Latest FTX Bankruptcy Jeopardizes Small Creditors

Discover the latest FTX bankruptcy development that poses a threat to small creditors and the potential impact of this critical development on stakeholders

A vital claim previously lodged against FTX EU, formerly K-DNA Financial Services, has been transferred to FTXcreditor. This development represents the most recent progression in the FTX bankruptcy case.

While the transfer may expedite all subsequent proceedings, it exposes smaller creditors to potential dangers.

The documents submitted on May 15 in the U.S. Bankruptcy Court for the District of Delaware indicate that the claim is a component of the ongoing Chapter 11 proceedings previously initiated against FTX EU.

The transfer was executed by the regulations stipulated in the Federal Rules of Bankruptcy Procedure, specifically Rule 3001(e)(2) about the transfer of claims:

“Seller hereby waives any notice or hearing requirements imposed by Rule 3001 of the Federal Rules of Bankruptcy Procedure, and stipulates that an order may be entered recognizing this Evidence of Transfer of Claim as an unconditional assignment and Buyer as the valid owner of the claim.”

Rule 3001(e)(2) of the Federal Rules of Bankruptcy Procedure

The action is a calculated effort to streamline the administrative procedures of the bankruptcy proceeding through the consolidation of all obligations to a single creditor.

While this may accelerate the resolution of the case, it exposes minor creditors to a degree of risk.

As a result of the company serving as the sole point of entry for claims, smaller creditors may be marginalized compared to more significant creditors, potentially resulting in less favorable terms.

Michael Bottjer defends the new single claim holder, FTXcreditor; nevertheless, the identity of the transferor is currently undisclosed.

“To protect the identity of the Transferor, Transferee has not disclosed the Transferor’s name or address, and has not attached the signed Evidence of Transfer to this Notice of Transfer of Claim.”

Michael Bottjer, FTXcreditor claim holder

The absence of transparency may give rise to inquiries regarding the management of the bankruptcy procedure during this consolidatory process, thereby revealing vulnerabilities to manipulation in situations where the identities of claim transfers are concealed behind anonymity.

After its bankruptcy petition in November 2022, FTX, a cryptocurrency exchange, encountered abrupt financial setbacks that have had enduring repercussions for all creditors impacted.

Since then, regulatory efforts have been concentrated on cryptocurrencies, especially in the United States, to establish additional safeguards to protect investors. 

This latest development in the case follows a recent statement by Sam Bankman-Fried, co-founder of FTX, in which he maintained his innocence despite serving a 25-year sentence.

During an interview on May 9, Bankman-Fried recounted his ordeal, revealing that he had been subsisting on rice and beans, with the latter having evolved into what he termed  “one of the currencies of the realm inside.”