There are many moving parts to the FTX bankruptcy, but exchange customers, especially small ones, stand to reclaim most of their lost assets if the U.S. government does not elbow them out of the way.

_{By Nina Bambysheva, Forbes Staff}

While Sam Bankman-Fried fights for his freedom in criminal court, former customers of his FTX cryptocurrency exchange who have lost about $16 billion in assets are inching toward getting most of their money back.

FTX Trading, now being run by bankruptcy specialist John J. Ray III, announced this month that customers can expect to recoup over 90% of the “distributable value” of the funds recovered from the failed enterprise. But while it plans to direct the lion’s share of the pie to customers who held investments on its international and U.S. exchanges, it failed to specify how big that recovery pie might be. That depends on how many assets there actually are and when and how they can be distributed to creditors. Equity investors, mostly venture capitalists like Sequoia Capital and Temasek, will be wiped out under the plan, and lower-ranking creditors, including trading partners of the Alameda Research affiliate, are likely to suffer significant losses.

Insiders such as former FTX US General Counsel Ryne Miller and company co-founders Gary Wang and Bankman-Fried—the latter of whom is on trial for a litany of charges related to the bankruptcy including fraud and money laundering—are precluded from recovering anything.

It turns out that smaller customers stand to reclaim most of their money as the company unearths previously missing assets and some investments appreciate in value. A Forbes tally of customer claims and visible FTX assets (see table below) estimates that nearly $13 billion of the $15 billion in claims is accounted for. That should mean almost full restitution for account holders who withdrew less than $250,000 on the FTX.com and FTX.US exchanges. Those with more are subject to a 15% clawback of funds withdrawn in the final calamitous days of the crypto conglomerate’s operations.

There’s one big problem: the Internal Revenue Service claims that FTX owes it $44 billion, a figure likely to preclude much or all of the recovery for any other creditors, depending on who gets first crack at the assets. The agency has filed its demands against various FTX entities for things like failing to withhold payroll taxes as administrative claims, which at least in theory may take precedence over lost customer funds, overwhelming the company’s visible assets.

FTX Assets Could Satisfy Most Customer Claims

The latest version of the failed crypto company's bankruptcy plan allocates more than 90% of "distributable assets" to exchange clients. According to Forbes estimates it’s nearly enough to meet their claims.

One big source of recovery is customers themselves. Those with net withdrawals above $250,000 during the nine days before FTX’s bankruptcy petition will effectively contribute about $1.2 billion toward the client claims by taking a 15% haircut on the money they took out during that period. The clawbacks may affect 4,500 customers of FTX.com and FTX.US, based on data in the company’s latest presentation to the creditors, which was filed on September 11.

“Not many good estimates exist, largely because claims are still coming in, they need to settle clawback issues,” cautions Zach Rosenberg, attorney and principal at crypto-focused Rosehill Legal.

On top of that, FTX had $2.4 billion in cash and $1.7 billion in major cryptocurrencies excluding bitcoin and solana as of August 31. After recent market advances, the holdings in those two tokens are now worth $2.6 billion.

Other financial assets held in brokerage accounts at Bitwise, Grayscale and BlackRock and combined with additional token holdings total $900 million. The company also has real estate in the Bahamas, including the now-infamous Orchid penthouse where Bankman-Fried and his closest lieutenants lived and multiple condos, appraised at $199 million.

FTX has about $3.8 billion of venture investments, based on the amount of capital it committed. One of those, the artificial intelligence startup Anthropic, carried on the books at $500 million is now worth between $3 billion and $4.5 billion, based on a report by The Information that the company is in talks to raise capital at a valuation as high as $30 billion. The venture investments are otherwise hard to value, especially given the turmoil in the cryptocurrency markets over the past two years and the difficulty in selling assets that are not listed on financial exchanges. We assigned a total value of $5.65 billion to them, including the Anthropic stake.

There are $16.6 billion of what the September presentation classified as “non-customer avoidance actions,” consisting of payments that might be reclaimed from FTX affiliates, insiders, donations and vendors. Subtracting $588 million already “monetized” and considering the company’s statement that some of the total was also included with the customer clawbacks, we assigned a modest recovery value of 5%, or $565 million, to the rest.

The bankruptcy presentation mentions the possibility of the exchange being sold or restructured and relaunched. Bloomberg reported that FTX is considering proposals from three bidders. Forbes chose not to assign a value to the former exchange operations.

Only counting the assets that can be estimated from the incomplete company filings and using conservative valuations, we calculate FTX has about $12.6 billion against $14.8 billion in customer claims after accounting for the clawbacks on large net withdrawals.

It was originally estimated that $8.7 billion was missing from FTX coffers when the exchange failed, but the company has already located $7 billion, according to the September filing.

By far the biggest challenge to customer and creditor recoveries is the U.S. government. The IRS has filed 45 claims totaling $44 billion against FTX and affiliates. That seems to be overly optimistic on the agency’s part.

“The IRS’s claim is administrative and, therefore, would default to having priority over unsecured claims, but whether most customers have unsecured claims or property interests (that is because they never ceded legal title to the assets deposited on FTX) is an open question that is the subject of a lawsuit filed against the estate,” says Rosenberg in an email to Forbes.

Rosenberg says he believes that the IRS claim is wildly inflated. “Based on available information, it appears the IRS levied a jeopardy assessment against the estate and assessed as much as it could at each level of the organization,” according to Rosenberg, “meaning there is almost certainly a significant amount of duplication inherent in that $44 billion figure.” He and others believe the IRS will reach a settlement, but it will likely be far lower than the current claim.

In cases where fraud is involved, IRS claims should be structurally subordinated, despite the agency’s contention that it has priority, says a crypto investor known as Mr. Purple who is following the case and asked not to be further identified. “The IRS claim would, or at a minimum should, not be ahead of customers or non-customer claims.”

In its September presentation, FTX says the IRS claim is “assumed to be subordinated.”

The IRS has not responded to Forbes’ request for comment.

While the issue gets decided, investors who are betting on the value of the customer claims indicate they do not think the IRS will entirely pre-empt the payouts. Buyers are currently paying 44% (41% bid, 46% ask) of face value of customer claims, according to Vladimir Jelisavacic, manager at Cherokee Acquisition, which runs Claims Market, a marketplace for bankruptcy claims. That’s up from 41% two weeks ago and just 12% at the start of 2023. The unsecured claims, for which the demand is much smaller, are trading at 15%, he says.

FTX Trading Ltd.

Why the huge discount between the 44% claims price and the expected recovery approaching face value? “Claim buyers are buying at a value today based on the net present value of when they anticipate getting that recovery,” says Mr. Purple. “So, if a claim buyer is looking for a 15% internal rate of return, they are assuming the payout will take many years into the future to get all of that value.” He estimates the final recovery would come to 85 cents on the dollar.

The longer it takes, the more the FTX estate pays in legal fees, which are averaging $30 million a month.

“Obviously, the outcome of the major litigation is very interesting and will dramatically impact what customers receive. Typically, these litigations drag on for years and thus the reason that customers are inclined to sell their claims and not wait for future uncertain distributions,” says Joseph Sarachek, a lawyer who specializes in distressed assets.

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