The Hot New Market in Crypto? Trading FTX Claims

Imagine this: After a big cryptocurrency exchange, FTX, went bust, something unexpected happened. People started making money off the mess. How? Well, they’re playing a kind of money game with what’s left of FTX. It’s like turning a disaster into a chance to make some cash.

This guy named Thomas Brazil, who knows a thing or two about tricky situations, started it all. He helped someone sell their share of what’s left of the company for way less than it was worth. And suddenly, a whole bunch of people wanted in on the action. Now, they’re making bets and playing a game with these leftover FTX things, and it’s turning into a pretty big deal.

So, let’s dive into this surprising tale of how a bad situation turned into a chance for people to make some money. We’ll explore why these FTX claims are suddenly so valuable and how everyday folks are jumping into a money game that no one saw coming.

Also Read: SEC Chair Gary Gensler Says an FTX Reboot Could Happen if It Follows the Law

The Genesis of FTX Claims Trading

@kanekallaway

FTX goes from $32B -> $0 overnight #ftx #crypto #binance #sambankmanfried

♬ Storytelling – Adriel

Thomas Brazil, a seasoned investor with a penchant for distressed businesses, started this money game. In the wake of FTX’s bankruptcy filing, Brazil orchestrated a unique transaction, connecting one of its clients with a major financial firm that had incurred losses of approximately $100 million in the collapse of FTX.

The deal involved the sale of the financial firm’s claim in the bankruptcy for a mere 6 cents on the dollar. This manoeuvre was grounded in the belief that waiting for the company to unravel would be a protracted process, and obtaining fast cash at a fraction of the claim’s value seemed more prudent. Read here about what would happen to the victims after this huge scandal.

FTX Claims Market Explosion

What started as a discreet transaction soon exploded into a full-fledged market for FTX claims. Thomas Brazil, now a partner at the investment firm 117 Partners, shares his recent success in brokering the sale of a $19 million FTX claim for an impressive 68 cents on the dollar. In doing so, Brazil pocketed about $100,000 in commission.

The market’s temperature is scorching, with some claims fetching prices exceeding 70 cents. Investors, driven by optimism surrounding the new leadership and the potential recovery of nearly $8 billion allegedly embezzled by founder Sam Bankman-Fried, are diving headfirst into this unconventional market.

Speculators’ Maths

For speculators, the equation is deceptively simple: purchase a $10 million claim at, for instance, 50 cents on the dollar and reap substantial profits if the bankruptcy estate ultimately repays more than $5 million. Exclaim, a company facilitating these transactions, reports that FTX claims have changed hands between $1 billion and $1.5 billion since the commencement of the bankruptcy proceedings.

Diverse Participants in the Claims Market

Court records reveal that the FTX claims market is not just attracting well-known hedge funds and investment firms such as Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management, and Canyon Partners. It has also become a magnet for individuals with varied histories in the finance industry, adding a layer of complexity and risk to the burgeoning market.

Quick Link: Binance’s CEO CZ Rejects FTX’s $40 Million Offer: Insights From Latest Book

Legal and Regulatory Landscape

While claims trading is not a novel concept, recent bankruptcies in the cryptocurrency sector, including Genesis Global, Celsius Network, and BlockFi, have given rise to a specialised niche of brokers facilitating these transactions. The market provides creditors entangled in lengthy court proceedings an opportunity to access immediate funds, albeit at the cost of accepting a fraction of the face value of their claims.

FTX’s Recovery Surprises

John Ray, the corporate turnaround veteran who assumed control from Sam Bankman-Fried, initially characterised FTX as the worst corporate mess ever. In August, however, he astounded observers by estimating that the company had recovered $7 billion, challenging the prevailing narrative of an irretrievable collapse.

This unexpected turnaround has caused a shift in perceptions and valuations, with FTX claims that were once trading for mere cents now commanding prices in the 70s. It’s a great opportunity for anyone who loves taking risks and has patience.

Risks and Uncertainties

Despite the enthusiasm in the claims trading market, it is not without its risks. Brokers operate with limited oversight, and the absence of controls on who can participate in these transactions raises concerns about potential bad actors. Some matchmakers impose restrictions on sellers, dictating specific timeframes for finding buyers, potentially limiting a creditor’s ability to secure a favourable deal.

FTX's risk management team landed new jobs at a cleaning company after the FTX collapsed. Great to see they landed on their feet. pic.twitter.com/GxqfgZIHua

— Mod (@wsbmod) December 19, 2023

Bradley Max, director of claims broker Cherokee Acquisitions, points out the challenge sellers face in negotiating deals independently, navigating the “Know Your Customer (KYC)” rules meant to prevent transactions with questionable actors.

The Internal Revenue Service (IRS) Challenge

Adding another layer of complexity is the involvement of the IRS, which has filed claims amounting to $24 billion against FTX, citing unpaid taxes, employment taxes, and penalties from 2018 to 2022.

This claim, if validated, could significantly reduce the funds available to creditors, as the IRS typically takes precedence over other claimants in a bankruptcy proceeding. However, the actual amount owed to FTX is still under dispute, with a hearing scheduled for early next year.

Also Read: FTX and Binance: Impact of Recent Crypto Scandals on Public Perception of Digital Currency Regulation

Unpredictable Terrain of FTX Claims Trading

The unexpected surge in FTX claims trading reflects a fascinating intersection of financial speculation and the unpredictable dynamics of the cryptocurrency market. As investors navigate the intricate landscape of bankruptcy proceedings, the FTX saga continues to unfold, presenting both opportunities and pitfalls.

One year ago today, crypto died…again.

Since the FTX saga, crypto adoption and utility has continued to grow despite the noise. Here's how far the industry has grown over the last year and why crypto (still) isn’t dead. pic.twitter.com/nFgw5dhczw

— Coinbase 🛡️📞 (@coinbase) November 9, 2023

While the market is currently characterised by exuberance and high valuations, the ultimate resolution remains uncertain, leaving participants to grapple with the intricacies of a rapidly evolving and complex financial landscape. You can read an extended version of this article at nytimes.