According to the document filed by FTX on 12 July 2024 in the U.S. Bankruptcy Court for the District of Delaware, the bankrupt cryptocurrency exchange FTX and the United States Commodity Futures Trading Commission (CFTC) have reached a $12.7 billion settlement, concluding a 19-month long lawsuit. This agreement follows extensive negotiations and is now pending court approval.
“The Proposed Settlement is an integral and valuable component of the Debtors’ proposed chapter 11 reorganization plan,” stated Commodity Futures Trading Commission senior trial attorney Carlin R. Metzger and FTX’s CEO John J. Ray III. “It resolves ongoing litigation and disputes with one of the largest creditors of the Debtors, avoids the cost and delay of further litigation, and mitigates a significant risk of diminution of the assets available for distribution to creditors.”
The CFTC initially sued FTX, its former CEO Sam Bankman-Fried, and FTX’s sister trading firm Alameda Research in December 2022. The regulator accused the firm of fraud and misrepresentations by marketing FTX.com as a digital commodity asset platform. The lawsuit highlighted customer losses amounting to $8 billion.
The settlement comprises $8.7 billion in restitution and $4 billion in disgorgement. Importantly, the CFTC did not seek a civil monetary penalty, emphasizing the substantial potential liability faced by FTX due to the conduct, guilty pleas, and convictions of the FTX insiders. This agreement underscores the CFTC’s role as the “most significant single creditor” in the Chapter 11 bankruptcy cases, as noted by FTX.
“The Proposed Settlement thus provides much-needed certainty as to the magnitude of the Allowed CFTC Claim and allows these Chapter 11 Cases to move swiftly toward resolution, thereby enabling the prompt distribution to the Debtors’ other creditors and customers,” the court filing read. A hearing on the settlement is scheduled for August 6 in the Bankruptcy Court for the District of Delaware.
FTX’s proposed reorganization plan aims for a 118% return for 98% of the creditors—those with claims under $50,000—based on the US dollar value of asset prices at the time of FTX’s bankruptcy filing in November 2022. However, many creditors prefer a cryptocurrency payout in-kind, considering the market’s 166% increase in market cap since the bankruptcy filing. Creditors are currently voting on their preferred payout method, with a final decision by US Bankruptcy Court Judge John Dorsey expected on October 7.
This settlement marks a significant development in the realm of cryptocurrency dispute resolution, demonstrating that settlements are becoming a preferred method for resolving complex legal disputes in the crypto sphere. Andy Dietderich, a partner at Sullivan & Cromwell and lead attorney for FTX Debtors, highlighted that the CFTC pursued its lawsuit to ensure customer and cryptocurrency creditor recoveries exceeded typical Chapter 11 case levels. “In this bespoke settlement, the CFTC foregoes its own recovery against FTX in order to supplement the recoveries of customers and cryptocurrency lenders beyond the levels typical in chapter 11 cases,” said Dietderich.
The collapse of FTX in November 2022 wiped out an estimated $200 billion in crypto market capitalization, marking one of the most significant downturns in the industry. Sam Bankman-Fried has since been sentenced to 25 years in federal prison, underscoring the severe repercussions of financial misconduct within the cryptocurrency market.
As the cryptocurrency sector continues to mature, settlements like the one between FTX and the CFTC are likely to play a crucial role in resolving disputes. These agreements provide a pathway to recover substantial funds for creditors while avoiding protracted and costly litigation. The FTX settlement highlights the importance of regulatory oversight and the potential for collaborative solutions to protect investors and maintain market integrity in the rapidly evolving world of digital assets.
