FTX’s Multi Billion-Dollar Distribution Plan Is Approved. Here’s How It Will Impact the Crypto Market

A US bankruptcy court approved the reorganization plan of bankrupt crypto exchange FTX on Monday, meaning that between $14.7 billion and $16.5 billion in recovered assets are set to be distributed to FTX creditors.

Many investors have been expecting that those distributions would lead immediately to increased demand and higher cryptocurrency prices as creditors used their recovered funds to re-invest in digital assets. The reality is much more complex however.

The approval of the reorganization plan by US Bankruptcy Judge John Dorsey doesn’t immediately turn on the spigot of distributions, according to Kyle, an advocate for FTX creditors who’s known as Mr Purple on X. For starters, the court has to set a date for when the plan will be implemented, known as the effective date, which is currently estimated to be Oct. 31.

“Given [the debtors’] track record, I would expect that [timeline] to slip a little bit,” Kyle said. “Probably higher likelihood is the plan effective date would be sometime in November—maybe end of November—and at that point, then the debtors can really effectuate the start of the distribution process.”

What’s the Schedule for Distributions?

Once the effective date is reached, the debtors will have 60 days to make distributions to what’s known as the “convenience class,” which comprises any individual customer claims under $50,000. Around $1.2 billion of recovered assets will be distributed towards this class, taking into account the debtors’ recovery estimates.

The timetable for redistribution remains a work-in-progress and depends on logistics, said Yesha Yadav, a professor of law at Vanderbilt University, in an email to Unchained.

“The payment schedule right now is a phased one—with smaller creditors owed under $50,000 scheduled to be repaid sooner, and the larger creditors potentially having to wait well into next year before they receive a distribution,” Yadav said.

The earliest that the group of larger creditors, known as the “entitlement class,” are likely to be paid is February of next year, according to Kyle. This group has around $9 billion in claims, and Kyle said he expects that these creditors will be paid between 100 to 110 cents on the dollar in the spring of next year, followed by interest payments on the unpaid portion of their claims until those claims are paid in full, and a further distribution coming from the $12.7 billion settlement between the FTX estate and the Commodities Futures Trading Commission (CFTC). The FTX estate estimates a final recovery rate of between 129% to 143% for the entitlement class.

John, an FTX creditor and claims buyer who requested anonymity due to concerns about retaliation from the debtors, noted that the bankruptcy estate has missed every deadline it’s given the public so far.

“I think convenience classes are going to get their money, maybe next year—April, May, something like that—and it’s not going to be all together, but phased out,” John said. Thomas Braziel, co-founder of distressed investing firm 117 Partners, agreed that payments are likely to come in waves, based on his experience with other bankruptcy cases involving crypto firms, such as Mt. Gox, Celsius, and Voyager.

How Will Distributions Impact the Market?

Whenever the distributions occur, they are unlikely to be major liquidity events for the crypto market in which creditors use recovered funds to drive up crypto prices, experts say. That’s because of the outsized role that claims buyers and distressed investment firms have played in this bankruptcy case.

A report from Fortune in March showed that hedge funds Attestor, Baupost, and Farallon are the biggest holders of FTX claims, with $520 million, $518 million, and $346 million worth of claims, respectively. In February of this year, pricing broker Cherokee Acquisition noted that the top six holders of FTX claims are distressed-debt firms, having amassed a $1.3 billion position.

In total, around half of the claims in the docket, or somewhere between $6 billion to $7 billion, belongs to distressed firms, according to Braziel. Kyle arrived at a similar figure, noting that one of the ad hoc groups—mostly made up of claim buyers but not representing all claims buyers in the case—collectively sits on around $6 billion worth of claims.

“I say that with extreme confidence, almost none of [the claims buyers] will redeploy into crypto,” Kyle said. “Many of them will not be allowed to, even if they wanted to. Several of the claim buyers are funds that have limited partner arrangements that are not crypto investors.”

Braziel helped broker many claims deals and also bought a small fraction of claims for clients through his investment firm. In those cases, distributions are going back to the clients and they will decide how to invest the money, Braziel said.

“Most of those guys are big crypto folks and they already have a lot of crypto. They’re not redeploying back into crypto,” Braziel said.

John, the FTX creditor and small claims buyer, works in crypto but said it’s “a long shot” that all the money from his distributions will be deployed into crypto. “Everything feels a little bit overpriced,” he noted.

Not everyone is staying away, though; crypto investing firm Sol Strategies told The Block it intends to buy more Solana tokens with capital recovered from FTX. And some members of the entitlement class in the case are institutional crypto firms who traded on FTX, Braziel said.

Being mostly made up of retail investors, the convenience class figures to be the most likely to reinvest proceeds into crypto, but Kyle said he was skeptical that that would happen.

“It’ll be some number less than $1 billion coming into the market in December/January, and that’s the real figure,” Kyle said. “Anyone who’s trading on that being a big liquidity event is going to be sorely mistaken.”

One other consideration in all this is that many of the main crypto bankruptcy estates, such as those of Celsius and Voyager, have been selling the crypto assets recovered in the bankruptcy proceedings as a way to pay back creditors, which had been putting some selling pressure on the crypto market.

“I actually think the most bullish thing for the crypto markets is the fact that all these estates are basically done,” Braziel said. “There’s a few things on the margin, but for the most part, they’ve sold a lot of their—in crypto parlance—bags.”