Galaxy Digital's asset management division helped sell assets of FTX, while its trading division was one of the buyers.

By Nina Bambysheva, Forbes Reporter

Translated by Luffy, Foresight News

When FTX filed for bankruptcy, savvy cryptocurrency traders sniffed out a profitable opportunity. Sam Bankman-Fried's (SBF) cryptocurrency empire lost billions of dollars of client funds but still holds various cryptocurrencies worth $3.4 billion, which must be sold to satisfy creditors' claims, and likely at a price far below market value.

Most companies responsible for managing bankrupt assets have little to no experience with cryptocurrencies, and early attempts to consolidate funds sometimes result in embarrassing losses of tens of thousands of dollars. In September 2023, bankrupt FTX enlisted the asset management division of Michael Novogratz's Galaxy Digital Holdings to help manage its massive cryptocurrency reserves, including selling, hedging, and pledging cryptocurrencies. This process allows token holders to earn passive income by validating transactions added to the blockchain network.

FTX holds approximately one-third of its cryptocurrencies in the form of SOL, the native token of the Solana blockchain advocated by SBF. According to the Solana Foundation, from August 2020 to May 2021, Bankman-Fried's company purchased nearly 60 million SOL, most of which are in a locked state. By late August 2023, the trading price of SOL was around $20 per token, but by the end of the year, its price had increased fivefold, exceeding $100. It seems that if FTX can quickly cash out its SOL and other assets, it can fully meet its clients' claims (calculated at the USD value on the application date), something rarely achieved by creditors in major bankruptcy cases.

It is important to note that most of the tokens owned by SBF are locked, meaning they can only be sold in monthly installments from 2025 to 2028. Long-term vesting plans like this typically mean that tokens must be auctioned at a significant discount to compensate buyers for the enormous risks associated with cryptocurrency volatility. However, the potential returns could be substantial. Galaxy's trading division, on the other hand, is one of the buyers in the FTX asset auction.

In the fall of 2023, the debtor faced a daunting task. Rapidly selling billions of dollars' worth of SOL would disrupt an already volatile market, and the cryptocurrency market was just beginning to recover from the damage caused by the collapse of FTX. Therefore, after consulting with Galaxy Asset Management, it chose to separate the sales through multiple auctions.

The first batch of SOL tokens (ranging from 25 to 30 million) was sold at the end of March for over 60% below the market price at $64 per token. The auctioned tokens were purchased by a few companies, including hedge funds Pantera Capital and Neptune Digital Assets.

According to a source familiar with the transaction, undisclosed buyers also included Brevan Howard Digital, venture capital firm Multicoin Capital, and the Solana Foundation. The Solana Foundation is a non-profit organization based in Zug, Switzerland, originally founded by blockchain developers dedicated to the development and security of the Solana network.

However, Galaxy, led by Novogratz, was also one of the first buyers of locked SOL from FTX. According to Bloomberg, Galaxy Trading represented investors to purchase tokens for a special purpose fund, which raised approximately $620 million and charged a 1% management fee. Assuming Galaxy's fund traded at a discounted price of $64, it would ultimately acquire 9,687,500 SOL tokens. Pantera, which also participated in the bidding, created a similar fund to purchase up to $250 million worth of SOL. Based on current prices, Galaxy's fund is expected to have realized a paper profit of $1.03 billion from the anticipated purchase of 9.7 million tokens.

In late April, the second auction saw FTX sell 1.8 million SOL at prices ranging from $95 to $110 per token (15% to 26% below market price). According to The Block, Galaxy Trading once again raised funds from investors for this auction, with a minimum commitment cap of $5 million. Pantera also participated in the auction. The final batch of SOL was sold on May 22, attracting Pantera and the newly established cryptocurrency exchange Figure Markets. Figure acquired 800,000 tokens at $102 per token, approximately 42% below the recent market price of $177 per token. What is the potential profit from the second auction? Based on current prices, it would exceed $130 million.

When details of the first auction emerged, many FTX creditors and other bidders were surprised. "When both the buyer and seller of your house are involved in the same transaction, the situation looks very bad," said a source familiar with the sale who declined to be named.

"Involvement of investment banks in sales or liquidation activities, as is the case here, is not uncommon," said Rob Hadick, a general partner at cryptocurrency-focused venture capital firm Dragonfly. "That said, it's clearly not good and would raise concerns from the creditors' committee… Concerns about unfair information access and unstable price discovery are reasonable."

A spokesperson for Galaxy declined to comment on the specifics of the SOL token sale and its dedicated fund, and directed Forbes to contact FTX. It is currently unclear how much Novogratz's Galaxy will profit from the bankruptcy restructuring of FTX. Galaxy Digital's stock trades in Toronto and has risen 161% in the past 12 months, with a current market value of $3.6 billion. According to the company's first-quarter financial report, as of March 31, Galaxy holds $104.1 million in investments from the Galaxy Digital Crypto Vol Fund, which acquired a large amount of SOL from FTX assets this quarter.

FTX's official unsecured creditors' committee, composed of former major clients and market makers of the exchange, has approved the token sale, and an FTX spokesperson issued a statement supporting Galaxy's dual role in the bankruptcy restructuring:

"The bankruptcy court has approved the retention provisions of Galaxy Asset Management, which have been reviewed by interested parties (no objections received), including Galaxy's ability to transact with Galaxy affiliated entities… The prices paid by Galaxy affiliated entities for Solana are the same as or higher than those paid by other buyers, and all Solana sales have been approved by the Official Unsecured Creditors Committee and the Non-U.S. Customer Special Committee. The sales to Galaxy under the framework approved by the court do not involve any conflicts of interest, and any reports to the contrary are false."

Nevertheless, some FTX creditors and clients are still complaining. Take Sunil Kavuri, a former client of FTX who invested over $2 million in the exchange and is a member of the unofficial "Non-U.S. Customer Special Committee," which consists of over a thousand former FTX clients: "I think the people handling the bankruptcy assets have already lost over $10 billion. So more than what SBF initially caused us to lose," Kavuri said. "The biggest loss is Solana."

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