The collapse of FTX: can investors recover their losses?

FTX, the world’s second largest cryptocurrency exchange, sent shockwaves throughout the crypto market after it collapsed last week and has now filed for Chapter 11 bankruptcy in Delaware, USA.

FTX is an unregulated crypto exchange that is not regulated or authorised by the FCA in England. Whilst this is common in the UK as cryptocurrency lenders are generally not regulated in the region, this does not mean that exchanges can ‘go rogue’. They still must adhere to their legal duties.

Recent case law demonstrates that English courts are beginning to recognise cryptocurrency exchanges more widely. For example, the courts have recognised cryptocurrency exchanges as constructive trustees of client funds. However, if those funds are misappropriated, or used outside of the legal framework, then a claim against them for breach of trust (fraudulent or otherwise) could exist.

An investigation is already underway in relation to FTX and the alleged misappropriation of client funds. Investors will now be seeking to recover their FTX assets.

If it can be established that customers’ investments have been used to support Alameda Research (FTX’s trading partner), then this will almost certainly amount to fraudulent conduct. This would be a serious problem for FTX and the directors behind the exchange and is likely to result in a high volume of legal claims against FTX. This will undoubtedly cause panic in an already turbulent cryptocurrency market.

If client funds have been misappropriated, it is a fraud. Directors could face criminal prosecution as well as striking off.

How can investors recover their funds from FTX?

Victims of this need to seek urgent civil recovery advice if they have any chance of salvaging their investments, particularly as the Terms of Service currently on FTX’s website state that with regard to FTX Trading Ltd, any dispute will be governed by English Law.

It is not yet clear whether these Terms of Service apply to customers who have lost their money, and a full review on a case-by-case basis will need to be undertaken to determine whether these Terms of Service bite in any particular case, but they are likely to have a significant impact.

Immediately after a liquidator is appointed, the powers of the company’s directors cease, and the liquidator takes control of the company’s assets. Ordinarily, the unsecured creditors cannot take legal action against a bankrupt, or a company once a liquidator has been appointed under the Insolvency Rules.

In this case, lawyers will need to carefully consider the Insolvency Rules and binding Terms of Service to determine whether claims over recovery of client funds fall outside the control of the liquidator (if those client funds are not company assets).

Investors (both individual and institutional) affected by the collapse of cryptocurrency exchange FTX are advised to take legal advice. If you have crypto assets lost with the FTX collapse, please contact Louise Abbott.