Explaining FTX's Accelerated Compensation Plan: How to Address the $9 Billion Shortfall in Compensation Funds?

FTX.cm and the Debtors related to FTX have proposed a settlement proposal for the "customer property dispute," expected to be submitted to the court on December 16, 2023. The bankruptcy restructuring team aims to expedite the compensation process through this proposal, stating in a press release that this proposal represents a "significant development." However, it is evident that the compensation ratio for FTX creditors is not only "squeezed out," but also subject to many variables.

In essence, FTX not only lacks funds, but ordinary users do not have priority in compensation order. Therefore, in the interest of fairness, it is necessary to cut some of the money from priority creditors to subsidize ordinary users.

How to Solve the $9 Billion Compensation Shortfall? Understanding the Points of Contention

Despite having divided the funds into "FTX.com Segregated Assets," "FTX US Segregated Assets," and the "General Pool," the harsh reality is that FTX does not have enough funds to cover the compensation. The estimated shortfall claims are around $8.9 billion for FTX.com and approximately $166 million for FTX US.

The General Pool will allocate 66% to cover the shortfall claims, with the remaining portion going towards other claims. According to statistics, FTX.com and FTX US users may have the opportunity to receive 90% of the remaining assets of FTX globally, which is not the proportion of compensation they will receive.

FTX Regular Users Should Have the Right to Claim Priority

The majority of FTX's global regular users are classified as "Unsecured Creditors," ranking lower in compensation priority compared to secured creditors. Note: US Creditor Priority Order

The Customer Property Lawsuit aims to enhance the claiming rights of FTX regular users, arguing that customers of FTX.com and FTX US have a property interest in some assets, rather than being unsecured creditors.

Customer Shortfall Solution Emerges: Seeking a Bit of "Fairness"

FTX introduces the "Customer Shortfall Settlement" to advocate for more compensation resources for FTX regular users. The proposal asserts:

Although classified as "Unsecured Creditors," assets taken by FTX or set aside have equal priority.

Where Does the Money Come From? Secured Creditors Withdrawing in Bulk Within Nine Days

"Reduce the amount that secured creditors can claim!"

Secured creditors eligible for priority claims who withdrew Net Preference Exposure exceeding $250,000 within nine days before FTX's bankruptcy application pursuant to clawback rules will have 15% deducted from the withdrawal total or be required to pay an equivalent amount in cash, reducing their priority claimable amount, known as the "Preference Settlement Amount."

Note: Settlement Look Back Period, from 12:01 AM ET on 11/2/2022 to 10:00 AM ET on 11/11/2022

"Some secured creditors are not subject to this restriction"

However, if secured creditors withdrew less than $250,000 within nine days before the bankruptcy filing, this rule does not apply to them.

"These individuals do not have priority claim rights"

• FTX insiders, affiliated company employees
• Clients who knew or might have known about FTX misappropriating funds
• Clients who altered KYC information to facilitate withdrawals or received manual assistance from FTX for withdrawals
• Clients who need to compensate FTX or its affiliated companies' clients
• Any situations that do not align with fair value

Many Variables Remain! FTX.com Creditors Face Massive Losses

FTX acknowledges that FTX clients still cannot fully recover their losses, with FTX.com users experiencing a higher loss proportion.

There are numerous variables in both customer and non-customer claims, such as:

• Tax and government claim resolutions
• FTX restructuring team expenses
• Various lawsuit outcomes
• Open claims processes
• Fluctuations in compliance with KYC processes
• Digital asset value volatility
• Fluctuations in effective interest rates and collateral yields
• Variable selling prices for illiquid assets
• Amounts related to any subsequent offshore exchange payments
• Confirmation and effectiveness of restructuring plans
• Handling of Bahamian companies and real estate
• Utilization of assets seized by government agencies

All these factors contribute to the unpredictability of the compensation proportion for FTX regular users, making it inappropriate to confirm the results analyzed externally at this moment.