Customers who trusted crypto giant FTX may be left with nothing

Signage for the FTX Arena, where the Miami Heat basketball team plays, is illuminated Saturday, Nov. 12, 2022, in Miami. (AP Photo/Marta Lavandier)

As the dust settles from one of the most shocking financial implosions in history, one of the key unknowns is how much customers who can't access their money expect to get back from FTX, the crypto exchange that filed for bankruptcy last week.

The answer, according to legal experts, may be zero.

Before its unravelling, FTX.com marketed itself as a safe-for-beginners destination for buying and selling cryptocurrencies. But a liquidity crunch last week forced FTX to halt withdrawals, leaving customers and investors in limbo. FTX reportedly used customer funds to prop up its sister hedge fund's high-risk trading operation without permission, according to the Wall Street Journal.

On Friday, FTX and the hedge fund, Alameda Research, filed for bankruptcy.

Federal prosecutors in New York are now investigating the exchange's collapse, a person familiar with the matter told CNN. And authorities in the Bahamas, where FTX is based, launched a criminal probe into the firm over the weekend.

The legal ramifications for FTX and its founder, Sam Bankman-Fried, remain unclear. But as the exchange, once valued at more than $30 billion, collapses, it looks increasingly likely that customers who handed their money over to FTX could be left holding the bag.

"We just don't know the extent of contagion," said Howard Fischer, a partner at law firm Moses Singer and a former Securities and Exchange Commission lawyer. "The first ring of victims are the people who had assets held in FTX … They are probably not going to be made whole, or anywhere close to it."

There are a few reasons for this.

In a traditional U.S. bank failure, the government insures customer deposits, making them whole up to $250,000. But there simply is no mechanism for depositor insurance in the largely unregulated world of cryptocurrencies.

In theory, FTX's customers should get a cut of what's left of the company's assets at the end of the bankruptcy process. But so far, at least, it's not clear how much will be left to disburse.

"As far as I know, they have two assets – the goodwill value of the exchange and the value of their FTT coins," said Eric Snyder, head of the bankruptcy department at the law firm Wilk Auslander. (Goodwill value refers to intangible assets like a brand's reputation and intellectual property. And FTT coins, the crypto token issued by FTX, have lost more than 90% of their value over the past week.)

In bankruptcies, Snyder explains, there's a fairly simple formula to figure out how much creditors – in this case, FTX depositors – will receive.

"The numerator is the assets, the denominator's liability. You divide one into the other, and the [result] is what everybody gets," he said. "But if people are pulling out all the assets, then there's not going to be much of a numerator."

He added: "It's very conceivable that the return will be minimal at best."

Of course, the suddenness of FTX's downfall makes it a difficult case to assess this early on, lawyers say.

Normally, companies would have weeks to prepare bankruptcy filings that disclose, among other things, an explanation of why the company sought Chapter 11 protection and what it aims to accomplish in bankruptcy court.

Dan Besikof, a partner at Logan & Loeb LLP who specializes in bankruptcy, says it's too soon to say whether customers are going to get any money back.

"All you can really do is guess from tweets where things stand," he said. "And how customers recover their money might depend on a lot of different things, including which entity they hold the money through, what amount of the coin still remain."

The FTX fallout has rattled the entire crypto industry, raising serious questions about the future of digital assets and the lack of global regulation.

On Monday, Changpeng Zhao, the CEO of FTX competitor Binance, sought to reassure his audience of the sector's legitimacy.

"It's obvious that people are jittery," said Zhao, widely known as CZ, in a question-and-answer session on Twitter. "I want to say, short-term, it is painful. But I think this is actually good for the industry long-term."

The giant crypto exchange briefly emerged as a lifeline for FTX before reversing course last week before rescinding its offer.

Zhao, whose tweet announcing Binance's divestment in FTX helped fuel the smaller firm's liquidity crisis, has denied having a "master plan" to expose FTX. Still, critics note the biggest, and perhaps only, winner in the downfall of FTX is none other than Zhao, now unquestionably the wealthiest and most influential player in digital asset trading.

"As much as some people blame me for whistle-blowing or poking the bubble, I apologize for that … I apologize for any turmoil that I caused. But I think any time, if there's a problem, the earlier we reveal it, the better."

–CNN Business' Matt Egan and Kara Scannell contributed to this article.