Will FTX traders get their money back? Bankruptcy experts weigh in

Disgraced FTX founder Sam Bankman-Fried appeared in a Manhattan courtroom on Thursday to face a federal indictment, a key step as prosecutors seek answers to what they described as a “fraud of epic proportions.” to have.

But more than a million potential victims are still in the early stages of what will likely take years to complete bankruptcy proceedings that are likely to recover only some of the money lost, some bankruptcy experts told ABC News.

According to the indictment, Bankman-Fried — who was released on $250 million bail and did not file a plea — allegedly stole $8 billion from FTX investors and clients, and in doing so, stole debt and expenses from Alameda Research, his Privately owned, hedge funds have settled. He also used the money to buy lavish real estate and make political donations to mostly Democrats but also some Republicans as he sought influence in Washington, prosecutors said.

Many crypto traders who deposited their savings on the platform fear they will never get their money back.

The sudden collapse of the $32 billion crypto exchange is a challenge for officials overseeing the bankruptcy. They will attempt to identify lost assets shrouded in the complexities of novel digital currencies, a largely unregulated financial sector and an alleged lack of proper records, the experts said.

“You have a real holy mess here,” G. Ray Warner, a professor of bankruptcy law at St. John’s University, told ABC News. “This is really not a normal company bankruptcy.”

FTX did not immediately respond to a request for comment.

Last week, FTX CEO John Ray testified before the House of Representatives that he and his colleagues are “now working on behalf of the FTX Group to achieve a fundamental goal: to maximize value for FTX’s customers and creditors, so that… we can mitigate as much as possible the damage that so many have suffered.”

Here’s what experts say you need to know about the current status of bankruptcy cases, the process of returning funds to crypto traders, and whether they end up getting any of their money back.

Where is the bankruptcy right now?

The once-announced cryptocurrency exchange FTX declared Chapter 11 bankruptcy on Nov. 11 following a spate of customer withdrawals. That same day, Bankman-Fried resigned as CEO and was replaced by Ray, a veteran of corporate bankruptcies leading the dissolution of scandal-plagued accounting firm Enron supervised.

The bankruptcy filing listed more than 130 companies associated with FTX and its sister hedge fund Alameda Research. The number of creditors applying for reimbursement is at least 100,000 and may reach more than a million, the filing said.

The company, which had about $1.25 billion in assets last month, said it owes more than $3 billion to its top 50 creditors, plus additional money beyond that.

Ray told members of Congress last week that FTX lacks corporate controls to a degree it has never experienced, making efforts to recover lost assets more difficult. “I’ve never seen a total lack of records,” Ray said. “Absolutely no internal controls.”

Edward Janger, a professor of bankruptcy law at Brooklyn Law School, told ABC News that FTX’s sudden collapse gave the company little time to prepare for an orderly liquidation.

“Sometimes companies go bankrupt without planning,” Janger said.

How Will Crypto Traders Try to Get Their Money Back?

The first claim some crypto traders will make is that lost money is theirs and not FTX, said Warner of St. John’s University.

If creditors can show their money was held independently of the company’s assets, the money will be returned to them before the bankruptcy proceedings are completed, giving them the best chance of full repayment, he added.

“The difference is if you loaned me your car for the week and I didn’t return it and I filed for bankruptcy, the car wouldn’t be part of my bankruptcy estate,” Warner said. “You could get your car back from me.”

Such attempts at rapid asset recovery typically fail because they must meet stringent conditions and otherwise undermine the fairness of the equitable allocation of assets among creditors, Warner said. But some crypto traders could get funds back this way, perhaps in cases where they deposited funds into an FTX account but didn’t invest, he added.

For the most part, FTX creditors will await the full bankruptcy proceedings, during which officials will reclaim, identify, value, and eventually reorganize or liquidate the company’s assets.

In a statement Monday, FTX said some recipients of donations from the company, Bankman-Fried or other officials have sought instructions for the return of that money. The company urged other donors to come forward, otherwise it will take legal action to secure the funds.

After assets are recovered, crypto traders have to queue behind other parties who receive lost funds. Priorities include unpaid taxes, unfulfilled employee payroll, and other business expenses. Shareholders and other corporate investors are at the back of the line behind the traders.

How long will it take for crypto traders to get their money back?

The exact duration of the bankruptcy proceedings remains uncertain, but it could well be several years before crypto traders get their money back, some bankruptcy experts have said.

Stuart Brown, a partner at DLA Piper who specializes in bankruptcy, told ABC News that similar proceedings have been going on for several months without resolution.

“The other crypto bankruptcy cases have been pending for about six months without a clear path to an exit being found and these cases do not have the complexity that FTX has,” he said.

Asset recovery will likely take several years before the company even begins returning funds to creditors, Warner said.

“The distribution to the beneficiaries – that will probably take quite a while,” he said.

There is also the possibility of additional delay from a jurisdictional dispute between the Bahamian and US authorities over who should decide on the bankruptcy, Warner said. Such disputes are usually settled in settlements, but potential litigation over the matter may take several years before bankruptcy proceedings can move forward.