Original | Odaily Planet Daily (@OdailyChina)

Author: Azuma (@azuma_eth)

On October 7, local time in the United States, Judge John Dorsey of the Delaware Bankruptcy Court officially decided to approve FTX's bankruptcy plan at a hearing, which means that FTX's compensation process has finally made qualitative progress. Next, FTX will use the maximum $16.5 billion in assets recovered since the bankruptcy application to compensate its creditors.

Considering that there is still a lot of confusion and even rumors about FTX’s compensation process in the current market, most readers do not yet understand the full picture of the incident, and are unable to proactively assess the potential impact of the incident on the market. In order to dispel these doubts, Odaily Planet Daily will combine official information and public statements from professionals to clarify this information in the form of questions and answers.

Q1: What exactly is FTX’s bankruptcy plan?

The so-called bankruptcy plan is a reorganization plan formally proposed by the FTX liquidation team headed by John J. Ray III on May 7 this year. The plan was approved by Judge Dorsey to enter the voting stage on June 25 this year, and was formally approved by Judge Dorsey last night.

From a user perspective, the most important element of the bankruptcy plan is that FTX will first use its recovered assets to compensate its customers, and then pay potential competing claims filed by government regulators.

Q2: What does it mean if the plan is approved?

With the official approval of the plan, FTX will compensate 98% of its users within 60 days after the bankruptcy plan takes effect.

Q3: When will the bankruptcy plan take effect?

It should be clarified that the approval of the plan does not mean that the plan will take effect, and the specific effective date has not yet been determined.

However, according to statements from several FTX creditors, the expected effective date will be October 31, which means that 98% of FTX users may start receiving FTX compensation before the end of the year.

Q4: Which users will receive compensation first?

According to FTX’s bankruptcy plan, 98% is actually a reversed user ratio, covering customers who held US$50,000 or less in the exchange at the time of FTX’s bankruptcy.

Q5: What is the total amount of funds available for compensation?

In its bankruptcy plan, FTX estimated that the total value of assets recovered, converted into cash and available for distribution since the bankruptcy filing would be between US$14.5 billion and US$16.3 billion.

Q6: Will FTX pay the full amount at one time?

According to research by Galaxy research director Alex Thorn, FTX expects to pay approximately $1.1 billion in advance compensation to 98% of its users (i.e. users with debts of less than $50,000) within the year, and the remaining amount is expected to be paid between the first and second quarters of 2025.

Q7: What are the compensation standards?

According to the bankruptcy plan, FTX will first compensate 98% of creditors in cash based on the dollar value of their claims at the time of bankruptcy in November 2022, with an estimated compensation ratio of 118%; the remaining creditors will also receive a 100% compensation ratio, plus a total of billions of dollars in time value compensation.

Q8: What is the attitude of the creditor group towards the compensation plan?

Last night's hearing revealed that approximately 94.48% of creditors, with a total claim value of approximately US$6.83 billion, voted in favor of the bankruptcy plan.

However, some creditors, including Sunil Kavuri, the representative of FTX's largest creditor group, have explicitly expressed their opposition, arguing that FTX should directly compensate cryptocurrencies in "kind form" rather than in 2022 U.S. dollar value. The price of Bitcoin has risen from $16,000 in November 2022 to $63,000. Compensation in U.S. dollar value means a significant shrinkage of the currency standard. The so-called "118% compensation rate" is not worth mentioning at all compared to the rise in currency prices.

David Adler, an attorney representing some of the creditors, also raised another issue in court: creditors could face huge tax bills if they are paid in cash rather than in kind.

Q9: Why not use compensation in kind (directly return currency)?

In response to the demands of some creditors for compensation in kind, FTX’s attitude was “impossible”.

FTX’s liquidation team stated that many users believed that FTX always kept the cryptocurrencies in their accounts, but the reality was that when the team took over FTX, they discovered that there was a huge asset gap on the exchange’s books—BTC only had 0.1% of its book value and ETH only had 1.2% of its book value.

Steve Coverick, a financial advisor to FTX, testified that if physical compensation was to be made, FTX would need to purchase crypto assets on the open market, a cost that would be "ridiculously high."

Judge Dorsey also opposed in-kind compensation at the hearing.

Q10: Will the compensation funds flow back into the market?

For more investors who have not used FTX, this may be the most noteworthy issue - whether up to US$16.5 billion in funds can flow back, inject more liquidity into the market, and thus drive the market up.

However, considering that FTX-related claims have been circulating in the market for a long time, a large number of original creditors have traded their claims to institutions specializing in bankruptcy claims in order to realize them as soon as possible. It is expected that this part of the funds will be difficult to flow back again.

There is no clear figure for the proportion of such claims that have been sold, but well-known creditor Mr. Purple estimates that the proportion may be around half.

Su Zhu, who had helped boost the last bull market with SBF in the form of "sacrifice", said that even if these funds cannot return to the crypto market in full, it is still a large number and may boost the market.