Bishop & Sewell

Investors affected by the shocking collapse of cryptocurrency exchange FTX are being advised to speak with specialist lawyers. The exchange collapsed this month after it ran into liquidity issues and was accused of mishandling customer funds.

In an updated bankruptcy filing, FTX revealed the insolvency could impact more than one million people and businesses who are now owed money from the exchange, which is currently missing anywhere between $1 billion and $2 billion in customer funds.

The filing detailed the firm having some 100,000 creditors, assets in the range of $10 billion to $50bn (£8.4bn to £41.9bn), as well as liabilities in the range of $10bn to $50bn.

Michael Kashis, Managing Partner and Head of Corporate and Commercial team at Bishop & Sewell LLP, said:

“The fallout from what has already become an epic financial scandal has hit many businesses and affected millions of people.

“There is now an understandable clamour for greater regulation of cryptocurrency and I think it is likely there will be some effort put into getting new rules behind these exchanges, not to mention the prospect of criminal proceedings being brought against FTX’s ex-CEO Sam Bankman-Fried.

“However, without global consensus it is difficult to see how an effective regulatory regime can be introduced. If nations decide to make unilateral decisions on crypto regulation, the likelihood is that these exchanges will relocate to the most favourable jurisdictions to bypass the new rules.

“Thankfully, despite FTX potentially carrying billions of dollars of debt, the connections between cryptocurrency and ‘mainstream’ finance are not significant enough to have caused a knock-on effect to global financial systems.

“However, the collapse of FTX has sparked widespread fears of contagion in the industry, with many more companies at risk of collapse. The circumstances that brought about FTX’s rapid demise are akin to a run on a bank; cryptocurrencies rely on confidence and if that bubble were to burst, we could see similar collapses on other exchanges.

“The key thing is whether the exchange has sufficient assets to back its currency – the failings at FTX, such as poor governance and record keeping, could be symptomatic of wider problems with cryptocurrency exchanges. While it is too early to tell, I expect any wider collapse of crypto currencies will happen quickly, as governance of other exchanges must surely be under close scrutiny.”

The enormity of FTX’s collapse could trigger a cascade of lawsuits, comparable with some of the biggest bankruptcies in history, such as Lehman Brothers or Enron. Liquidators have found evidence of “serious fraud and mismanagement” at FTX, which is likely to instigate several lawsuits against the company.

Indeed, FTX’s new acting CEO, John J. Ray III, an attorney who has presided over several high-profile insolvencies, said: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” calling the situation “unprecedented.”

There are still many details to come out about the collapse of FTX, but one thing is certain: as the extent of the damage becomes clearer over the coming months, lawyers specialising in insolvencies are likely to be in much higher demand.

Contact our Corporate & Commercial Solicitors

If you are an entrepreneur and would like help with the legal aspects of a business or if you have any general queries concerning and need a helping hand to guide your initial steps, please contact Michael Kashis in the Corporate & Commercial team or call on 020 7631 4141 and ask for a member of the team.

The above is accurate as at 22 November 2022. The information above may be subject to change during these ever-changing times.

The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.

Category: Blog, News | Date: 22nd Nov 2022

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