FTX, crypto and the future

His jailing comes after a month-long trial last autumn where he was found guilty of seven counts of wire fraud and conspiracy to launder money. It took the jury just four hours to find him guilty of perpetrating one of the largest frauds in American history.

The resulting sentence was far higher than the minimum six years his defence team was calling for. That sentence is based on Bankman-Fried having allowed Alameda Research, FTX's sister hedge fund, to draw on FTX customer funds through a $65 billion line of credit it had, which Alameda used to repay its loans from crypto lenders. FTX customers were not told that this was being done. When it left FTX with an $8 billion deficit and customers sought to withdraw their assets, the result was a liquidity crisis that ultimately led to the collapse of FTX.

This, however, is in stark contrast to Bankman-Fried's argument that he did nothing wrong and that FTX customers have not suffered any loss. According to him, FTX was solvent when it filed for bankruptcy and the customer funds were still there and never lost.

With this argument in mind, his legal team called for the minimum sentence for him, on the grounds that he was a first time, non-violent and neurodivergent offender. That argument, as we now know, was unsuccessful. Bankman-Fried's sentence ended up being more than four-times the size of the one his legal team was seeking.

But while the public face of FTX is now imprisoned, we are still far from the end of this high-stakes saga.

While the headlines have focused on the billions that FTX customers have lost, the current CEO of FTX, bankruptcy expert John Ray, has put forward a plan which states that customers will see 90% of all funds recovered. This, it should be emphasised, does not mean that customers will see 90% of their assets returned.

When it collapsed, FTX had an estimated $8.7 billion shortfall. By September 2023, approximately $6.9 billion of that shortfall had been recovered. At present, the plan is for smaller investors to receive more funds than the larger investors; which will mean that venture capitalists such as Sequoia Capital and Temasek will suffer substantial losses. And anyone who withdrew $250,000 or more in the nine days leading up to FTX filing for bankruptcy is set to face a 15% cut on what they are entitled to.

Yet this cutting-edge catastrophe does appear to have a silver lining.

The sifting through the remnants of FTX is all happening against a backdrop of Bitcoin’s increasing value. At the time of FTX's collapse, Bitcoin was trading for around £13,500. But by March 2024, it was peaking at £58,000. Even now, Bitcoin is hovering around the £53,000 mark. Similarly, the blockchain platform Solana, which Bankman-Fried invested in heavily, has seen a surge in price. It hit a low of $10 in December 2022, but at the time of writing it is staying above $180.

The upshot of this is a major increase in the value of the assets held by FTX. This surge in crypto values can arguably be attributed, at least in part, to FTX selling its crypto assets with the aim of generating liquidity in order to distribute funds to its customers later this year.

It should also be remembered that FTX also held investments in other successful companies. One prime example is the $500 million AI startup Anthropic – a company now worth somewhere between $3 billion and $4.5 billion. Other assets held by FTX are also coming to light as the bankruptcy process grinds on. There are also Bahamas properties said to be worth millions.

The aftermath of FTX's collapse is not, therefore, as grim for creditors as it could have been. Many collapsed companies run by fraudsters have left far less for creditors than FTX has.

But there are hurdles that those creditors still have to face – not least the Internal Revenue Service (IRS). The IRS has filed 45 claims against FTX, alleging that the firm owes $44 billion. As it is an administrative claim (a claim for costs and expenses relating to the administration of an estate) there is the question of whether the IRS claim will take priority over the unsecured claims of FTX customers. This may hinge on whether those customers have unsecured claims or actual property interest in FTX. And that, in turn, may be dependent on whether they transferred legal title to the assets they deposited in FTX.

This could prove to be a major challenge for those seeking to regain what they believe is theirs from the remains of FTX. But while this could prove to be a whole new chapter in the legal saga of FTX, there is the possibility that the figure of $44 billion is inflated and / or the IRS would settle for a lesser sum.

While we are yet to see precisely how the various legal claims are resolved in relation to FTX, the case has already shown that the crypto world has gained at least some degree of respectability. Bankman-Fried's trial was never short of testimony regarding families who have lost their life savings or anxious crypto investors who have colossal sums still tied up in FTX. But there have not been many voices citing the case as evidence that the crypto sector is inherently untrustworthy.

Perceptions of crypto do appear to be changing. Views of the crypto sector as an unregulated wild west or the bad new boy in the financial world appear to be losing ground. General attitudes towards the crypto market remain favourable. With the value of crypto continuing to nudge upwards to new all-time highs, the collapse of FTX and Bankman-Fried's jailing are being viewed as individual failings rather than proof that cryptocurrency as a whole is the problem.

At the time of writing, there are many FTX customers expressing anguish at how complicated it is to submit claims through the website of Kroll, the bankruptcy administrators for FTX. For this reason alone, it would be wrong to say we are anywhere near the end of the FTX story. But the ending, whenever it comes, looks set to be not quite as bad for individuals – or for the crypto sector as a whole – as it could have been.