Introduction to the bankruptcy system design and possible handling of emerging cryptocurrency assets.
Author: Xiao Sa Team
In 2023, the latest progress of the FTX bankruptcy case, which single-handedly dragged the entire cryptocurrency asset circle into a downward spiral, has been made—the preliminary compensation plan for investors. On December 26, 2023, the bankruptcy administrator of FTX submitted a modified reorganization application to the court, proposing to: (1) calculate the amount of customers' cryptocurrency claims in US dollars; (2) determine the benchmark price of cryptocurrency based on the bankruptcy date (November 11, 2022).
FTX's actions have sparked anger among most investors, as many believe that the compensation plan is unfair and unreasonable. Today, the Xiao Sa team will introduce to everyone the bankruptcy system design and possible handling of such emerging assets based on the FTX bankruptcy reorganization case.
Is the FTX compensation plan fair and reasonable?
The bankruptcy administrator's compensation plan for FTX investors is actually quite simple. The request for FTX to use the US dollar as the asset calculation unit is quite normal. The Xiao Sa team had previously discussed in the analysis of the FTX case that in international virtual asset exchange bankruptcies, the calculation of investment amounts would likely be based on a legal currency that can be accepted by citizens of different countries, thus eliminating some uncertainties for investors.
As for the bankruptcy administrator's decision to determine the benchmark price of cryptocurrency as of November 11, 2022, it is a double-edged sword for the administrator. However, at present, the administrator's suggestion is seen as very unfair to investors, mainly due to the significant price fluctuations of virtual currencies. In simple terms, the cryptocurrency market was relatively sluggish on November 11, 2022, with the trading prices of various virtual currencies being low. However, the cryptocurrency market has since experienced a significant surge, with the prices of related virtual currencies increasing significantly compared to November 11, 2022. Therefore, it is understandable that investors consider this unfair.
From FTX's perspective, the administrator's reasons for making the two aforementioned suggestions are mainly to avoid "unnecessary delays" in the bankruptcy proceedings. Additionally, the FTX bankruptcy administrator believes that conducting individual settlements for each investment related to cryptocurrency is "neither practical nor necessary," as it would cause delays in the FTX case under Chapter 11 of the US Bankruptcy Code.
Therefore, the core issue for the Xiao Sa team is whether using November 11, 2022 as the benchmark date to determine the benchmark price of various virtual currencies is fair and reasonable.
How should VASP bankruptcy cases be handled?
The Xiao Sa team believes that the handling of bankruptcy cases for platforms like FTX can refer to traditional bankruptcy procedures, and can also consider the handling of securities dispute cases, especially the determination of the "three-day price" standard. Firstly, VASPs such as FTX have significant similarities with listed companies throughout their operation. Secondly, VASPs like FTX engage in the issuance of securities-like financial products. Therefore, the Xiao Sa team believes that in the process of determining the benchmark date for compensation, the method used in securities dispute cases to determine the benchmark date can be considered.
According to Article 25 of the "Judicial Interpretation on False Statements in Securities (2022)," "The scope of civil liability borne by information disclosure obligors in the securities trading market is limited to the actual losses incurred by the plaintiff due to false statements. The actual losses of the plaintiff include the difference in investment, the commission on the part of the investment difference, and the stamp duty." In China, for relevant securities false statement dispute cases, the determination of investors' investment losses requires a clear "three-day price" in order to finally determine the amount of compensation. The "three-day price" refers to the date of the false statement, the date of the public disclosure of the false statement, the benchmark date, and the benchmark price.
(1) Date of the false statement: Refers to the date on which the listed company made the false statement. This is to determine the starting point for compensation.
(2) Date of the public disclosure of the false statement: This is the date on which the false statement by the listed company was first publicly disclosed in national media such as newspapers, radio, television, regulatory department websites, trading venue websites, major portal websites, and well-known industry self-media, and became known to the securities market. The determination of the date of the public disclosure of the false statement is particularly difficult. In practice, the court generally judges whether investors were aware of the false statement based on the market's reaction to the relevant information.
(3) Benchmark date: The date for calculating the difference in investment losses, which is the deadline for determining the reasonable period for calculating losses after the public disclosure or correction of the false statement. According to Chinese law, in trading markets that use centralized bidding, the benchmark date is the date when the cumulative trading volume of the affected securities reaches 100% of the tradable portion from the disclosure or correction date. If the cumulative turnover rate does not reach 100% within 30 trading days, the 30th trading day is taken as the benchmark date.
(4) Benchmark price: The average price of the closing price on each trading day from the date of the public disclosure or correction of the false statement to the benchmark date, which is the benchmark price for calculating losses.
The Xiao Sa team believes that in cases of bankruptcy reorganization like FTX, it is not responsible to arbitrarily determine a benchmark date and benchmark price solely based on the reason of "not delaying the reorganization time."
Additionally, we need to consider the possibility of future changes in the cryptocurrency market after the benchmark price is determined. If the cryptocurrency experiences a significant surge or decline after the benchmark date and price are determined, it will have a huge impact on both the bankrupt party and the investors. To put it in a less accurate analogy, this may even create a "zero-sum game" problem.
Final Thoughts
Is it correct to completely follow the traditional handling of securities dispute cases to determine the compensation standard? The Xiao Sa team does not think so. VASPs and cryptocurrency have their own unique characteristics. Whether it's the fluctuating prices of various cryptocurrencies or the differences in the operation and management of virtual assets issued by VASPs and the management of customer assets compared to traditional listed companies, they deviate from the familiar financial order. Not to mention, the cryptocurrency market is constantly evolving, and new cryptocurrency assets may emerge every day.
The bankruptcy reorganization system involving cryptocurrency assets is a long road. Currently, existing legal systems cannot provide a fair and balanced solution for determining the benchmark date and price of cryptocurrency assets. When the compensation plan becomes extremely unfair due to market changes, there is also no effective remedy to solve the problem. Overall, the Xiao Sa team does not support FTX's preliminary compensation plan. It is highly likely that FTX will make reasonable adjustments and modifications to the benchmark date, and we will closely monitor the relevant compensation plan and provide legal services to readers in need.
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