In Hunt for FTX Assets, Lawyers Locate Billions in Cash and Crypto

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Two months after FTX filed for bankruptcy, lawyers for the once high-flying cryptocurrency exchange have begun to identify and put a value on its assets, as they determine how much they will be able to recover to repay lenders and customers who lost billions of dollars.

In a court filing on Tuesday, lawyers from the New York firm of Sullivan & Cromwell — which is facing a controversy of its own tied to work it did for FTX before the bankruptcy — said that they had located $5.5 billion in assets held in customer accounts or tucked away in other parts of the company.

As the lawyers disclosed more detail about the nature of the assets tied to FTX, the scope of the challenge involved in untangling and recouping them became clearer. In just three years, FTX, founded by Sam Bankman-Fried, had swiftly put money into a hodgepodge of assets, from esoteric cryptocurrencies to investments in hundreds of other companies.

About $1.7 billion of the $5.5 billion is in cash on FTX’s books. Another $3.5 billion or so is in cryptocurrency assets — a pool that includes more established coins like Bitcoin, as well as other coins of more questionable value. The lawyers say that stash of digital currencies can be turned into cash because the coins are relatively easy to trade.

The total includes $268 million of Bitcoin, as well as $245 million of so-called stablecoins, or cryptocurrencies that are designed to maintain a constant value of $1. But it also includes holdings worth hundreds of millions of dollars of lesser-known coins that may not retain their value over the long term: There’s $529 million of FTT, a coin that FTX created, as well as $42 million of Dogecoin, the cryptocurrency that was invented as a joke, only to surge in price for a time.

The crypto recovered by FTX also includes another $1.2 billion in various digital currencies held at other exchanges — holdings the lawyers said they had “limited visibility” into. A smaller amount, worth about $300 million, sits in investment funds tied to the cryptocurrency market.

Aside from the $5.5 billion, FTX also holds sizable positions in 20 digital assets that the lawyers described as “illiquid tokens” that are difficult to convert into cash. Figuring out what they’re worth could take a long time.

What to Know About the Collapse of FTX

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What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.

Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.

How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.

What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.

Despite the substantial collection of assets lawyers have identified, FTX said in a statement accompanying the filing that they found fewer digital assets than they had hoped to find, both at the main offshore exchange based in the Bahamas and its U.S. unit. The FTX lawyers said they had shared the information earlier in the day with members of a committee that represents customers, lenders and others.

When FTX collapsed in November, initial reports suggested that as much as $8 billion was missing from customer accounts, including money held in some of the nine million accounts that customers opened at the exchange. The exact amount of money it owes lenders — including other big cryptocurrency trading firms — hasn’t been disclosed.

As lawyers continue to dig into the finances of FTX, the final accounting of what the exchange owes, what it holds and what can be recovered is likely to change. The task is complicated by the fact that FTX did not keep complete financial records. Prosecutors contend that for years, Mr. Bankman-Fried treated customer deposits like money in a piggy bank that he could do with as he saw fit.

FTX’s lawyers have said Mr. Bankman-Fried and two other associates took out more than $1 billion in loans from the exchange.

Prosecutors have charged that FTX regularly diverted customer deposits to fuel trading and cover losses at Alameda Research, a crypto trading firm that Mr. Bankman-Fried owned. FTX executives also spent customer money to acquire lavish real estate in the Bahamas and make political donations to both Democrats and Republicans, according to federal authorities.

Mr. Bankman-Fried has pleaded not guilty to charges of fraud, money laundering and campaign finance violations. And he has denied stealing any customer money.

Federal authorities have said that Mr. Bankman-Fried also used billions of dollars in customer deposits to invest in hundreds of other cryptocurrency firms. Last week, FTX’s lawyers said Mr. Bankman-Fried’s businesses made at least $4.6 billion in investments in roughly 300 other companies, and that those funds could be reclaimed through litigation or negotiations. That amount does not count toward the $5.5 billion total.

It will be harder to reclaim — or even value — the more esoteric digital assets that FTX’s lawyers have identified among the exchange’s holdings, including millions of dollars worth of Serum, Sol/Ethereum and a little-known coin called Trump Loses.

Many of these unusually named coins came into existence or rose to popularity in 2020 and 2021, as the crypto market boomed. Entrepreneurs tried to capitalize on the hype by marketing new cryptocurrencies to investors, who were looking to generate quick profits. But now many of these coins have fallen in value. In some cases, the number of coins held by FTX is so large that it would be difficult for the company to sell the digital currencies without cratering their price.

FTX also is planning to raise cash by selling some business operations in the Bahamas, Japan and Europe that might be viable with a capital infusion. And the company plans to work with officials in the Bahamas to market the company’s real estate holdings — a total of 36 properties valued at $253 million.

But it’s unclear just how much all those assets can sell for, or how quickly. In short, FTX customers and lenders still need to brace themselves for a multiyear legal drama before they see a return of any money, and they are likely to incur steep losses, experts say.

The sudden collapse of the crypto exchange has left the industry stunned.

“It is possible creditors could be given the option of getting digital coin or cash. It depends on what the underlying crypto is,” said Kenneth Marshall, a financial adviser who has specialized in working with investors who have been victims of failed deals, including those involving crypto. “This could drag on for a long time.”

The latest disclosure about FTX assets has also put a spotlight on the work of Sullivan & Cromwell, one of the world’s most prestigious corporate law firms. It is not only representing FTX in the bankruptcy but also did legal work for the exchange before it collapsed.

On Friday, Andrew R. Vara, the United States Trustee in the bankruptcy proceeding, filed an objection to FTX’s decision to retain Sullivan & Cromwell, claiming that its work before the bankruptcy poses a potential conflict of interest. The trustee also has argued for an independent examiner to be appointed to investigate matters.

The law firm’s bankruptcy work doesn’t come cheap: Billing rates for Sullivan & Cromwell partners range from $1,575 to $2,165 per hour, according to an earlier court filing.

A representative for Sullivan & Cromwell pointed to a court filing on Tuesday that said the law firm had “worked tirelessly” to recover assets for the company. In a related court filing, a lawyer from the firm, Andrew Dietderich, defended the firm’s prior work for FTX and its ability to conduct an investigation into the events surrounding the collapse of the exchange.

Mr. Dietderich took issue with Mr. Bankman-Fried’s prior claim that he was pressured to put the company into bankruptcy. He said in the filing that Mr. Bankman-Fried tapped the restructuring lawyer John J. Ray III to replace him as chief executive after consulting with his father and three other lawyers.