FTX and Genesis Global, two bankrupt crypto platforms, take different approaches to repaying their customers. Explore how these contrasting strategies impact customer recoveries in the evolving crypto landscape.
In a tale of two bankruptcies, FTX and Genesis Global, both once-prominent crypto platforms, are navigating their financial collapses with contrasting strategies that highlight the complexities of cryptocurrency in legal and financial frameworks.
FTX, which filed for bankruptcy in November 2022 during a significant downturn in the digital asset market, has committed to fully reimbursing its customers. However, these repayments will be made in cash, based on the value of the customers’ crypto holdings at the time of the bankruptcy filing. This approach, while adhering to U.S. bankruptcy law, has stirred dissatisfaction among FTX users who feel shortchanged by the lack of credit for the substantial increase in crypto prices since the filing.
Conversely, Genesis Global, another major player in the crypto space, has adopted a markedly different approach. Instead of cash repayments, Genesis is returning digital assets to its customers in their original crypto form. This decision allows customers to benefit from the recent surge in cryptocurrency values, providing them with significantly more than they would have received had their claims been converted to cash during the market’s low point.
The divergence between these two strategies stems from a novel legal question: how to appropriately value cryptocurrency-based claims in a bankruptcy proceeding. U.S. bankruptcy law mandates that creditor claims be valued in dollars as of the bankruptcy petition date. For FTX, this meant locking in the claims at the depressed prices of late 2022, capping the potential recovery for its customers.
FTX’s repayment plan is designed to fully cover these claims in dollars, plus interest, but without accounting for the appreciation in crypto prices since the bankruptcy filing. This has led to discontent among some users who argue that the so-called “full-pay” Chapter 11 plan falls short of truly compensating them for their losses.
On the other hand, Genesis’s approach has been more favorable to its customers. In January 2023, when Genesis filed for bankruptcy, it froze customer assets. Now, as part of its repayment plan, the company has returned approximately $4 billion worth of digital assets to its customers. For example, customers who had lent bitcoins to Genesis are recovering about 51% of their digital assets—yet, due to the recent crypto rally, this equates to roughly 166% of their claims based on the petition-date value.
Sean O’Neal, a lawyer representing Genesis, emphasized this strategy in a recent bankruptcy court hearing, stating, “We think that if someone lent us three bitcoins, they’re due three bitcoins.”
Genesis’s creditors might also see additional recoveries depending on the outcomes of ongoing litigation involving its parent company, Digital Currency Group (DCG). Genesis’s Chapter 11 case took a decisive turn in October 2023 when it ceased efforts to restructure a $1.7 billion debt owed by DCG and instead focused on liquidating assets to repay creditors. Despite objections from DCG, which argued that repayments should be based on the January 2023 petition-date prices, a bankruptcy judge approved Genesis’s wind-down plan in May.
As the situation unfolds, Genesis has also worked with crypto exchange Gemini to return digital assets to customers of its Earn lending program, who had lost access to their accounts due to the bankruptcy. This move was largely funded by selling shares in the Grayscale Bitcoin Trust, which were part of Genesis’s loan collateral.
Meanwhile, FTX remains steadfast in its strategy, aiming to liquidate its crypto holdings and repay customers in cash based on November 2022 valuations. An FTX representative underscored that their Chapter 11 plan reflects the unique challenges faced by the company and complies with U.S. bankruptcy law, which requires the equal treatment of creditors.
As the crypto landscape continues to evolve, these divergent strategies between FTX and Genesis highlight the ongoing challenges in managing and valuing digital assets in legal proceedings, leaving customers with varied outcomes in the face of financial turmoil.
