May 10, 2024 co-funder and bankruptcy attorney Nicholas Hall joins "First Mover" to discuss the FTX estate's new plan that would see 98% of its creditors get back 118% of their claims in cash.

Video transcript

This week, we heard that FTX creditors will get 100 and 18% of their funds back in cash. According to a new plan by the estate, the new reorganization plan would see a whopping 98% of creditors get back 100 and 18% of their claims in cash within 60 days of a court approval. Now, this plan has been celebrated by some, but our next guest has a bit of a different view. Bankruptcy attorney and co-founder of Nicholas Hall took to X recently to outline the hidden pitfalls of the plan. He joins us now to dig a bit deeper. Nicholas, welcome to first mover. Hey, thanks for having me. Of course. Thanks for being here. Now, let's just start very broadly here. What did you think of the estates plan when you initially saw it overall? I think that there are just some misconceptions right in the bankruptcy process. Uh Not everybody's going to be happy. I actually said that a good negotiated plan is something that nobody's happy with other than the attorneys, obviously, because they're getting paid. Um but you know, the recoveries are high on, on a typical bankruptcy basis. But for those creditors and customers that, you know, they had Bitcoin solana other digital assets that have, you know, substantially increased in price since the petition date. Uh, they're not getting that back and, and that's a huge disappointment for them. So, while the recoveries are high, you know, with standards in a typical chapter 11 rework, uh they're not necessarily up to par for the, the customers that have missed out on the appreciation market. Uh that being aside from just the recoveries, you also have to look at the fact that many of these customers are international, they are in countries that don't have the best banking laws and, or most trustworthy governments. And so they're gonna have to rely on a cash check which, you know, their, their banks typically freeze uh large deposits. And so, you know, they really pushed hard for stablecoin distributions and that's not going to be the case as of right now. Uh Another issue is that there's going to be a mandatory 30% tax withholding for foreign customers. Uh You know, they're being, that's typically when you have profits, for instance, if you make an investment in the United States. So their argument as a customer is, look, I was in the uh trading platform, which is out of the Bahamas, not in the United States. And so therefore, my funds should not be taxed uh pursuant to, you know, United States laws. Uh So you know, it's, it's a little bit of a mixed reaction. Uh and we will see what, what kind of pans out through the restructuring process. Can you compare this to other bankruptcies? For me? I think a lot of people are looking at this and thinking at one point, we thought FTX creditors were not going to get any money back. And now the estate is saying 100 and 18% that sounds kind of good. Is this typical, there's absolutely nothing typical uh in, in a case of this size, this magnitude uh with this level of systemic fraud. And in fact, if you would compare it to a typical fraud case, I would say the FTS customers are getting back much more than you would like in, in a a Ponzi scheme case like a Madoff case. Uh So that, that's the argument for the estate professionals, right? They're, they're saying compared to other bankruptcies that are similar where you have massive fraud. Uh these customers are are getting a great return. Uh But once again, you know, unlike other cases, this is digital assets and digital assets have appreciated since the petition date. So the customers are going to say, well, look the market did this for you. The market is what pumped the prices that you've been liquidating of these digital assets and that's what's resulted in this, this perceived windfall of, of a restructuring plan. And and more specifically, there are customers like Sunil and others in the coalition group and, and they're going to say, look, we want our actual assets back. We, we, you know, we don't want cash distributions. There's a reason we were at Bitcoin, uh these, these, these crypto assets, there's tax reasons why they didn't want to liquidate their assets. You made for tax reasons, want to hold that long term. Uh So they're, they're not happy whatsoever and, and I totally understand that. So, you know, we will see where this goes. This is still, there's a lot of baseball to play as they would say, uh, you know, while it seems like we're very close to confirmation, there's just many different things that can come out in this negotiated process. And I do think that the customers will get some concessions going with the confirmation hearing. It's interesting you bring that up. Do you think we could see, um, a lawsuit from creditors trying to get their actual assets back instead of the cash equivalent? Yeah, so there is right. So Neil and, and, you know, Pat Rabbit, some of the other uh creditors, they, they have filed the lawsuit. And so there's a class action lawsuit too against Sullivan Cromwell who's debtor's counsel. And so, you know, that, that obviously is going to be kind of dealt with by Judge Dorsey uh in, in the confirmation uh process, uh the likely table it and, and, you know, be dealt with post confirmation, uh because there are parties involved such as the ad hoc committee, which is, you know, a committee that was formed sanctioned by the court uh to represent the international creditors. And, and so, you know, it would be interesting to see what comes of that. I will say that there's the examiner's report due uh May 24th and it, that, that's, that's gonna have a huge impact. Uh We'll see how that, that kind of uh influences the, the confirmation negotiations going through the summer. Now, we've touched on some of the points you brought up in your ex post cash distributions, undeliverable distributions, tax withholdings. Uh but we haven't touched on KYC yet unpack that a little bit more for me. What are your concerns when it comes to KYC as it pertains to the plan? Customers would definitely say uh concerns with execution. Actually, they provided documents and uh the plan administrator is going to likely be who has ministered the KYC through the case, which is cruel. Uh The customers have, have, have had just a very difficult time getting their, their documents approved. Uh And so in the plan, you have three months, 90 days if you do not get your KYC approved, um you don't get your distribution furthermore, you don't get future distributions, you essentially forfeit your entire claim. Uh So that, that is a huge concern for, for many customers. Uh And, and you know, for, for claims traders, obviously, they look that is shrinking the denominator. That, that's great from their perspective. Uh because, you know, that, that means they can increase the distributions beyond what's even in the plan to date. So, yeah, it's a contentious issue and, you know, hopefully that can be resolved because the KYC is subjective. Uh there's not necessarily like a litmus test here on, on dro or denial. So that, that is something that, that definitely, I think will be negotiated heavily between the committees and the estate. Do you think it's likely a court is gonna approve this plan anytime soon? His current form? No, I think that there's, there's any plan is a negotiation. Uh And it's, you know, like, uh I'll say there, there's some 3d test that, that will, that will take place. Uh For instance, I've been in meetings uh with, with some other funds that, that are looking at other classes of creditors to acquire so they can file litigation to negotiate better terms. So they understand it and, and some of the customers do too, which is Sunil and the coalition. You know, they weren't necessarily satisfied with what the ad hoc committee was doing. They took it upon themselves to, to file and form their own committee which anybody can do. Uh, they petitioned the court to try to get sanctioned. Uh And, and we will see what comes of that. They filed the class election lawsuit. They're doing all the necessary steps to, to assert the rights for themselves and on behalf of other similarly situated customers. And so I, I do think that all of these things when combined are going to be extremely influential in getting the customer better. Uh you know, these come we discussed, right? Getting the KYC, maybe a little bit more time uh getting on the cash distributions, definitely putting in place a stablecoin facility. Uh Also with the uh there's some other terms like uh if, if you are, don't deposit, if it ends up being that you get a cash check, right? And you don't deposit it for six months under the plan as it is. Now that reverts as you as she your, your property to the estate. Uh, you know, like what if you're traveling, what if you're in the hospital? What, what if any of these things happen? And so under state law or federal law, usually that's what controls, um, forfeited or undeliverable or un deposited, uh, distributions. Uh, their plan currently says that, yeah, that doesn't matter. We're, we're just gonna tell you after six months cut off. So I do think that these things will be negotiated and change in the plan. Um, uh, you know, going into confirmation, Nick, how long do you think this process is gonna take? Uh, I think it's gonna go fast. I think the plan is strapped to a bulldozer and they're gonna get it through the finish line. Uh I would say right now if you look at the plan, there's some Easter eggs and clues that give you some idea those dates that they're targeting. Uh, they have August in there. I think that that's a little optimistic. Um, it's really hard to, you know, solicit millions of, of customers during, uh, a couple of months. So I think we're looking at September October for confirmation. Uh, and I think that the first distribution to the entitlement, uh, to the convenience class that's looking at, you know, earliest November, uh more than likely December or early next year. Um So maybe, you know, there, there's, there's a good outcome here where people get a, a distribution of their funds uh for Christmas. All right, I want to turn now to your company. It's called Found XYZ. You say that you help FTX creditors get the best price for their claim. Talk to me a little bit about how that works and what you do, you know, we, we tokenize the claims, but essentially it's a marketplace where you can go to list your claims. Uh and we bid your claim out to every single buyer big or small. And so it's an extremely competitive uh sales process where, you know, there's no pressure, no stress, you don't have to sell if you don't want to. Um So we've taken this approach to, to really automate and streamline the process, uh which reduces, of course, the dependencies, the cost, but ultimately results in the highest price that you can potentially get uh for your claim. Um You know, there's been a lot of players in this space that, that, that, you know, are, are funded or otherwise, but we're fully bootstrapped and we've done the second most volume of any platform um in FTX. So it's helped a lot of customers. You're a marketplace. So I'm assuming your business model is you make fees off of the, um, claims that are tokenized and then, and then sold to others. That's correct. We get a one point standard for trading debt. Uh But that's paid for by the buyer. The seller doesn't have to pay us anything and, and they don't pay us anything if, if we don't get them a, a sale that they agree to. Um So, and again, they're free to list anywhere they want to. Our approach is like, look, we have a best price guarantee if you're unsatisfied at any point in the process, you don't have to sell and you can sell elsewhere. We don't care. Um So we're, we're highly motivated to get people a good outcome and, and ultimately, we also have the, the biggest buyers for us DC. So that's one of the things we did early on in this case is obviously we have a, a digital asset or crypto payment rail. Um And so they can get paid in US DC and we keep all of their private information confidential. Do you have um a figure or an estimated figure on, on how many transactions have been made uh when it comes to tokenized FTX claims and how many fees you've got off of those transactions. So we've got about $100 million in volume. Uh There's been about $4 billion in this case that is traded today. Uh A lot of them in large accounts through the platform. So, you know, you can do the math on, on what we've been able to do today. So, but we again, like, uh it's not necessarily like we're doing this, not necessarily the profit, we're doing this as a fintech company that that's really looking at the future of tokenized financial assets, that's huge to us, you know, and, and so we view that as the future and ultimately any successes that we, we have, we want to share that with our customers. Well, I gotta ask you, you know, people watching this interview might think, you know, poking holes in, in the bankruptcy claim. I think you brought up some valid points, but you also uh have a marketplace for tokenized FTX claims. So what would you say to someone who said, maybe it's in your best interest to poke holes in these claims? Um And bring up some of the discrepancy that discrepancies that you brought up because it might benefit your business. Yeah. Well, then I, I wouldn't tell you that, I think that these things will actually get negotiated in the customers favor. Um, but I think, you know, ultimately someone's got to bring it to their attention because if you don't do something about it, it's not going to change. Right. You, you've got to be a zealous advocate of your rights and, and get these changes in the plan going into confirmation. So, you know, that's been our approach, transparency, you know, listing these things out. Uh, I feel like it's a disservice if I don't as a bankruptcy professional at least list these things out uh for customers because it necessarily hasn't been readily apparent to date. And, and so, you know, everyone has the right to be a skeptic. Ultimately, the proof is in the pudding and we get the best prices for customers. Now we gotta wrap this up. But there are there any other crypto bankruptcies that you're watching this year? There's, you know, we have Voyager Genesis, any other ones that you're watching closely? I mean, we have been working light speed, so we, we've been laser focused on FT OS.

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