On July 3, 2025, Sunil, a representative of FTX's creditors, stated on the social media platform X that FTX applied for court approval to authorize it to implement a new "Restricted Jurisdiction Procedures" in 49 jurisdictions that restrict cryptocurrency activities, including China (hereinafter referred to as "Restricted Jurisdictions"), and no longer repay the claims of users in "Restricted Jurisdictions". According to the proposed framework of the FTX Recovery Trust, affected creditors who fail to respond within the deadline will completely lose their right to compensation.
FTX blocked Chinese creditors from compensation in the name of the so-called "restricted jurisdictions". What is the official reason given? Is this basis for refusing compensation tenable? The following will briefly review the FTX bankruptcy incident and analyze the official reasons.
Review of FTX bankruptcy
From glory to bankruptcy
In May 2019, FTX was founded by Sam Bankman Fried (SBF) and Gary Wang. With high-leverage derivatives trading, it quickly rose to become the world's second largest cryptocurrency exchange, with more than 1 million users worldwide. Top institutions such as Sequoia Capital, SoftBank, and Temasek rushed to invest, with $900 million in Series B financing in 2021 and $400 million in Series C financing in 2022. SBF's personal wealth once soared to $24 billion, and he was hailed as the "next Buffett."
However, on November 2, 2022, a piece of heavy news brought a turning point in the fate of FTX and SBF. The well-known crypto media CoinDesk disclosed the balance sheet of FTX hedge fund Alameda Research, 60% of its $14.6 billion assets were FTX's own token FTT, which lacked real value support. On November 6, 2022, Zhao Changpeng, CEO of Binance, the world's largest cryptocurrency platform, announced on Twitter that he would liquidate all FTT tokens in his hands, with a total value of up to $580 million. Although Binance once expressed its intention to acquire FTX, it eventually gave up. In just ten days, this cryptocurrency exchange, which was once valued at more than Credit Suisse, collapsed and filed for bankruptcy in the United States on November 11.
Start the bankruptcy liquidation process
On February 18, 2025, FTX officially started the user asset liquidation process. According to the compensation plan, convenience creditors with losses of less than US$50,000 have priority to be repaid, and the amount they recover is converted into a cash compensation of about 119% based on the currency price on the day of bankruptcy. However, the regional restrictions on FTX's compensation have begun to emerge. Sunil, a representative of FTX creditors, posted on the social media platform X on February 21, 2025 that users from China, Russia, Egypt, Nigeria and Ukraine were temporarily excluded from this round of compensation. FTX did not clearly state the specific reasons for the restriction on compensation, but the cryptocurrency circle generally believes that mainland China's restrictions on cryptocurrency-related business activities have made FTX particularly cautious in paying compensation to creditors in mainland China.
Formally submit "Restricted Processing Procedures"
On July 2, 2025, the FTX Bankruptcy Trust formally submitted the "Motion of the FTX recovery trust for entry of an order in support of the confirmed plan authorizing the FTX recovery trust to implement the restricted jurisdiction procedures in potentially restricted foreign jurisdictions" to the Delaware Bankruptcy Court of the United States. The motion was initiated by the FTX Bankruptcy Trust, which intends to request the court to authorize the FTX Bankruptcy Trust to execute "Restricted Processing Procedures" in specific countries and regions in accordance with Sections 105(a), 1142(b) of the United States Bankruptcy Code and Section 3020(d) of the Federal Rules of Bankruptcy Procedure.
In the context of U.S. bankruptcy law, a motion is a "motion for authorization" applied by a trustee to the court for the purpose of requesting the court to authorize the trustee to execute a procedure for managing the bankruptcy property. According to Section 105(a) of the U.S. Bankruptcy Code, the court may issue any order, procedure, or judgment necessary or appropriate to implement the provisions of the bankruptcy law. Even if the parties do not file it, the court may take action or make a ruling on its own initiative (sua sponte) to execute or implement court orders or rules, or to prevent abuse of procedures.
The "restricted jurisdictions" in the document refer to countries and regions where the FTX bankruptcy trust has investigated the applicable laws and regulations worldwide and has not yet confirmed whether the "FTX bankruptcy trust and its distribution service provider" can legally pay creditors in the region. According to the motion attachment, there are currently 49 "potential restricted jurisdictions", involving approximately 5% of the total claims, of which the value of Chinese claims accounts for as much as 82%. Creditors affected by the "restricted jurisdiction" have the opportunity to object to the restricted status of their claims within 45 days. If no affected creditors object to this, or the court dismisses the creditors' objections, the FTX Recovery Trust will no longer distribute to creditors in the "restricted jurisdiction", and any interest in the distribution will be re-attributed to the FTX bankruptcy trust.
FinTax Comments
From the wording disclosed in the motion document, the restricted processing procedure proposed by FTX seems to be a compliant and prudent move to follow the crypto regulatory laws of various countries in cross-border bankruptcy distributions, but in fact it is difficult to conceal the suspicion of evading compensation obligations for the following reasons:
First, the reason why the FTX bankruptcy trust proposed the special mechanism of "restricted jurisdiction" is unconvincing. In its motion, the FTX bankruptcy trust emphasized that regulations in various “restricted jurisdictions” vary, but generally prohibit individuals or entities from engaging in any activities related to digital assets, including trading cryptocurrencies or paying cryptocurrency proceeds to residents of the region (for example, in Macau, “financial institutions and non-bank payment institutions are explicitly prohibited by the mainland Chinese authorities from providing services for these tokens and virtual currencies.” In Moldova, “the provision of virtual asset services is considered a crime, whether within the Republic of Moldova or as an auxiliary or supplementary activity to the main activity.”). The original document claims: "If the FTX bankruptcy trust distributes in violation of local laws, it may trigger fines, personal liability of management, and even criminal penalties, thereby harming all stakeholders; but at the same time, they cannot withhold these distributions indefinitely." "The FTX bankruptcy trust shall not violate relevant laws and distribute to residents of jurisdictions where its activities are not allowed or accounts located in prohibited areas. It is reasonable and an effective exercise of the FTX bankruptcy trust's authorization to return the funds allocated to residents of these regions to the FTX bankruptcy trust and distribute them through a planned distribution process." However, although mainland China does not support cryptocurrency trading activities and financial institutions to provide related services, Chinese residents have never been prohibited by law from holding virtual currencies and their derivative claims in accordance with the law, and Chinese courts have repeatedly recognized the property attributes of virtual assets. In addition, FTX's compensation plan for users is essentially denominated and cleared in US dollars, and users should also receive compensation in US dollars, which has no direct conflict with whether they engage in cryptocurrency trading. More importantly, there is no legal obstacle for Chinese residents to legally hold and receive overseas US dollar assets within the foreign exchange quota, and it is completely feasible through bank wire transfers. In fact, Celsius and other crypto platforms that are also under bankruptcy proceedings in the United States have successfully paid compensation to users including China by bank wire, and have not refused to pay due to so-called "restricted regulation". It can be seen that the compliance and prudence reasons of FTX's restricted processing procedures are difficult to be self-consistent, and it is more like a practice of shirking the responsibility of compensation to Chinese creditors in the name of excessive prudence.
Secondly, at the procedural level, the "restricted jurisdiction" standard is not fair. In the motion, FTX judged whether a jurisdiction is a "restricted jurisdiction" by "if there are still doubts about a potential restricted jurisdiction, the FTX Recovery Trust will hire qualified lawyers in the region to issue a formal legal opinion on whether distributions can be made to residents or custodial accounts in the region in accordance with the law." The FTX bankruptcy trust emphasizes hiring local lawyers in the restricted area to conduct compliance due diligence, but does not provide any protection design for the independence and fairness of lawyers. The local lawyers hired by themselves determine the "compliance risk", lacking a neutral supervision mechanism. Such a due diligence method is suspected of discriminating against Chinese creditors, and is not completely consistent with the principle of maximizing the interests of creditors in the US Bankruptcy Law. In addition, the "restricted processing procedure" does give creditors the opportunity to raise written objections within 45 days and prove their legitimacy through court relief, but this mechanism is almost a decoration for retail investors. For most scattered overseas individual creditors, it is extremely time-consuming and costly to hire professional lawyers across borders, translate local laws, prepare evidence, and deal with the jurisdiction and evidence disclosure procedures of the US courts in such a short period of time. In general, FTX excludes some creditors, especially Chinese creditors, from normal compensation on the grounds of "restricted jurisdiction", which has serious defects in factual basis, substantive justice and procedural justice. For cross-border bankruptcy distribution, maximizing the legitimate rights and interests of all creditors should be the priority principle, and any compliance arrangement should not be at the expense of the legitimate rights of a few people. Moreover, in the decentralized crypto world, equal rights are a common pursuit, and nationality and identity should not be the reason for "you have what I don't have."
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