Another domino has fallen. Earlier this year, I wrote about the challenges facing the crypto industry As a result, Three Arrows Capital, Celsius Network and Voyager Digital filed for bankruptcy. Note that other cryptographic entities may also end in Chapter 11, and that prediction has proven correct.
Nov. 11, FTX Trading Co., Ltd. Additionally, approximately 130 affiliates have filed voluntary Chapter 11 bankruptcy filings in Delaware. FTX operates the second largest cryptocurrency exchange in the world, reaching her $32 billion valuation earlier this year. In the FTX filings, the debtor’s debt is estimated at between $10 billion and $50 billion, and the number of creditors is estimated to exceed his 100,000, although the actual number is more than 1 million. may exceed.
FTX’s bankruptcy filing could push the so-called crypto winter into a full-blown ice age, with more crypto companies failing, but some experts say the impact will be more limited. One thing is for sure, Voyager Digital’s lawsuit has been derailed. Just last month, a bankruptcy judge in Voyager Digital’s case approved its sale to FTX. Per FTX’s filing, Voyager Digital has said the transaction will not occur.
FTX bankruptcy is a free fall bankruptcy, meaning FTX has no immediate plans to get out of Chapter 11. This type of Chapter 11 filing has become less common over the past decade, but in so-called pre-packaged cases where the debtor files Chapter 11 in advance. – Negotiated restructuring plans – are becoming increasingly popular. Pre-packaged cases are preferred by debtors as they are quicker, easier and cheaper. Both the Celsius and Voyager Digital cases are bankruptcies due to free fall.
However, FTX also did not file many of the motions that debtors typically file on the first day of litigation. These motions often seek a range of emergency relief, including the ability to use cash collateral and continue to pay employees. These motions have a significant stabilizing effect on the debtor’s business and are often used to send a reassuring message to vendors, employees, clients, and other stakeholders. It is therefore worth noting that FTX did not file these emergency motions. In one of the only first-day motions ever filed, FTX described the filing as being made on an “emergency basis” and foretold that a request for additional relief would be forthcoming. Further emphasizing gender, FTX also claimed to be one of the most respected companies in the crypto space just a week before filing.
FTX’s sudden financial troubles date back to November 2, when it was reported that a hedge fund run by FTX’s co-founder and CEO held a large stake in FTX’s native cryptocurrency token, FTT. I can. Close economic ties between the two companies were previously undisclosed. This new information caused FTT prices to plummet and customer withdrawals from FTX’s platform to surge. According to reports, the trader has withdrawn about $6 billion from the platform in just three days. Customer withdrawals were frozen on November 8th.
This may sound like déjà vu. Because the spike in customer withdrawals (similar to a bank run) and subsequent freeze of customer accounts is eerily similar to what happened with cryptocurrency filings earlier this year. For a while, however, it seemed that FTX could avoid bankruptcy by selling to a competitor. However, the deal fell through during his diligence stage. This is another sign that FTX’s business is not doing well. The company’s CEO stepped down from his role as more and more questions were raised about FTX’s leadership. He and the professionals he hired soon began working around the clock, bringing the FTX company out of business.
In another twist, one day before the Chapter 11 filing, a governmental regulator in the Bahamas, where many of FTX’s key employees were located, was granted a license to one FTX entity (an entity that is not a Chapter 11 debtor). entered bankruptcy proceedings under government authority. – Appointed liquidator. On November 15, these liquidators filed a cross-border Chapter 15 lawsuit in bankruptcy court for the Southern District of New York. That filing is separate from the ongoing Chapter 11 lawsuit in Delaware and was made without coordination or consultation with FTX’s new CEO. After the Chapter 15 lawsuit was filed, FTX filed a petition in a Delaware state court to transfer the Chapter 15 lawsuit to Delaware. The motion he has scheduled to be heard in Delaware court on November 22, during which time the New York court has not granted substantive relief to the Chapter 15 action.
Additionally, FTX reports that it is in communication with the U.S. Department of Justice, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, and other federal, state, and international regulatory agencies. Voyager Digital and Celsius filings have launched similar investigations into the circumstances surrounding the bankruptcy. Court documents also saw a ton of letters written by private investors who could lose everything they invested in the company. For these creditors, regulatory investigations conducted after the company had already imploded may prove too late.
In short, this cryptocurrency collapse is a reminder that more regulation is needed in the crypto space. Appropriate government regulation not only helps prevent fraud and misuse of client funds, but also helps establish bankruptcy regimes to avoid investor panic.