Digging into FTX’s finances

When FTX collapsed in November, initial reports suggested that as much as $US8 billion was missing from customer accounts, including money held in some of the 9 million accounts that customers opened at the exchange. The exact amount of money it owes lenders — including other big cryptocurrency trading firms — hasn’t been disclosed.

As lawyers continue to dig into the finances of FTX, the final accounting of what the exchange owes, what it holds and what can be recovered is likely to change. The task is complicated by the fact that FTX did not keep complete financial records. Prosecutors contend that for years, Bankman-Fried treated customer deposits like money in a piggy bank that he could do with as he saw fit.

FTX’s lawyers have said that Bankman-Fried and two other associates took out more than $US1 billion in loans from the exchange.

Prosecutors have charged that FTX regularly diverted customer deposits to fuel trading and cover losses at Alameda Research, a crypto trading firm that Bankman-Fried owned. FTX executives also spent customer money to acquire lavish real estate in the Bahamas and make political donations to both Democrats and Republicans, according to federal authorities.

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Bankman-Fried has pleaded not guilty to charges of fraud, money laundering and campaign finance violations. And he has denied stealing any customer money.

Federal authorities have said that Bankman-Fried also used billions of dollars in customer deposits to invest in hundreds of other cryptocurrency firms. Last week, FTX’s lawyers said Bankman-Fried’s businesses made at least $US4.6 billion in investments in roughly 300 other companies, and that those funds could be reclaimed through litigation or negotiations. That amount does not count toward the $US5.5 billion total.

Trump Loses

It will be harder to reclaim — or even value — the more esoteric digital assets that FTX’s lawyers have identified among the exchange’s holdings, including millions of dollars worth of serum, sol/ethereum and a little-known coin called Trump Loses.

Many of these unusually named coins came into existence or rose to popularity in 2020 and 2021, as the crypto market boomed. Entrepreneurs tried to capitalise on the hype by marketing new cryptocurrencies to investors, who were looking to generate quick profits. But now many of these coins have fallen in value. In some cases, the number of coins held by FTX is so large that it would be difficult for the company to sell the digital currencies without cratering their price.

FTX also is planning to raise cash by selling some business operations in the Bahamas, Japan and Europe that might be viable with a capital infusion. And the company plans to work with officials in the Bahamas to market the company’s real estate holdings — a total of 36 properties valued at $US253 million.

But it’s unclear just how much all those assets can sell for, or how quickly. In short, FTX customers and lenders still need to brace themselves for a multiyear legal drama before they see a return of any money, and they are likely to incur steep losses, experts say.

“It is possible creditors could be given the option of getting digital coin or cash. It depends on what the underlying crypto is,” said Kenneth Marshall, a financial adviser who has specialised in working with investors who have been victims of failed deals, including those involving crypto. “This could drag on for a long time.”

The latest disclosure about FTX assets has also put a spotlight on the work of Sullivan & Cromwell, one of the world’s most prestigious corporate law firms. It is not only representing FTX in the bankruptcy but also did legal work for the exchange before it collapsed,

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On Friday, Andrew R. Vara, the US trustee in the bankruptcy proceeding, filed an objection to FTX’s decision to retain Sullivan & Cromwell, claiming that its work before the bankruptcy poses a potential conflict of interest. The trustee also has argued for an independent examiner to be appointed to investigate matters.

The law firm’s bankruptcy work doesn’t come cheap: Billing rates for Sullivan & Cromwell partners range from $US1,575 to $US2,165 per hour, according to an earlier court filing.

A representative for Sullivan & Cromwell pointed to a court filing Tuesday that said the law firm had “worked tirelessly” to recover assets for the company. In a related court filing, a lawyer from the firm, Andrew Dietderich, defended the firm’s prior work for FTX and its ability to conduct an investigation into the events surrounding the collapse of the exchange.

This article originally appeared in The New York Times.