency exchange globally.

An FTX creditor named Arush Sehgal, who had a brief advisory role with one of the potential purchasers, Proof Group, blamed them for wiping out billions of dollars’ worth of value.It was as simple as turning it back on; their company was booming and the exchange was the number two in the globe. However, it was not the case.

Customers who have already used FTX’s services are upset that they will only receive a fraction of the value of their cryptocurrency when the company files for bankruptcy in November 2022. Since then, the value of bitcoin has more than tripled, and it is now trading around record levels, at around $70,000. Customers should be compensated for that missed opportunity, according to proponents of an FTX relaunch, by receiving shares in a rebooted exchange.

John J. Ray III, CEO of FTX since the company’s bankruptcy filing, said that his team had sought for potential purchasers or merger partners for the exchange extensively, but that the proposals they received were inadequate.

After considering the expenses, delays, and other issues, Ray informed The Wall Street Journal that no credible investor was willing to provide us with meaningful value in any of the cases. The brand was associated with deceit and the code was out of date, so we didn’t even get a serious offer for any intellectual property.

On Thursday, sentencing will be handed down to Bankman-Fried, who faced seven counts of fraud and conspiracy. Because of his involvement in the collapse of FTX, which the prosecution has characterized as one of the biggest financial scams in American history, they have requested that the judge impose a prison term of forty to fifty years.

In order to understand what transpired with FTX 2.0, the Journal spoke with creditors, bidders seeking to revive the cryptocurrency exchange, and the management team of FTX after Chapter 11.

At first, it appeared that FTX clients would not be able to get even a partial refund of their claims. In January of 2023, Ray initially proposed the notion of starting over. “If there is a path forward on that, then we will not only explore that, we will do it,” he told the Journal at the time.

Before becoming CEO of FTX, Ray had no background in cryptocurrency, but he is a seasoned restructuring expert best known for supervising Enron’s bankruptcy. In private, he voiced his reservations regarding whether or not a restart in the spring or summer of 2023 was even possible. He questioned the point of cryptocurrencies in general and voiced his concerns about getting regulatory clearance to relaunch FTX.

Nonetheless, FTX started seeking purchasers in May. In the background, the committee representing unsecured creditors actively sought to resume the process. The purpose of these committees is to represent the interests of the creditors, and they are frequently used in bankruptcy proceedings. Crypto companies, like algorithmic trading firm Wintermute Asia, made up the majority of FTX’s committee.

Disagreement arose between the insolvency estate and the committee. In private, some creditors claimed that Ray’s team was slacking off on FTX 2.0 development and botched crypto transactions.

Claiming differences regarding the 2.0 process, the bankruptcy estate denied any issues with the committee.

According to FTX, 75 prospective bidders had expressed interest by September. Ultimately, three primary bidders surfaced: Proof, an investment group based in Silicon Valley; Bullish, a cryptocurrency exchange run by former NY Stock Exchange president Tom Farley; and Figure, a software company.

The main goal of the bidders was to get the clients of FTX to utilize their own exchanges. As an incentive to lure former FTX users to their own platforms, some aspired to become a distribution channel for digital assets that customers would get at the conclusion of the bankruptcy process. Like high-stakes casino patrons, FTX’s “whales” were a sizable portion of the exchange’s one million users prior to its demise.

It became widely believed that Bullish was the best option. In exchange for FTX clients receiving a 15% ownership in Bullish, Farley’s firm offered to pay with its own shares, with an additional compensation possible if Bullish met specific goals. Additionally, Bullish aimed to entice FTX clients by launching a market for digital tokens standing in for their claims of bankruptcy.

In December, Bullish’s proposed FTX purchase collapsed. The majority of the FTX 2.0 offers were predicated on percentages of future revenue rather than cash or other physical assets, which Ray’s team found disappointing. Ray’s group shared the view that it would be unjust to essentially coerce FTX users into joining a new exchange. The creditors’ committee, meanwhile, eventually agreed that completing the complicated arrangement wasn’t worth the effort and money.

Reboot attempts came to a standstill during a court hearing on January 31, according to FTX lawyer Andrew Dietderich. He deemed it “simply too high” to create a profitable transaction using the items that Mr. Bankman-Fried discarded in the dumpster.

A few days after that, Mike Cagney, CEO of Figure, made his offer on X public. A new exchange that Figure was planning to build would be co-owned by FTX creditors, and he suggested merging FTX’s client list with it. He stated that the proposal would create an owner-community on the first day of the exchange and would be worth billions to FTX creditors.

Ray still doesn’t believe it. He argued that the most just course of action would be to give victims as much money as possible and let them chose how to spend it.

Mark Cooper

Mark Cooper

Mark Cooper is Political / Stock Market Correspondent. He has been covering Global Stock Markets for more than 6 years.