The collapse of FTX – the recovery of crypto assets

The collapse of FTX

FTX was a centralized crypto exchange platform created by Sam Bankman-Fried (SBF) through which people can buy and sell cryptocurrencies without having their own “crypto wallet”. SBF transferred $10 billion (USD) in funds to Alameda Research (essentially FTX’s private crypto hedge fund). Alameda used FTT (FTX’s native token) and the $10 billion (USD) in client funds to fund essentially risky investments (without their clients knowing of course!).

In Australia, on November 11, 2022, FTX Australia (and its subsidiary FTX Express Pty Ltd, which operates a digital currency exchange not regulated by the Australian Securities and Investments Commission (ASIC)) were put into voluntary administration. Since that time, FTX Australia administrators, KordaMentha, have identified 29,234 clients who have lost significant property, with “recoverability and current value to be determined”. However, some of these clients have written to KordMentha’s admins saying they have losses ranging from $40,000 to $1 million (AUD). On November 16, 2022, ASIC suspended FTX Australia’s Australian financial services license.

If customer funds are found to have been pocketed, it is a scam. In such circumstances directors of FTX Australia could be prosecuted Companies Act 2001 for breach of their board duties.

Recovery of your Crypto assets and/or funds

So what do you do if you are one of the 29,234 clients who lost their crypto or money using FTX?

First and foremost, you must seek urgent legal advice if you want any chance of recovering your crypto and/or funds. The terms of use on the FTX Australia website state that all disputes are governed by Australian law.

As an external voluntary administrator has been appointed, the powers vested in the directors of FTX Australia will end and the administrator will assume control of the company’s assets. Voluntary administration usually results in a company either entering into a Deed of Memorandum of Association (DOCA) or otherwise entering into liquidation.

An unsecured creditor (an individual or entity that in this case had cryptocurrency or funds on the FTX exchange) cannot initiate proceedings against an entity under administration except with the consent of the administrator or the permission of the court.

However, there are additional complexities when it comes to cryptocurrencies. The treatment of managed cryptocurrencies depends on the circumstances and the context in which the particular cryptocurrency was used (ie trading, as an investment or purchase of goods and services). Since the corresponding private key has to be obtained to recover the cryptocurrency, the cooperation of the administrator is crucial in this regard.

Collection of electronic evidence should be considered to support the administrator, e.g. B. Proof of ownership of the cryptocurrency. For example, emails, mobile applications, QR codes, recovery seeds, Internet browsing history, and hardware may contain such evidence of ownership. Checking electronic devices to find evidence of the public and private keys would be a must in this regard.

If the keys can be accessed, it may be possible to track past transactions through the FTX exchange where the cryptocurrency was stored. However, if another party has both the public and private keys, the cryptocurrency may already have been moved, making tracing difficult.

How can we help?

If you are affected by the FTX collapse, we recommend that you seek legal advice. Contact Gareth Kerr, Senior Associate for advice on recovering crypto assets or funds that appear to have been lost with the FTX collapse.

For more guidance or information on the crypto landscape, please subscribe to our mailing list here.

Disclaimer

The information contained in this insight is intended as general comments only and should not be considered legal advice. If you need specific advice on the topics discussed, please contact us directly.


Leave a Comment