A group of former customers of bankrupt crypto exchange FTX are rebelling against a proposed plan that would return the entirety of the money they lost. In a lawsuit filed this week, the customers argue they are due a whole lot more.
The plan laid out by FTX in December to return customer funds does not reflect the full scope of the firm’s obligation to customers, claims Pat Rabbitte, one of the plaintiffs in the lawsuit—particularly given an upswing in the price of crypto since the bankruptcy. “We’ve filed a lawsuit seeking fair recovery. This is a key piece of the puzzle that should have been resolved a long, long time ago,” says Rabbitte.
FTX collapsed in November 2022 after failing to meet a surge in withdrawal requests. Billions of dollars’ worth of customer money was missing. A year later, FTX founder Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy in connection with the fall of the exchange.
The messiness of the FTX bankruptcy has led to uncertainty about the amount of money it will return to customers; over the past year, bankruptcy claims being traded on the secondary market have experienced major price swings. In a hearing on January 31, Andrew Dietderich, a lawyer representing FTX, provided a concrete indication, telling the bankruptcy court that the company expects to have “sufficient funds to pay all allowed customer and creditor claims in full.” Dietderich stopped short of guaranteeing customers a full recovery but said the objective is “within reach.”
A development that might look like a reason to celebrate, though, is for some FTX customers a bitter pill. In their lawsuit, Rabbitte and others object to the way their claims have been valued under FTX’s plan. Many customers held crypto assets like bitcoin on the FTX platform, but through a process common to bankruptcy proceedings known as dollarization, their claims have instead been assigned a dollar value based on the price of those assets on the date of the bankruptcy petition.
When FTX fell, the crypto market was in the doldrums, but it has since rebounded. The value of bitcoin, for example, has risen from roughly $16,000 in November 2022 to more than $40,000 per coin. The market recovery is part of the reason FTX is in a position to repay customers in full, but it also means that customer claims could be less than half as valuable, dollarized, as they would be if mapped to the present value of crypto assets.
In the court hearing, Dietderich acknowledged that some customers might feel that dollarizing claims does not represent “true payment in full from where they started” but said it was the appropriate method under the bankruptcy code. The same day, the presiding judge, John Dorsey, ruled that FTX’s “methodology for estimating the claims is fair and reasonable.”
In their lawsuit, however, the former customers argue that stipulations in the FTX terms of service complicate the picture. The terms, they claim, make clear that “digital assets held in customer accounts expressly were not the property of and could not be loaned to FTX.” Therefore, the argument goes, FTX should not be able to sell off those assets in order to repay customers and other creditors—and especially not to repay customers at a rate that reflects an outdated valuation.