FTX Estate Faces Backlash Over Blocked Payouts to 49 Jurisdictions

A Chinese creditor has raised objections to a proposal by the FTX estate that aims to block payouts to users in countries with restrictive cryptocurrency laws. The creditor, Weiwei Ji, argues that this policy unfairly penalizes compliant creditors and could impact over 300 individuals.

In a court filing, Ji challenged a motion submitted by the FTX estate on July 2. This motion seeks to pause distributions to residents in 49 jurisdictions, including China. Ji, who resides in Singapore but holds a Chinese passport, stated that he has been designated as a Chinese creditor and submitted the objection on behalf of a growing group of similarly affected creditors.

Ji highlighted that his family holds four KYC-verified accounts with aggregate claims exceeding $15 million. He emphasized that they have fully complied with every procedural requirement under the Plan. Ji's filing argues that FTX’s planned distributions are denominated in U.S. dollars—a legally recognized form of repayment—and asserts that under Chinese law, cryptocurrencies are classified as “personal property,” not banned assets.

The FTX estate, in its motion, expressed concerns that making payouts into countries with restrictive crypto regimes could expose the estate and its directors to legal or criminal penalties, including potential imprisonment. The motion was submitted to the U.S. Bankruptcy Court in Delaware and lists 49 jurisdictions where crypto laws are deemed unclear or hostile. The estate cited Moldova as an example, noting that even auxiliary services related to crypto are considered criminal under Moldovan law.

Roughly 5% of total approved claims fall under the restricted jurisdictions category, according to the motion. FTX began repayments in February, starting with convenience class creditors, based on the dollar value of crypto holdings at the time of the exchange’s collapse in November 2022. However, not everyone is satisfied with the terms. While the estate performed well in dollar terms, many creditors argue they would have been better off receiving payouts in crypto. Given the surge in prices since FTX’s collapse, crypto holdings like SOL have gained substantially, meaning customers paid in cash may be missing out on much larger returns.

Recovery rates vary based on claim category. Customers on the former dotcom platform will receive 72 percent of their approved claims, while U.S.-based customers are expected to recover 54 percent. General unsecured creditors and digital asset loan claimants are each set to receive 61 percent. Those with convenience claims, which typically involve smaller amounts and simplified procedures, will recover 120 percent—effectively receiving full repayment with a small premium.

The controversy surrounding the motion to address user claims in "restricted countries" has sparked significant backlash. The FTX crypto debacle has highlighted the challenges that arise when innovation outpaces regulatory oversight. Advocates of free markets argue that industries should be allowed to develop without excessive government intervention, while others contend that stronger regulations are necessary to protect consumers and maintain market stability.

The FTX estate's decision to freeze payments to creditors from 49 regions, including China, has raised concerns about the potential impact on global financial markets. The motion to halt payouts in these regions has been met with resistance from creditors, who argue that the decision is unfair and discriminatory. The situation has left many creditors in a state of uncertainty, as they await a resolution to the ongoing dispute.

The FTX crypto debacle has served as a stark reminder of the risks associated with investing in cryptocurrencies. The collapse of FTX has left many investors and creditors with significant financial losses, and the ongoing legal battles have only added to the uncertainty surrounding the future of the company. As the bankruptcy liquidation process continues, it remains to be seen how the situation will be resolved and what impact it will have on the broader cryptocurrency market.