Chinese Creditors Challenge FTX's Payout Pause in 49 Restricted Countries

A Chinese creditor has filed an objection to a motion from the FTX estate that would pause payouts to residents in jurisdictions with laws or regulations restricting cryptocurrency transactions. The creditor, Weiwei Ji, resides in Singapore but holds a Chinese passport, classifying them as a Chinese creditor. Ji's objection is on behalf of themselves and a growing group of over 300 Chinese creditors.

The objection presents two main arguments. First, it asserts that FTX settlements are made in US dollars, which are a standard legal repayment method. Second, it notes that cryptocurrency distributions are legal in China, with digital assets constituting “personal property.” Ji argues that their family holds four KYC-verified accounts with aggregate claims exceeding $15 million USD and has fully complied with every procedural requirement under the Plan. The proposed motion, according to Ji, now jeopardizes their right to distribution in an arbitrary and inequitable manner.

The FTX Estate's motion, filed on July 2, aims to pause payouts to residents of restricted countries. The motion states that distributions made into jurisdictions in violation of legal restrictions may trigger fines and penalties, including personal liability for directors and officers, and/or criminal penalties up to and including imprisonment. The motion identifies 49 countries with unclear or restrictive crypto laws, which could lead to risks due to complex cross-border legal complications. These countries include Russia, Egypt, Afghanistan, Tunisia, Zimbabwe, Ukraine, and Moldova, among others.

The motion was filed with the US Bankruptcy Court in Delaware. According to the motion, 5% of the value of allowed claims is due to residents in these restricted jurisdictions. The FTX Estate used Moldova as an example, stating that it is a criminal offense to engage in the activity of providing services regarding virtual assets on the territory of the Republic of Moldova, including in cases where this activity is auxiliary/supplementary to the main activity.

The FTX Estate began repayments on February 18, starting with convenience class members. The repayment amounts were based on the value of the digital assets around the time of the exchange’s collapse in November 2022, a policy that irked some creditors. Over 500 Chinese creditors have taken legal action against FTX's recent attempt to freeze $470 million in payouts to users in jurisdictions with restrictive regulations. This move comes as a response to FTX's efforts to halt payouts in regions where cryptocurrency transactions are heavily regulated or prohibited. The creditors argue that FTX's actions are unfair and unjustified, as they seek to recover their funds despite the regulatory challenges.

FTX's decision to freeze payouts is rooted in the regulatory environment surrounding cryptocurrencies. In mainland China, transacting in cryptocurrencies has been made illegal for citizens, and additional restrictions may apply in other regions. This regulatory landscape has created significant hurdles for FTX and its users, leading to the current legal dispute. The creditors' challenge highlights the complexities and uncertainties surrounding cryptocurrency regulations and their impact on financial transactions. The legal battle between FTX and its creditors underscores the need for clear and consistent regulatory frameworks to ensure fairness and transparency in the cryptocurrency market. As the dispute unfolds, it remains to be seen how the courts will rule on the matter and what implications this will have for the broader cryptocurrency industry.