FTX Freezes Payouts in 49 Countries with Restrictive Crypto Laws

The FTX bankruptcy estate has taken a significant step to address concerns over payouts to creditors in countries with ambiguous or restrictive cryptocurrency regulations. On Wednesday, the estate filed a motion with the US Bankruptcy Court for the District of Delaware, seeking authorization for the FTX Recovery Trust to freeze distributions to creditors in "potentially restricted foreign jurisdictions." The motion highlights 49 countries with unclear or restrictive crypto laws, which could pose risks due to complex cross-border legal implications.

The filing emphasizes that distributions made in violation of these legal restrictions may result in fines, penalties, and even criminal charges, including imprisonment for directors and officers. The estate is taking these precautions to ensure compliance with local laws in each jurisdiction before issuing cryptocurrency distributions. The regulations in these 49 countries generally prohibit individuals or entities from engaging in any activities related to digital assets, including crypto trading or distributing crypto-related proceeds to residents within those jurisdictions.

Among the listed countries are China and Russia, which have stringent regulations against cryptocurrency activities. For instance, in China, financial institutions and non-bank payment institutions are explicitly prohibited from providing services for tokens and virtual currencies. The estate is not entirely blocking payouts to these countries but is holding the distributions pending resolution. The recovery trust is ready to clear some of them as the process progresses.

China accounts for 82% of the value of affected asserted claims among the total number of potentially restricted foreign jurisdictions. The region remains one of the most contentious jurisdictions regarding cryptocurrency, as regulators have repeatedly banned crypto transactions but have not explicitly prohibited individuals from holding digital assets. Neighboring jurisdictions have taken a more pro-crypto stance, greenlighting crypto investment products like derivatives and exchange-traded funds.

The FTX estate has developed restricted jurisdiction procedures to provide notice and a process for resolving the question of whether distributions will be made pursuant to the plan. The court’s consideration and approval of these procedures are consistent with the implementation of the plan. While some in the community have expressed outrage over the estate’s approach, others suggest that its stance is reasonable given the significant legal uncertainty surrounding token distributions in bankruptcy.

According to the estate, the court’s approval of the restricted jurisdiction procedures is in line with the implementation of the plan. The estate’s approach aims to provide clarity to stakeholders and ensure compliance with local laws, even if it means holding distributions pending resolution. The estate’s decision to freeze payouts in potentially restricted jurisdictions underscores the complexities and risks associated with cross-border cryptocurrency distributions in bankruptcy proceedings.