TechScape: How to Slice the Cake of a Billion Dollar Crypto Bankruptcy?

IIf you owe the bank 1,000,000 and you can’t pay it back, you’re in trouble. If you owe the bank a billion and you can’t pay it back, the bank is in trouble. If the bank owes you a billion and cannot pay it back, the system is in trouble.

When cryptocurrency exchange FTX filed for bankruptcy last week, it wasn’t quite sure how much it owed customers, the company’s new chief executive, John Ray III, said. said in a file. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has happened here,” Ray wrote. That’s a strong statement, given that he worked on the bankruptcy of Enron, the most notorious example of corporate fraud in recent American history.

FTX, Ray wrote, is expected to have “significant liabilities arising from crypto assets deposited by clients…However, these liabilities are not reflected in the financial statements prepared…under the control of Mr. Bankman-Fried.” There is a vague justification for this choice: FTX, in its terms of service, insisted that crypto assets deposited on the platform remained the property of its customers. If it’s not your property, it shouldn’t be recorded on your balance sheet, right?

FDIC pictures

Unfortunately, the nature of bankruptcy is that you have a lot of people expecting you to give them things – mostly money, but sometimes other things with names like “bitcoin”, “ethereum ” Where “a 40 million dollar mansion in the Bahamas– and not enough to give everyone what they want. A terms of service document stating that you do not own the assets that some of these people have deposited on your offshore cryptocurrency exchange could help them recover their assets. But other people will have documents qualifying them as “senior creditors”, which they say will also help them recover their assets. And each of these groups thinks that if there isn’t enough to do, they should get all their things first. The job of a bankruptcy court is, in part, to try to sort out these claims and determine who gets all of their stuff, who gets some of their stuff, and who gets nothing at all.

Sam Bankman-Fried’s $40 million Bahamian penthouse is reportedly on the market. Photo: Twitter/FTX/Reuters

FTX being FTX, things can’t be that simple. In Delaware, where FTX filed for bankruptcy, companies are generally expected to submit their 20 largest creditors. But FTX — or, more specifically, the FTX Group, a loosely connected network of more than 100 companies united by Sam Bankman-Fried — got permission to combine all of its bankruptcies into one case and all of its creditors into one document. 50 against – evenings. Annoyingly for us, he also got permission to keep these creditors secret.

Nevertheless, we now know that the 50 largest unsecured claims held against FTX total a staggering $3.1 billion (not including insiders who may also be indebted for the money and are treated differently). All 50 of them were customers of the company, with the largest owed $226,280,579 and the smallest just $21,344,561. There will be many more to whom FTX owes millions, if not tens of millions of dollars, who did not make the top 50. In Bankman-Fried’s versions of the company’s balance sheet, prepared he two weeks ago in an attempt to raise funds to save the company, he estimated the company’s total liabilities to be around $8 billion.

Unfortunately, the document that these clients promised that none of their crypto is “owned by, or shall or may be lent to, FTX Trading” is unlikely to help. FTX is not a bank, and depositors are not a special class of creditors: they are only, as the bankruptcy documents suggest, unsecured creditors. Worse still, another filing from the company’s financial adviser suggests someone is getting a haircut. Across the group, cash reserves total just $1.2 billion. Crypto and net worth, plus things like $121 million in Bahamian ownershipwill increase that somewhat, but it’s a big hole to fill.

In fact, FTX relied quite heavily on the fact that it wasn’t a bank to do a lot of things that a regulated bank wouldn’t be allowed to do: things like printing a token, FTT, supposed to represent a right to a share of the company’s profits and then transfer that token to its sister company Alameda to use as additional collateral in loans and business transactions.

One of the first signs that things weren’t quite right at FTX was last August, when the company’s regulated US subsidiary received a warning letter from the FDIC, the US federal agency responsible for protect consumer deposits in banks. The agency slapped FTX.US on the wrist for a tweet from its then-president, Brett Harrison, that implied the exchange had such protection.

Since the collapse of the exchange, which I wrote about in last week’s newsletter, there has been renewed interest in the crypto industry to find a way to offer deposit insurance to customers. Changpeng Zhao, founder of Binance, injected $1 billion into SAFU, the “Secure Asset Fund for Users”, created in 2018 with the aim of reassuring retail investors. Since then, he has also offered “an industry recovery fund, to help projects that are otherwise strong, but in liquidity crunch” – the equivalent of a lender of last resort, the Federal Reserve, to the FDIC (Federal Deposit Insurance Corporation) of the asset fund. .

The proposals could help the next time there is a crisis in space. But $1 billion wouldn’t even hit the sides of the black hole in FTX’s finances; the fund is going to have to get a lot bigger if it does more than shine a spotlight on the gap between crypto ambitions and achievements.

Vox populi

The Twitter office in Dublin.
The Twitter office in Dublin. Photography: Charles McQuillan/Getty Images

At this point, the question remains open as to who has destroyed more value in the past 30 days: Sam Bankman-Fried or Elon Musk. The FTX empire was worth $32 billion at its peak; Twitter was worth $44 billion when Elon Musk bought it. Twitter probably isn’t worth $0 now, but it sure isn’t in good shape.

Musk fired thousands of staff in his first weekend as boss, and hundreds more resigned voluntarily over the following week, while contractors were also furloughed without notice. By the second weekend, he had decided to send an opt-out loyalty test to his employees, forcing them to agree to work with him in “hardcore mode” or leave the company, then, when too many of them chose the latter optionscrambled to find employees to reassign within the company who could be tasked with critical infrastructure after entire teams were bailed out.

In the process, Musk seemed to forget that Twitter is a global company, with employees scattered around the world. In countries like Britain, Germany and Ireland, it is actually not legal for an employer to fire staff, at will or on a whim, without reason or notice. But Twitter is trying it anyway.

The company already has received a letter from Business Secretary Grant Shapps “reminding” him of the UK redundancy law. But over the weekend, after the deadline for Musk’s Loyalty Pledge passed, Twitter employees across Europe began to find themselves cut off from internal systems, despite not having allegedly received no notice, were given no cause for dismissal, and were given no chance to discuss their options with the company.

Employees in Germany have formed a works council and are pursuing; employees in the UK have approached the Prospect union about recognition. Elon Musk has got away with it a lot in his life, but it seems unlikely that this will be dismissed by the courts. It could be “only” a very costly mistake once compensation is paid to all former employees, but it would be the latest in a month of very costly mistakes for the multi-billionaire.

And all the while hovering over Musk’s head is Twitter’s obligation to pay around $1 billion in interest to the banks that helped fund the company’s purchase. Even before he scares away advertisers, it’s only slightly lower than total profit the company achieved in 2018, one of only two years in which it made a profit. Now, that’s the ticking time bomb under the whole acquisition. What will be more valuable by the end of the year: Musk’s participation in Twitter, or a lettuce?

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