FTX Overview: Hacking Incident, 80% Debt Recovery, and Reasons for Cash Settlement
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GM,
FTX has been undergoing bankruptcy proceedings since November 2022, and it's about to reach the one-year mark in just two more months. First and foremost, we want to express our sympathy to everyone affected by this event.
At the end of last year, the CEO role at FTX was handed over from Sam Bankman-Fried (SBF) to John J. Ray III, who took charge of asset liquidation. Since then, sporadic updates about FTX have emerged in the news, including SBF's incarceration, FTX asset recoveries, and the FTX 2.0 reboot plan. However, for most people, it's unclear whether these updates are accurate or how far along FTX has progressed in its recovery efforts.
This article aims to consolidate the most significant milestones from FTX's bankruptcy filing in November of last year up to the present. We'll start by discussing the crucial matter of claims and reimbursements, which directly impacts everyone involved.
Filing a Claim for Compensation
If you had assets still held in FTX or Blockfolio accounts when the FTX exchange collapsed in November 2022, you are considered one of the affected users in this event. The first step that all affected users need to take now is to complete the identity verification and file a claim on the FTX website before September 29, 2023. According to a press release issued by FTX exchange in July:
FTX announced today the launch of an online claims portal for its users, accessible at https://claims.ftx.com. Users can log in with their personal FTX account credentials to view their transaction history and account balances up to November 11, 2022. If you agree with the information provided on the website, you only need to submit your Know Your Customer (KYC) details, and then submit your claim.
The deadline for user claims set by the U.S. court is 4:00 PM Eastern Time on September 29, 2023. FTX has already started notifying all customers through email and physical mail, urging them to complete the claims process.
This step is equivalent to informing the U.S. court that you are a creditor of FTX and confirming the amount of money FTX owes you. It's crucial to complete this process within the specified deadline, as this will determine your eligibility for compensation from FTX in the future. If you are an affected user, I recommend taking action as soon as possible (checklists, community groups)! The claims process may encounter some difficulties that require time to resolve, such as forgetting your account password, incorrect displayed amounts, or needing to apply for additional KYC documentation. Waiting until the last day carries a high risk of last-minute complications.
However, if you completed your claim early and now wish to revisit your data, you may encounter issues trying to log in to the current website.
A reminder window in the upper right corner of the webpage will display the message: "Not allowed with read-only permissions." This indirectly indicates that FTX has already received your claim information. The reason for not allowing you to log in is due to a hacking incident that occurred at the end of August. To prevent users who have already completed their claims from falling victim to phishing attempts, FTX has temporarily restricted user logins.
Data Breach
According to FTX's announcement:
The claims processing agent, Kroll, was affected by a cybersecurity incident that resulted in the exposure of non-sensitive customer information for certain claimants. This incident occurred within Kroll. Kroll is currently notifying those affected. It's important to note that FTX account passwords are not maintained by Kroll, so the FTX system remains unaffected by this incident. Please exercise caution regarding fraudulent emails claiming to be from bankruptcy-related parties.
Kroll is a well-established American financial risk consulting firm with 90 years of experience. After FTX's bankruptcy last year, Kroll was commissioned by the new FTX management team to handle the subsequent claims processing. All schedules and documents related to FTX claims are now publicly available on a dedicated page established by Kroll for FTX. User data that has already been submitted as part of the claims process will naturally be managed by Kroll as well.
While FTX initially stated that the incident was Kroll's fault, Kroll has also acknowledged that one of its employees was targeted in a hacker attack. However, it appears that U.S. telecommunications company T-Mobile may also have a role to play in this. According to Kroll's press release:
On August 19, 2023, a hacker conducted a sophisticated "SIM card swap" attack targeting a T-Mobile phone number belonging to a Kroll employee. Specifically, T-Mobile, without authorization from Kroll or its employees, transferred the employee's phone number to the hacker's device as per the hacker's request. As a result, the hacker is suspected to have obtained certain personal information of claimants, including those associated with BlockFi, FTX, and Genesis. We have already notified the affected users via email.
SIM card swap (SIM swap) attacks are indeed quite common in the United States and are related to the inadequate security of identity verification mechanisms employed by telecom providers. In such attacks, hackers call the telecom company, posing as the victim, claiming a SIM card malfunction, and requesting assistance in transferring their identity from the old SIM card to a new one. If the telecom company fails to diligently verify the caller's identity or if the victim's personal information has already been compromised, the hacker can easily succeed.
There have been studies where researchers purchased 50 prepaid cards from five U.S. telecom providers to simulate hacker attacks. The results showed a success rate of up to 80%. Once a hacker gains control of the victim's SIM card, they can use it in combination with account credentials inadvertently leaked by the victim to access various accounts and obtain more valuable information.
In the context of this security breach, those who completed their claims early are likely to be the victims of data leakage. Therefore, FTX decided to close the website login access for these individuals to prevent phishing attacks. Conversely, if you can still log in now, it may be because you completed your claim after the end of August, or it could be due to Kroll not having received your information at all.
Aside from filing claims, the most pressing concern for everyone is how much money they will receive and whether it will be in cash or cryptocurrency.
Debt Recovery
Determining how much money affected users will receive is one of the most confusing aspects of this situation, akin to election results where different media outlets provide varying counts. While the Central Election Commission's website may update slowly, at least it doesn't engage in "inflation" of numbers. FTX's liquidation team is required to report progress to the U.S. court every few months and compile an interim report, which is then updated on the Kroll website. Currently, FTX has completed two interim reports, submitted in April and June 2023, respectively:
The third interim report, originally expected in August, has not been released yet. According to the second interim report, when FTX filed for bankruptcy in November of last year, the total debt owed to users was approximately $8.7 billion. As of June 2023, FTX has recovered approximately $7 billion in liquid assets. When calculated proportionally, FTX has recovered about 80% of its debt. In other words, ideally, affected users can expect to recover 80% of the assets they initially held in FTX and Blockfolio accounts. However, these numbers may still be subject to change.
It's well-known that the financial records of FTX and Alameda Research, the two companies, were in disarray, making it challenging for both outsiders and even internal records to align. Former Alameda CEO Caroline Ellison once estimated a cash deficit of up to $10 billion for FTX in her notes. However, internal company documents recorded a debt of $8.9 billion. The numbers didn't match up. Eventually, the FTX liquidation team made various adjustments to arrive at the $8.7 billion figure.
In theory, the amount of debt owed is unlikely to change significantly. What will vary more is how much FTX can recover and the methods of reimbursement, both of which will affect how much money people can ultimately expect to receive.
Cash Reimbursement
Recent news highlights that the U.S. brokerage firm Robinhood repurchased a batch of stocks, previously held by SBF and later confiscated by the U.S. Department of Justice, for $600 million.
In reality, Robinhood had agreed to repurchase these stocks earlier in the year, but determining ownership was quite complex. Initially, the stocks were purchased by SBF, but the funds used clearly came from FTX deposits, including yours and mine. Later on, Alameda used these stocks as collateral to borrow $680 million from BlockFi but was unable to repay. As a result, FTX, Alameda, and BlockFi all went bankrupt. Now, all three parties (SBF, BlockFi, and FTX creditors) claim ownership of these stocks. Eventually, the U.S. Department of Justice confiscated the stocks on behalf of everyone and sold them back to Robinhood. As for who will ultimately receive the $600 million, that remains a subject of debate.
Additionally, last week Blocktrend also discussed how Alameda holds around $500 million worth of GBTC (Grayscale Bitcoin Trust) shares. If Grayscale is approved to convert GBTC into a Bitcoin spot ETF in the future, these GBTC shares may become even more valuable.
After all the juggling, it may not be too difficult to gather the $8.7 billion owed to everyone. The more awkward part is that FTX plans to reimburse assets, not in the form of the original cryptocurrency held in your accounts but by converting them into an equivalent amount of U.S. dollars for reimbursement.
Cryptocurrency prices have seen considerable fluctuations, and today's prices are different from those in November last year. So, how should FTX calculate the value? The market generally believes that FTX will use the USD value at the time of its bankruptcy filing in November 2022. In other words, if you held 1 BTC in your account, and the price at that time was $16,000, assuming FTX eventually reimburses 80%, you would receive $12,800 in cash.
From the users' perspective, this may seem disadvantageous, as the current BTC price is much higher than it was then, and even if you receive 100%, you may not be able to buy back 1 BTC. However, from the FTX liquidation team's standpoint, their goal is to compensate for losses as much as possible. If cryptocurrency prices rise, it would be more favorable to compensate losses in terms of USD. Conversely, if prices are lower than before, FTX might prefer to directly reimburse users with cryptocurrency.
The ultimate goals of the FTX liquidation team and creditors do not align. The former is focused on performance metrics, while the latter is concerned with the actual assets recovered. Those who held only USD or stablecoins in their accounts at the start are likely the least affected.
Recently, FTX has reported to the court, seeking to hire the professional asset management firm Galaxy Digital to assist in selling up to $3 billion worth of cryptocurrency and hedging BTC and ETH price risks during the process to avoid selling at a loss. For cryptocurrency investors, this is indeed another storm on the horizon. The market may have a chance to recover only after the $3 billion worth of cryptocurrency is sold.
Despite the likely disappointing outcome of the claims process and uncertainty about when the funds will be returned, the cryptocurrency industry is characterized by resilience. Many people have envied those who bought Bitcoin at a low price a decade ago, thinking they were just lucky. However, few realize the many challenges they had to endure to survive until now. I used to believe that a good memory was an asset, but since I got involved with Bitcoin, I've come to wish that one day I could learn to "forget after buying."
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