FTX Bankruptcy Ruling Could Set a Precedent for Anonymity

In Brief

• Judge John Dorsey ruled that US customers of the collapsed exchange FTX can stay anonymous.
• FTX customers lost billions in digital assets locked up in the exchange when it collapsed last November.
• Former FTX CEO Sam Bankman-Fried awaits trial and potentially faces up to 155 years in jail.

Judge John Dorsey has ruled in a Delaware court that ordinary FTX customerscan remain anonymous indefinitely.The decision could set a precedent for customer anonymity in other insolvencies.Even so, many face a long wait to retrieve their lost funds from the collapsed exchange.And, when assessing the ruling’s impact, it is well to remember that no two bankruptcies are exactly the same.
As reported by Fox Business and other sources, a conglomerate of media organizations argued there was a “compelling and legitimate interest” in the names. A US bankruptcy trustee backed this request. However, over the weekend, Judge Dorsey ruled the identities of FTX’s customers are a “trade secret.” Dorsey reasoned that revealing the names would open up the former customers to identity theft and other crimes.

US Customers Will Stay Anonymous

In January, Dorsey issued a ruling granting FTX the authority to redact customer information from court filings for a period of 90 days. “It’s the customers that are the most important issue here,” Judge Dorsey said. “I want to make sure that they are protected and they don’t fall victim to any types of scams that might be happening out there.”

Brian Glueckstein, a lawyer representing FTX, argued that “the debtors are in a position to realize value from these customer lists.”

The decision is a win for privacy for FTX customers who have already lost billions in digital assets locked up in the exchange when it went bust. In March, the now-defunct platform said it had identified $8.9 billion in missing customer funds. However, in January, lawyers for the company said they had discovered $5 billion that was previously missing.

Dorsey allowed the release of the names of creditors or equity holders from the United Kingdom and European Union. (Citizens of both jurisdictions are protected under GDPR rules.) He said that there is no evidence to suggest that their disclosure would cause any harm.

Clearly, Dorsey’s ruling is significant. It is one that parties to other insolvencies, and their counsel, are likely to revisit. But will it apply broadly across different types of restructurings? Joshua Garcia, a partner at Ketsal, a fintech and blockchain-focused law firm, told BeInCrypto it may depend on how decentralized the platforms in question really are.

“This ruling may have a limited effect on decentralized platforms. Because truly decentralized platforms likely won’t possess the names of any customers trading on their platforms,” Garcia said.

“This outcome will carry more weight in existing bankruptcy cases, not as much in SEC cases, because the current issues there are so different,” he added.
Sam Bankman-Fried Awaiting Trial

On November 11, 2022, FTX declared bankruptcy due to a significant increase in customer withdrawals that occurred earlier in the month. Then-CEO Sam Bankman-Fried acknowledged that the company lacked adequate reserves to fulfill customer demands.

The disgraced CEO is currently awaiting a trial that could land him up to 155 years in jail.

In a short space of time, he went from the industry’s wunderkind to a hated pariah. According to the Bloomberg Wealth Index, his wealth plummeted from $16 billion to under $980 million in a single day.

Disclaimer
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