FTX Risks Legal Backlash For Proposal to Freeze Payouts to Creditors in 49 Countries

Bankrupt FTX has filed a motion in Delaware bankruptcy court requesting permission to freeze assets owed to creditors in 49 countries with uncertain or restrictive cryptocurrency regulations.

This decision has raised concerns among creditors, particularly those in China, who are considering legal action against the company.

FTX Seeks to Freeze 5% of Claims Over Crypto Laws in 49 Jurisdictions

On July 2, FTX asked the court if it could hold back distributions to creditors in 49 jurisdictions where cryptocurrency transactions may be illegal or subject to heavy restrictions.

“Today, certain creditors of the FTX Recovery Trust reside in jurisdictions that continue to have laws and regulations that restrict cryptocurrency transactions. The collection of potentially applicable non-US laws and regulations is daunting,” the filing stated.

The company cited concerns that distributing assets in such regions could expose it to legal and financial risks. These risks include potential fines, penalties, or even criminal charges for violating local laws.

According to FTX, these jurisdictions have unclear or restrictive laws regarding cryptocurrency, which could complicate the payout process.

As a result, FTX Recovery Trust intends to temporarily freeze assets owed to creditors in these restricted regions while conducting legal reviews in each jurisdiction. The assets will be held in a “hold-and-review” structure, awaiting confirmation that distributing them would not violate any local laws.

If the legal review determines that no issues exist, the assets will be released to the creditors.

However, if compliance is questionable, the trust will notify the creditors and seek court approval to designate them as restricted. In such cases, any unclaimed distributions will revert back to the FTX Recovery Trust.

“[If] a Holder of a Claim (whether Disputed or Allowed) is determined by the FTX Recovery Trust to be a resident of aRestricted Foreign Jurisdiction, then the applicable Distribution and associated interest shall be forfeited,” FTX stated.

As per the court filing, creditors will have a 45-day window to object to these decisions.

Chinese Creditors Lead Legal Pushback

The 49 countries listed in the filing include China, Russia, Pakistan, Saudi Arabia, Egypt, Iran, and Ukraine, among others. Together, the claims from these regions represent 5% of the total claims, with China making up 82% of that figure.

Considering this, the proposal has sparked anger, especially among Chinese creditors who have been waiting for their funds since 2022.

Some creditors argue that Chinese residents can hold digital assets and receive US dollars in offshore accounts despite the domestic ban on crypto trading.

One creditor, Zhetengji, questioned why the settlement process does not support wire transfers to offshore accounts. This is despite the fact that the FTX claims process is denominated in USD.

“The claims process uses USD for settlement. Although foreign exchange controls limit the amount of USD that mainland Chinese residents can receive annually, they are allowed to hold USD overseas. So why isn’t wire transfer settlement supported,” the creditor questioned.

Another creditor alleged that the trust intends to use funds from restricted regions to cover shortfalls elsewhere, warning that this could provoke a coordinated legal backlash.

“There’s more than 1000 users I’ve see in WeChat groups that got hurt heavily in FTX scam…If victims in restrict regions unite together, it would force FTX to take the most serious consequences and pay for this fraud,” he stated.