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 in November 2022 and subsequently filed for Chapter 11 bankruptcy in Delaware, USA.

FTX was an unregulated crypto exchange that was 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 recognising 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 well underway in relation to FTX and the alleged misappropriation of client funds. Investors are now 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 are facing 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.

Creditors, whether institutional or individuals, ought to be taking all possible steps to protect their position and enhance the recovery of their digital assets. The deadline in which some categories of FTX creditors have to file a proof of claim in the Chapter 11 bankruptcy in the US is 30 September 2023.

Please contact Louise Abbott, who is representing a number of FTX creditors pursing claims outside the bankruptcy process, if you need advice or have questions about your investment before this month’s deadline.