Chinese Creditors Challenge FTX Payout Pause Over Crypto Restrictions

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. This policy has irked some creditors, leading to the current legal dispute.

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 payments in regions where cryptocurrency transactions are heavily regulated or prohibited. The creditors argue that FTX's actions are unjustified and that the funds should be released to the rightful owners.

The dispute arises from FTX's decision to halt operations in November 2022, which left many users, including those in mainland China, unable to access their funds. This has further complicated the situation for Chinese creditors, who are now seeking legal recourse to reclaim their assets. The creditors' challenge highlights the complexities and risks associated with cryptocurrency investments, particularly in regions with stringent regulatory environments. The legal battle could set a precedent for how similar disputes are handled in the future, potentially influencing the broader cryptocurrency landscape. The outcome of this case will be closely watched by industry stakeholders and regulators alike, as it could have far-reaching implications for the global cryptocurrency market.