Author: Kari McMahon Source: unchainedcrypto Translation: Shan Ouba, Golden Finance
The U.S. Bankruptcy Court approved the reorganization plan of bankrupt cryptocurrency exchange FTX on Monday, which means that of the recovered assets, approximately $14.7 billion to $16.5 billion will be distributed to FTX's creditors.
Many investors have been expecting these distributions to immediately increase demand for cryptocurrencies and push up prices as creditors use their recovered funds to reinvest in digital assets. However, the reality is much more complicated.
According to Kyle, a well-known FTX creditor advocate on Twitter and nicknamed "Mr Purple", the approval of U.S. Bankruptcy Judge John Dorsey's reorganization plan does not mean that the distribution of funds will begin immediately. First, the court must set a date for the implementation of the plan, the so-called "effective date," which is currently expected to be October 31.
“Given [the debtor’s] track record, I think [this timeline] could be delayed,” Kyle said. “It’s more likely that the effective date will be sometime in November, perhaps late November, when the debtor will actually begin the distribution process.”
What’s the timeline for the distribution?
Once the effective date arrives, the debtor will have 60 days to distribute funds to the so-called “convenience class” of creditors, which includes all individual customer claims under $50,000. Based on the debtor’s recovery estimates, about $1.2 billion in recovered assets will be distributed to that class.
The timeline for the redistribution is still being worked out, depending on logistics, Vanderbilt University law professor Yesha Yadav said in an email to Unchained.
“The current payment schedule is phased in — small creditors who are owed less than $50,000 will be paid sooner, while larger creditors may not receive distributions until next year,” Yadav said.
According to Kyle, a larger group of creditors, known as the “Rights Class,” could be paid as early as February of next year. The group has about $9 billion in claims, and Kyle expects these creditors to receive payments of 100 to 110 cents per claim dollar next spring, followed by interest payments on the outstanding portion of claims until those claims are fully paid. In addition, further distributions from the $12.7 billion settlement between FTX Legacy and the Commodity Futures Trading Commission (CFTC) will also come. FTX Legacy expects the final recovery rate for “Rights Class” creditors to be between 129% and 143%.
“I can say with great confidence that almost no [claims buyers] will reinvest their funds in crypto,” Kyle said. “Even if they wanted to, many of them aren’t allowed to do that. A lot of the claim buyers are funds that have limited partnership agreements, and those partners are not crypto investors.”
Braziel has facilitated many of the claims deals through his investment firm and has purchased small claims for clients. In those cases, he said, the allocations go back to the clients, who decide how to invest them.
“Most of those people are big believers in crypto, they already hold a lot of crypto, so they’re not going to put the money back into crypto,” Braziel said.
John, an FTX creditor and small claims buyer who works in the crypto space, said the chances of putting all of the allocations into crypto are “small.” “It feels like everything is a little overvalued,” he noted.
Not everyone is avoiding the crypto market, however; crypto investment firm Sol Strategies told The Block it intends to buy more Solana tokens with capital it reclaims from FTX. Moreover, some of the rights class members in the case are institutional crypto firms that had traded on FTX, Braziel said.
The convenience class is made up mostly of retail investors, who are expected to be the most likely to put money back into crypto, but Kyle is skeptical.
“It’s expected that less than $1 billion will come into the market in December or January, and that’s the real number,” Kyle said. “Anyone who bet on this being a big liquidity event is going to be disappointed.”
Another factor to consider throughout this process is that many major crypto bankruptcy estates, such as Celsius and Voyager, have been selling crypto assets recovered in bankruptcy proceedings to repay creditors, which has put selling pressure on crypto markets.
“I actually think the most bullish thing for the crypto market is that these estates are basically all over,” Braziel said. "There are still some marginal things, but for the most part they have sold their - in crypto parlance - 'bags.'"
FTX creditor and claims buyer John, who requested anonymity due to fears of debtor retaliation, said he believes convenience creditors may be partially repaid in April or May next year, but not all at once, but in stages.
How will the distribution affect the market?
Experts say that whenever the distribution is made, it is unlikely that creditors will use the recovered funds to push up cryptocurrency prices, so these distributions are unlikely to be major liquidity events in the crypto market. This is because claims buyers and distressed investment companies played a major role in this bankruptcy case.
Fortune magazine pointed out in a March report that hedge funds Attestor, Baupost and Farallon are the largest holders of FTX claims, holding claims of $520 million, $518 million and $346 million, respectively. In February, pricing broker Cherokee Acquisition noted that the top six holders of FTX claims were distressed debt firms, holding a combined $1.3 billion in positions.
By Braziel’s estimate, about half of the claims in the entire case, about $6 billion to $7 billion, belong to distressed investment firms. Kyle arrived at a similar figure, noting that the ad hoc panel (which is primarily comprised of claim purchasers, but does not represent all claim purchasers in the case) holds a combined total of about $6 billion in claims.
“I would say with great confidence that almost no [these claim purchasers] will put their money back into crypto,” Kyle said. “Even if they wanted to, many are not allowed to do so. Many of the claim purchasers are funds with limited partnership agreements, and those partners are not crypto investors.”
Braziel facilitated many of the claims trades through his investment firm and purchased a small portion of the claims for clients. In those cases, he said, the allocated funds are returned to the clients, who decide how to invest them.
“Most of these people are big crypto fans who already hold a lot of crypto. So they’re not going to put their money back into crypto,” Braziel added.
FTX creditor and small claims purchaser John works in crypto, but he said the chances of putting all of his allocation money into crypto are “very slim.” “It feels like everything is a little overvalued,” he noted.
Not everyone is avoiding crypto, though; crypto investment firm Sol Strategies told The Block it intends to buy more Solana tokens with funds recovered from FTX. And some of the rights class members in the case are institutional-grade crypto firms that once traded on FTX, Braziel said.
The convenience class creditors are primarily made up of retail investors, who are expected to be most likely to reinvest their proceeds into crypto, but Kyle is skeptical.
“The expectation is that less than $1 billion will come into the market in December or January, and that’s the real number,” Kyle said. “Anyone trading on this as a major liquidity event is going to be sorely disappointed.”
Another factor to consider in this process is that many of the major cryptocurrency bankruptcy estates, such as Celsius and Voyager, have already repaid creditors by selling crypto assets recovered in bankruptcy proceedings, which has put some selling pressure on the cryptocurrency market.
In fact, I think the most bullish thing about the crypto market is that these estates have basically been dealt with.
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