The Pulse: FTX recovery may include recent prices; Ethereum’s missing canary

As crypto prices have risen, much more pressure has been placed on the FTX bankruptcy process.

The core tension is whether customers are paid out in the crypto they supposedly had at the exchange or in an equivalent dollar value. So far, FTX’s bankruptcy lawyers have steamrolled ahead with dollarized claims. Yet with bitcoin breaking new highs, ether retesting old ones and solana rallying hard, customers are unsurprisingly asking the question: Why shouldn’t they be paid out in crypto?

It’s certainly been done in other bankruptcy proceedings. While Mt Gox’s process has taken a decade, the plan is to repay creditors in a combination of bitcoin and fiat currency. More recently, BlockFi has repaid creditors in crypto and Celsius is set to follow. While the FTX estate might argue that it only had a fraction of some cryptocurrencies, it certainly has plenty of others.

This would also have a big impact on claims. For instance, someone holding bitcoin would see the dollar value of their claim increase from $16,871 to around $66,000 today. Now, they likely wouldn’t get all of that value, but they could get a greater amount. Instead, that value trickles down to other claimants, such as shareholders and government entities.

Some creditors are pushing heavily for claims to be in-kind. Law firm Moskowitz and Boies, which represents creditors in a class action lawsuit against the estate’s bankruptcy lawyers, filed an objection to estimate the claims when the exchange went bankrupt. This motion was backed by FTX creditor activist Sunil Kavuri, who runs an FTX customer ad-hoc committee voting block of over 1,300 creditors with over $680 million of claims.

While it’s late in the process, it seems like the sands might be starting to shift.

In a draft filing on Thursday, debtors proposed a structure for handing out the assets that would prioritize customers over governmental entities. For the first time, this raised the notion that some creditors might get further assets based on the value of their crypto at a later date.

After FTX customers and Alameda lenders are made whole based on the dollarized value of their claims, potentially with interest, and expenses and IRS payments are made — any remaining funds would go to a Civil Remission Fund. This fund would then pay customers and Alameda lenders who have seen the value of their cryptocurrencies increase between the time FTX went bankrupt and when the Chapter 11 Disclosure Statement is approved by the Bankruptcy Court (estimated for later this year). But this could mean a bit of extra value going to customers.

Now the question is whether any money would be left over. That’s hard to estimate. But one creditor advocate has run the numbers and reckons FTX is looking at a $4.5 billion surplus at current prices over dollarized claims. These are funds that could have been handed out if payment was made in-kind but will trickle down to shareholders and other entities instead because the claims are dollarized. However, if there are any funds left at the bottom of this waterfall structure, then these may actually be returned to customers.

This surplus appears to be part of the reason the plan for FTX 2.0 was scrapped. With creditors seemingly made whole, there’s less incentive for the estate to take on the additional risk of restarting the exchange—and that’s not for a lack of buyers.

On The Block

A look at a selection of stories that caught my attention this week.

A missing bird 

One of my most peculiar experiences this week was getting a tip that an unnoticed GitHub comment revealed that the Ethereum Foundation had received a confidential voluntary request from a state authority. The comment was made in order to remove the Warrant Canary from its website, which was a symbol that the foundation hadn’t received such a request. 

Shortly after, Fortune revealed that the U.S. Securities and Exchange Commission issued subpoenas to firms that dealt with the Ethereum Foundation, citing people familiar with the matter. This further dampened hopes that the SEC will approve a spot Ethereum ETF any time soon. Although, some say that’s a good thing.

Double your money

Usually, when there’s the notion of doubling your money in crypto, it’s a scam, but this time it was a bug. Just a few hours after I was put in touch with the Super Sushi Samurai team — and had actually just tried out its idle Telegram game — high volumes of its token were minted and sold on decentralized exchanges, draining funds from liquidity providers. This was possible because the token had a bug where if you sent your entire balance back to your own wallet it doubled the funds. 

However, the funds may not entirely be lost. The person who drained the funds sent a message saying that it was a whitehat rescue hack. They provided details for contacting them and said that users should get reimbursed. The project has since reached out.

A sluggish stablecoin bill

In the House, the stablecoin bill led by House Financial Services Committee Chair Patrick McHenry has encountered challenges, Sarah Wynn writes, making the likelihood of the bill passing the full House uncertain. Cody Carbone of the Chamber of Digital Commerce suggests the chances of it passing could be as high as 50% in the House but only 5% of it becoming law overall due to the dynamics at play.

In the Senate, Senators Kirsten Gillibrand and Cynthia Lummis are working on their own stablecoin bill. While there's bipartisan support and willingness to move forward, uncertainties around details and strategy persist, causing frustration among stakeholders.

Overall, the timeline for passing stablecoin legislation remains uncertain, with stakeholders hoping for progress before the election cycle intensifies. The focus may shift to positioning legislative efforts for the next Congress if significant progress isn't achieved by the end of the year.