20. Juli 2024

FTX Debtors Reveal $8.9 Billion Shortfall in Customer Funds

• FTX debtors released a presentation on March 2, 2023 that revealed a $8.9 billion shortfall in customer funds.
• The preliminary analysis found that approximately $2.2 billion of the company’s total assets were found in FTX-related addresses, but only $694 million is considered „Category A Assets.“
• The report attributed the shortfall to a cyber attack that occurred the day after FTX filed for Chapter 11 bankruptcy protection, as well as the company’s practices of holding digital assets in sweep wallets that were not segregated for individual customers.

On March 2, 2023, FTX debtors released their second stakeholder presentation, which contained a preliminary analysis of the now-defunct cryptocurrency exchange’s shortfalls. The latest presentation revealed a significant shortfall, as approximately $2.2 billion of the company’s total assets were found in FTX-related addresses, but only $694 million is considered „Category A Assets,“ or liquid cryptocurrencies such as bitcoin, tether, or ethereum. This resulted in a $8.9 billion shortfall in customer funds.

John J. Ray III, FTX’s current CEO, stated that the debtor’s effort had been significant, and he added that the exchange’s assets were „highly commingled.“ The preliminary report attributed the shortfall to a cyber attack that occurred the day after FTX filed for Chapter 11 bankruptcy protection on November 11, 2022. In a now-deleted Telegram chat channel, FTX US general counsel Ryne Miller described the exchange being hacked and that the platform was unsafe.

The preliminary report also mentions that both FTX and FTX US typically held digital assets in sweep wallets that were not segregated for individual customers. The debtors noted that due to the cyber attack, the company’s computing environment was secured and „remains subject to certain restrictions,“ limiting access to crucial data. The report categorizes FTX’s holdings into two groups: „Category A Assets,“ which have larger market caps and trading volumes, and „Category B Assets,“ which have smaller market caps and lower trading volumes.

The FTX debtors presentation also outlined a number of steps the company has taken to secure and recover assets. These include engaging a third-party security firm to conduct an independent audit, implementing a multi-signature wallet system, and establishing a customer fund recovery process.

The FTX case is a reminder of the risks of holding digital assets on exchanges, and it serves as a cautionary tale for investors to consider the security of their funds before entrusting their assets to any digital currency exchange. The presentation is the latest development in FTX’s bankruptcy proceedings, and it remains to be seen if the exchange can recover any of the lost assets.