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FTX investors: Can depositors claim collateral rights as ex-Enron bankruptcy lawyer John J Ray III steps in

By Raphael Sanis

15:44, 14 November 2022

FTX logo surrounded by cash and cryptocurrencies
FTX has stopped withdrawals on its exchange after filing for bankruptcy – Photo: Getty Images

FTX investors may be waiting a while before they can claim their lost funds back. It is being speculated that investments will be treated as “unsecured claims”, meaning traders will not have collateral rights.

This follows the news that the bankrupt cryptocurrency exchange is disabling withdrawals, which will see users unable to cash out their investments.

“A messy and complex bankruptcy case”

Investors who used the FTX cryptocurrency exchange could struggle to get their funds back. The Wall Steet Journal have said investors will likely not be able to claim collateral rights.

Meanwhile, Daniel Besikof, partner at Loeb & Loeb, spoke to MarketWatch and said this “could be a very messy and complex bankruptcy case”.

He pointed towards FTX’s terms of service, which said: “None of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading; FTX Trading does not represent or treat digital assets in users’ accounts as belonging to FTX Trading.”

While this could be perceived as hopeful for FTX investors, it is a complex process and the exchange’s position is yet to be clarified.

Comparisons have been made with the collapse of cryptocurrency exchange Mt. Gox in 2014, where investors are still waiting for their money back.

XRP/USD

0.49 Price
+0.580% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

DOGE/USD

0.16 Price
+4.180% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

BCH/USD

498.05 Price
+3.160% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.50

BTC/USD

63,245.75 Price
-0.640% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

FTX’s new CEO

As FTX filed for Chapter 11 bankruptcy on 11 November, John Jay Ray III was named as Sam Bankman-Fried’s replacement as CEO of FTX.

Ray is experienced with handling bankrupt companies. He previously was the chairman of Enron, a failed energy trading company that filed for bankruptcy in 2001. Enron creditors saw a recovery rate of 52 cents for every $1, according to The Wall Street Journal.

In FTX’s bankruptcy press statement, the exchange said it would begin “an orderly process to review and monetise assets for the benefit of all global shareholders”. But it did not reveal a timeline for these events.

However, one of Ray’s first acts as CEO was to halt withdrawals. He posted a statement on Ryne Miller, FTX’s general counsel’s, Twitter account.

He tweeted: “We are in the process of removing trading and withdrawal functionality and moving as many digital assets as can be identified to a new cold wallet custodian.”

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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