FTX Freezes 82% of Claims in China Amid Legal Uncertainty

The FTX Recovery Trust has implemented a freeze on creditor repayments in 49 regions, including China, where cryptocurrency operations are legally restricted. This decision, announced in a court filing on July 2, impacts jurisdictions where crypto trading is either restricted or banned outright. The regions affected include Nigeria, Fiji, Andorra, and Zimbabwe, among others.

Despite these regions representing only 5% of the total allowable claims, China alone accounts for 82% of the total frozen claim value. The delay in repayments is due to FTX seeking legal clarity on whether disbursements to residents in these regions would violate local regulations. The bankrupt crypto exchange has recently begun the second phase of its creditor repayment program, distributing approximately $5 billion to eligible claimants.

China’s 2021 ban on crypto trading has significantly impacted FTX’s repayment obligations. The Recovery Trust has acknowledged the legal risks associated with distributing funds to jurisdictions where crypto transactions are outlawed. In response, FTX has submitted a proposal to the U.S. bankruptcy court requesting approval for a new claims protocol targeting these restricted regions. Under the proposed framework, claims would only be honored if legal counsel confirms that such payouts comply with the respective country’s laws. If not, claims risk being formally disputed and potentially denied.

FTX has introduced a “hold-and-review” system, reclassifying all claims from the 49 affected regions as “disputed.” These claims will remain on hold pending legal reviews. Should the court approve the updated claims process, affected creditors will receive a “Restricted Jurisdiction Notice,” detailing the reason for the hold and offering a minimum 45-day period to contest the decision.

FTX has indicated that legal opinions will be sought to determine if distributions can proceed. If legal barriers persist, creditors may be advised to transfer or sell their claims to entities in approved jurisdictions to recover value.

Chinese creditors, who dominate the list of impacted users, are actively exploring legal avenues. Some have voiced frustrations on social media, questioning why claims settled in U.S. dollars cannot be wired internationally to Chinese residents, given that while crypto trading is banned, holding virtual assets and foreign currencies is permitted under Chinese law.

Meanwhile, others have pointed out that unless legal pathways are established, the only options for affected users might be to transfer or sell their claims via approved jurisdictions.