Lawyers handling the FTX bankruptcy case are considering offers that could eventually lead to a relaunch of the troubled exchange.
At an Oct. 24 hearing of the United States Bankruptcy Court in the District of Delaware, Kevin Cofsky of Perella Weinberg Partners revealed he is negotiating with several parties interested in purchasing the company.
Cofsky, an attorney specializing in restructuring and liability management, told Judge John Dorsey that an initial 70 inquiries have been reduced to just three final buyers. But the exact structure of the sale and what kind of exchange might emerge thereafter is unclear.
Any potential relaunch of the company would have to contend with the severe reputational damage done to it. For that reason, industry experts are skeptical that a simple reboot of FTX is even possible.
Debra Nita, senior crypto public relations strategist at YAP Global — an international PR agency specializing in crypto, Web3 and decentralized finance — believes the FTX brand is too far gone to recover.
“The reputation and viability of FTX as a business is likely irreparable at this stage,” Nita told Cointelegraph. “The ability for a brand to recover comes down to several factors, primarily due to the nature and extent of the scandal. Secondary factors include the stability and strength of business operations when it failed, and the kind of response delivered after the initial downfall.”
With millions of customers out of pocket and former CEO Sam Bankman-Fried recently found guilty of seven counts of fraud, the damage to FTX is considerable. Past examples of financial misconduct or carelessness illustrate how difficult it is for exchanges to regain investor trust.
Cryptopia was down for two months as its founders formulated a rescue plan. Even as they sifted through the ashes, executives assured customers the damage was minimal. According to Cryptopia, the lost money amounted to a “worst case” of only 9.4% of its total funds.
Through March and April of that year, the exchange carried on, bringing various services back online in a staggered relaunch. By May, it was all over. The damage to Cryptopia’s systems, as well as its reputation, was simply too much to overcome.
Cryptopia is far from an isolated case. Enron, MF Global and Mt. Gox are further examples of companies so utterly compromised by their respective failures that there was never any real hope of rehabilitation.
“Due to the extent of the damage caused, the companies never could recover, regardless of how positively they may have responded after the scandal,” noted Nita.
Miraculous recoveries
On the other hand, there are examples of firms that managed to recover from significant setbacks.
Wells Fargo, an American multinational bank, is one such case. In 2016, the company was embroiled in a significant cross-selling credit card scandal. The bank issued credit cards and other lines of credit to its existing customers without seeking approval.
Executives initially tried to blame middle managers and entry-level workers, but it later transpired that the catalyst for the malpractice was unreasonable expectations of senior management, which created extreme top-down pressure.
“Following the scandal, they reimbursed affected customers and introduced internal ethics procedures, and their stock price and reputation recovered,” said Nita. “The strength of their business and their responsible responses were then able to see [Wells Fargo] recover in reputation.”
The Consumer Financial Protection Bureau fined Wells Fargo $185 million, and CEO John Stumpf resigned. The company also settled a class-action lawsuit for $575 million.
In the same year as the Wells Fargo scandal, a major crypto exchange suffered a security breach. In August 2016, Bitfinex lost 119,756 Bitcoin (BTC) in a hack worth $72 million at the time. Bitfinex ceased all trading, and the severity of the hack wreaked havoc in the markets, with the price of Bitcoin falling by 20%.
To deal with the matter, Bitfinex decided that all customers would take a 36% haircut. This was applied to all accounts, even those unaffected by the hack. The exchange also issued the Rights Recovery Token, intending to make customers whole.
Bitfinex’s recovery was by no means guaranteed following the hack, but swift (even if unpopular) action on the part of its management helped the exchange weather the storm.
Possible options for an FTX “relaunch”
Cofsky’s testimony highlighted several potential forms a future FTX might take depending on the conditions of the sale.
“We have been engaging in an outreach process with a number of interested parties to either acquire the legacy exchange assets and/or to partner with the debtors in connection with the launch of the exchange. We’ve been evaluating that process relative to the potential to reorganize the assets on a standalone basis.”
“I am optimistic that we will have either a plan for a reorganized exchange, or a partnership agreement, or a stalking horse for a sale on or prior to the December 16th milestone,” said Cofsky.
Not all prospective buyers would want to use the FTX brand despite relaunch discussions. Cofsky clarified that one of the most valuable FTX assets is its list of 9 million customers. One option is to simply sell the list to another exchange and dump the FTX brand entirely.
To make that sale possible, the prospective buyer must know how many FTX customers are unique for any counterparty. Cofsky said that in this instance, the database of FTX information would need to be compared with the counterparty’s database of customers without revealing the identities of anyone on either database.
Cofsky did not make clear how that process would be achieved, but the challenge sounds like a potential use case for zero-knowledge proofs.
A fly in the ointment
Cofsky has stressed the importance of preserving the anonymity of FTX customers, but the position is still being argued in the courts.
Katie Townsend, an attorney representing the Reporters Committee for Freedom of the Press, has argued that the public has a “compelling and legitimate interest” in knowing the names of those affected by the fall of FTX.
Cofsky’s argument has so far persuaded Judge Dorsey that releasing this information would jeopardize the sale, rendering its value close to zero. At each point, Cofsky has been able to extend the length of the anonymity ruling, but the matter is by no means closed.
“The value that would be provided to the estate would be conditioned on the extent to which customers transact on the future exchange or are accessible to others and therefore are not available to that counterparty,” Cofsky testified.
“I would think that the value of the customers to the exchange would remain even after the conclusion of the case,” he added.
In cross-examination, Townsend questioned how Cofsky could be sure that customers would even wish to trade on any future version of FTX.
“I don’t know how we would do that without contacting those customers,” replied Cofsky.
The admission highlights just how complex any sale of FTX really is.
Cautious buyers may even want to split the FTX purchase into a number of payment tranches, with the final value of the spend dependent on their ability to convert the customer database — which will have been inactive for more than a year at the time of any sale — back into active customers.
Given the lessons of history, achieving that goal will be no easy feat.
The pound has fallen sharply after the chancellor announced the biggest tax rises in a generation.
Over the last three days, sterling has dropped by 1.2% (in trade weighted terms) – the biggest fall in 18 months.
Between around 1.30pm and 5.30pm today, versus the dollar, it dropped from about 129.9c to the pound to about 128.6c. In the same period, against the euro, it went from 119.3c to the pound to about 118.4c.
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In addition, yields for 10-year UK bonds – the cost or interest rate charged for long-term government borrowing – have gone past 4.5% for the first time in a year.
Ed Conway, Sky News’s economics and data editor, said those yields are “pretty much halfway towards the danger zone” – a zone identified by the Office for Budget Responsibility (OBR).
However, he said other European bonds had risen, too. “But the UK does seem to be moving faster than most of the others,” he added.
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While cautioning that the budget is still very new, Conway said the “upshot” is that Rachel Reeves’s “room for manoeuvre” is already diminishing “because of market moves”.
Markets are reacting in “quite a violent way”, Conway said.
“It’s really unusual to see this after a budget, and that will have a bearing on how much this government will be able to afford in the future,” he added.
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1:22
‘Raising taxes was not an easy decision’
A sudden rise in the yields of 10-year UK bonds followed Liz Truss’s disastrous “mini-budget” of September 2022, which led to a surge in the cost of borrowing for ordinary consumers, while the pound slumped to a 37-year low against the dollar.
It is “certainly not like that at the moment”, Conway said.
Nonetheless, market movements will be “enough to really concern people at the Treasury”, he added, “because it suggests that a lot of traders are looking at how much money this government is borrowing, and they’re saying: ‘Hang on, maybe we’re going to charge you more’.”
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0:33
The pound has weakened and gilt yields – the cost of borrowing by the UK government – has increased in response to the budget, which saw Rachel Reeves introduce the biggest tax hike in a generation.
While Conway said it does not feel like a “crisis point”, he said the “calculus for this government” may be changing.
Jack Meaning, UK chief economist at Barclays, said market reaction was “materially different” to what happened in 2022.
Bond yields since Ms Reeves’s budget are up by about 0.3%, while in 2022 the rise was about 1.5%, he said.
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7:18
Reeves acting like ‘compulsive liar’
The conversation Barclays is having with its customers is also different to that in 2022, Mr Meaning added.
At that time, people were wondering whether a “big crisis point” had been reached.
This time, he said the focus is on comments from the OBR about a potential rise in inflation, and the potential knock-on effect as the Bank of England makes decisions on interest rates in the next few months.
The prime minister’s official spokesperson refused to talk about bond prices.
“We don’t comment on market movements,” they said.
“The chancellor has been very clear that first and foremost, this budget has been about restoring fiscal stability, and she’s outlined two new robust fiscal rules, which put public finances on a sustainable path.”
She told Sky News’ Breakfast With Kay Burley that, unlike the previous Conservative government, she has included everything ministers will spend in their forecast, including £11.8bn compensation for victims of the infected blood scandal and £1.8bn for victims of the Post Office accounting scandal.
Ms Reeves insisted the tax rises would “fix the foundations and wipe the slate clean” and that this would be a one-off budget.
She added: “As a result of what we’ve done, we’re not going to have to come back and ever do a budget like this again, because we’ve brought everything out into the open.”
The chancellor also admitted growth “is largely unchanged” in the next five years, as revealed by the Office for Budget Responsibility’s (OBR) report on the budget.
But she said that is because she is looking at the economy in the long-term.
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She said: “For the first time, the OBR are now looking at economic growth over a longer time frame.
“And that’s really important because often politicians make short-term decisions rather than things that are in the long term interests of the country.”
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‘Raising taxes was not an easy decision’
Ms Reeves said she had to make the tax rises she did, despite promising not to raise taxes beyond Labour’s manifesto, because of “the circumstances that I inherited” from the Conservatives as she repeated they left a £22bn black hole.
“I could have swept that under the carpet and pretended it didn’t exist, or try and raise a bit of money this year and a bit more next year,” she said.
“I didn’t want to do that.
“I wanted to be open and honest, to wipe the slate clean, to put our public finances on a stable trajectory, to make sure that our NHS is properly funded so we can bring down those huge waiting lists.”
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UK’s economic growth forecast
Ms Reeves’ predecessor, the Conservative Party’s Jeremy Hunt, said Wednesday was a “bad day for trust in British politics” and said it will mean “lower pay, lower living standards, higher inflation, higher mortgages” for ordinary families.
He told Sky News: “Because 30 times this year before the election, the chancellor said she had no plans to increase tax outside of what was explicitly written in the Labour manifesto.
“And we had the biggest tax raising budget in British history.”
The shadow chancellor said a Conservative budget would have taken “the harder path” by cutting the number of people on benefits to 2019 levels to fund public services, which he said would release £34bn a year.
He added he does not think “anyone actually believes this £22bn number… but she didn’t increase taxes by £22bn, she increased them by £40bn”.
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“This was not about her legacy. This was a choice,” he added.
“This was the budget that she wanted to do all along. And it’s a legitimate choice. It’s one I disagree with. But if she’d wanted to do that, she should have told us before the election we could have had the debate.”
Plans to ban smartphones in schools have been dropped after the government refused to support a change in the law, Sky News understands.
Josh MacAlister, the Labour MP for Whitehaven and Workington, put forward the proposal earlier this month to stop children “doom-scrolling” – the act of spending excessive amounts of time online consuming negative news or social media content.
However, upon revealing the details of his Safer Phones Bill, Number 10 immediately indicated it could not support the measure on the grounds that headteachers already have the power to ban phones – although it is not upheld in law.
It is understood Mr MacAlister has now dropped this element of his bill in the hope the government will support its other aspects.
Mr MacAlister’s bill, which received broad support from cross-party MPs, education unions and charities, also calls for the age of “internet adulthood” – the minimum age to create social media profiles and email accounts – to be raised from 13 to 16.
It also wants to strengthen the powers of the regulator Ofcom to protect children from apps that are designed to be addictive and to commit the government to review further regulation if needed of the design, supply, marketing and use of mobile phones by children under 16.
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Although the government indicated it could not back the phones ban, there has been some confusion on its overall position on the bill after some cabinet ministers, including Health Secretary Wes Streeting, signalled their support.
“Given the impact of smartphone use and addiction on the mental health of children and young people and the concerns from parents, this is a really timely debate,” he posted on X.
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Speaking to Sky News earlier this month, Mr MacAlister, who chaired an independent review of children’s social care for the former government, said there was a “huge public health problem” with children around the world having increasing levels of mental health problems, issues with sleep and being impacted by phones in school.
“I’m only interested in one thing, which is making sure we can change the law to protect children and reduce screen time and get them back to having a healthier childhood,” he said.
“Parents are saying they’re facing an impossible choice between either keeping their kids off smartphones and ostracising them, or letting children get on these phones and seeing all the harmful effects that it can cause.
“And we need to shape some collective rules that help parents and teachers make better choices for children.
“Children themselves are recognising the harm that comes with all of the doom-scrolling.”
Current guidance to schools in England intended to stop the use of mobile phones during the school day is non-statutory, and was introduced earlier this year by the previous Tory government.
Sky News has approached the government for comment. Earlier this month, a government spokesperson said: “We all want to find the best way of ensuring children are kept safe while also benefiting from the latest digital technology.
“The Online Safety Act will introduce strong safeguards for children, preventing them from accessing harmful and age-inappropriate content. This will include requiring companies to check the age of children so that parents can have peace of mind about the safety of their children online.
“The vast majority of schools already handle the use of mobile phones effectively, including with bans. Legislating for an outright ban would simply remove the autonomy from school leaders who know their pupils and their communities best.”
Mr MacAlister’s bill is due to have its second reading – the first opportunity MPs have to debate the contents of a bill – in March.