Back from the dead: Can FTX stage a comeback?

The reboot of collapsed cryptocurrency exchange FTX, once floated as a joke, could soon become a reality.

Since May, bankruptcy administrators have contacted over 75 bidders as part of a “marketing process” for FTX.com and FTX.US. Among the options under consideration is a transaction that could result in the relaunch of the exchange(s), according to a September stakeholder update.

The reboot isn’t a given. Administrators are unlikely to proceed if it could create regulatory concerns or fail to yield value for creditors, according to a draft restructuring plan filed in July.

A novel concept

Until its collapse, FTX was popular amongst traders and quickly garnered customers. Within three years of launching, it ranked as the second leading exchange in crypto derivatives after Binance.

The reason FTX grew so quickly is that it brought together novel combinations of concepts in derivatives markets from real-time clearing to 24/7 direct-to-consumer operations, said Brett Harrison, FTX.US’s former president, in a recent interview with Coindesk. He said this is part of the appeal in restarting the exchange.

Facing a shortfall in customer funds of over US$8 billion, FTX filed for bankruptcy in November last year. Several of the company’s former executives have pleaded guilty to criminal charges including fraud and the misappropriation of funds between the exchange and its sister entity Alameda Research. Sam Bankman-Fried, the firm’s founder and former chief executive officer, has pleaded not guilty and will face trial on Oct. 3.

John J. Ray III, who oversaw Enron’s bankruptcy, was appointed as the exchange’s new CEO. Months later, Ray publicly floated the possibility of a reboot.

“John Ray 3.0 threw all the prior accounting in the trash and rebuilt the numbers from scratch,” said the FTX 2.0 coalition, a group of creditors who are for rebooting the exchange, on X (formerly Twitter). “Results confirm: The exchange was a money printer. The problem was that a bankrupt hedge fund robbed it to hide its bankruptcy.”

Alongside profitability, the coalition views increasing competition amongst exchanges as one of the benefits of a reboot. Several members of the coalition did not immediately respond to an interview request. Representatives for the debtors, the unsecured creditor committee and the ad hoc committee, which represents FTX.com creditors, also did not respond to a request for comment on the reboot.

The intricacies of bankruptcy

“You’re talking about a lot of pieces coming together,” said Thomas Braziel, founder of 117 Partners, a firm that buys crypto bankruptcy claims. “Every single piece lowers the probability of [the reboot] happening.”

To confirm a bankruptcy plan under U.S. Chapter 11 proceedings, it must meet a set of requirements under Section 1129. A focus point of this section is feasibility, Braziel said. A plan for the reboot would need to tackle the feasibility of a range of issues from token lockups to compliance issues such as know-your-customer and anti-money laundering procedures. In many ways FTX would start from scratch, he added.

“I don’t see FTX 2.0 without a plan sponsor,” said Braziel, adding that only around 20 firms could take on an FTX. The bankruptcy of crypto lender Voyager is a “fantastic” case study on why a reboot is unlikely to happen because buyers ran into issues from “shaky balance sheets” to challenges from regulators, he added.

Voyager Digital filed for bankruptcy in July last year, not long after the collapse of crypto hedge fund Three Arrows Capital (3AC). The volatility in the crypto market and a default on a US$650 million loan to 3AC led to the proceedings. The lender is in the process of winding down after failing to secure deals with both FTX and Binance.US. Crypto lender Celsius Network soon followed suit with its own filing for bankruptcy.

Fahrenheit, the winning bidder of Celsius’s assets, is set to launch NewCo, a new company owned by Celsius creditors. It’s a way to manage its illiquid assets such as its mining and staking business lines, rather than a complete reboot. It’s included in Celsius’s current restructuring proposal, which has received over 98% creditor approval.

Tribe Capital and Figure have been reported as potential bidders for an FTX restart. Neither company responded to a request for comment.

A token-led recovery

Creditors of FTX.com, its offshore entity, may receive equity, tokens or some other form of interest in the rebooted exchange rather than all cash, according to the restructuring proposal.

Crypto exchange Bitfinex set a precedent when it issued a recovery token to recoup losses from a major heist in 2016. Bitfinex socialized losses across all accounts — resulting in a 36% haircut per account — and customers were given recovery tokens instead. Thanks to a bull rally in 2017, a spike in token prices helped make creditors whole.

Many reboot advocates look to Bitfinex as a precedent for FTX, but Braziel said that ship has sailed. Unlike FTX, Bitfinex issued the token before entering bankruptcy proceedings.

The token model is only effective if it mimics what would be a likely outcome in court, said Phil Potter, the former chief strategy officer of Bitfinex who oversaw the distribution, on X. Bitfinex was simple compared to FTX, he added.

Bitfinex’s approach stands in stark contrast to the proceedings of Mt. Gox, which was the largest Bitcoin exchange in 2013. The exchange, which lost 800,000 Bitcoin in 2014, is still to return funds to creditors and most recently delayed its repayment date by a year.

The average timeframe for a U.S. bankruptcy case is around 18 months, Braziel said, adding that the Mt. Gox case has been protracted due to its proceedings occurring in Japan, where nuances such as the absence of interim distributions slow the process compared to U.S. standards.

What about FTT?

Unlike Bitfinex, FTX already issued a token — FTT — and under the current restructuring proposal it will be extinguished and holders will not receive any distribution.

The U.S. Securities and Exchange Commission (SEC) has also alleged FTT is a security. Still, it hasn’t stopped the token’s price from fluctuating, gaining over 7.5% in the last 30 days, according to CoinGecko data.

“We need to distinguish between public opinion and real courts,” said Terrence Yang, managing director at Bitcoin investment firm Swan Bitcoin, adding that, while regulators have been critical of FTT, there’s been no formal ruling.

“[FTT] has a very low probability of recovering, longer term,” Yang said. “It can recover temporarily when the FTX 2.0 reboot launches and if they have some decent press around it and some good branding and marketing but I think it’s tough.”

FTX, HTX, GTX…

Thanks to FTX’s marketing spending spree, and now criminal proceedings, the exchange secured brand recognition, which led to a debate over whether it should be rebranded or not. FTX entered Axios Harris Poll of America’s most visible brands for the first time this year, however, it ranked 99th out of 100 in reputation.

“Just because the name is recognizable, doesn’t mean it can be trusted,” said Alon Goren, founding partner of investment firm Draper Goren Holm. “But people do like to, from a marketing perspective, say, ‘Hey, everybody already knows the name. It’s been on stadiums, it was on major league baseball jerseys. So why not? It’s a familiar name.’”

As a brand new industry this is something to be careful about, Goren said. He couldn’t imagine a world where mainstream users trust FTX again.

Some exchanges seem less concerned about links to the tarnished brand. Crypto exchange Huobi renamed itself to “HTX” for its tenth anniversary. A blog post said H stands for Huobi, T stands for its advisor Justin Sun’s blockchain Tron and X stands for exchange.

The founders of 3AC tried to launch a new exchange under the name “GTX” because “G comes after F,” according to a pitch deck. After receiving pushback, they said the name was “a placeholder.”

Though most of the focus has been on the reboot, there’s also a chance FTX will be acquired by a former competitor.

“I don’t think there’s much technology there,” Yang said. “People who have worked at FTX have talked about how they basically had almost no engineers. It was smoke and mirrors. I’m not sure how much value there is, to be honest, for a merger or acquisition.”

Braziel said administrators would be better off selling the assets at a granular level but he still expects objections from regulators similar to the Voyager and Celsius cases.

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