FTX asks court to cancel compensation for creditors in crypto-banned regions

The FTX Recovery Trust wants the US bankruptcy court to decide on a new claims process for users from 49 crypto-restricted jurisdictions.

According to the exchange’s proposal, they will only recognize claims from regions where the court verifies that local laws permit such payouts. Otherwise, user claims may be contested or rejected.

In most of the 49 jurisdictions, legal restrictions on crypto trading or the use of third-party distribution intermediaries have been enforced. 

FTX just started its second phase of creditor repayment this May, hoping to distribute about $5 billion to users, yet many claims remain disputed. 

FTX’s filing reveals a hold-and-review process.

On July 2, FTX creditor advocate Sunil Kavuri submitted a petition saying they cannot reimburse customers in certain regions unless the court confirms it would not violate local laws.

If the court approves the proposal, users in China, Nigeria, Andorra, Fiji, and Zimbabwe could have their claims rejected. Chinese FTX users are particularly vulnerable, accounting for roughly 82% of the 5% claims from the 49 regions against the bankrupt exchange. 

China first prohibited crypto trading in 2021, and with the existing legal restrictions, Chinese users may be unable to recover their funds.

The exchange’s filing outlines a hold-and-review process. Upon court approval, the trust will issue a “Restricted Jurisdiction Notice” to each listed creditor address in the impacted jurisdictions. 

The notice will detail the grounds for the restricted status and provide creditors with a minimum of 45 days from the notice date to file any objections.

Any customer who wishes to object must file a declaration acknowledging the authority of the US court. Distributions on all challenged claims will also be put on hold during the objection period. However, the withheld funds and accumulated interest will be returned to the estate if the disputes are not resolved by the distribution record date.

For each timely objection, the exchange must have the court decide that its label on a restricted jurisdiction is fair. The exchange further noted that failure to submit an objection by the deadline will result in automatic forfeiture of the claim, similar to those who lose their objection dispute.

The exchange also clarified that they consider a notice effectively served once mail or email is delivered to the most recent address on record. It even described the method as “commercially reasonable.”

Chinese FTX users are planning to seek legal counsel on the matter.

Some Chinese users have already raised their concerns about the exchange’s proposal, saying they are ready to take legal action. One FTX creditor commented, “I’ve already contacted my lawyer in New York and am waiting for her response. I will definitely take action and will raise objections at every stage.”

He further argued that although mainland China restricts digital asset trading, residents are still permitted to hold cryptocurrencies since the law acknowledges the commodity attributes of the assets.

Additionally, he questioned the decision to block international transfers to mainland Chinese residents, especially since claims are in US dollars and residents are legally allowed to keep USD offshore.

FTX Creditor Sunil also weighed on the matter, saying, according to the filing, the trustee has the last word. The worst case, he said, is that claimants may have to sell or assign their claims to someone in a permitted jurisdiction.

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