Actions taken by the FTX bankruptcy estate have ignited concerns regarding payouts to creditors located in jurisdictions characterized by ambiguous or restrictive cryptocurrency regulations.
On Wednesday, the FTX estate submitted a motion to the US Bankruptcy Court for the District of Delaware. This motion seeks authorization for the FTX Recovery Trust to implement freezing measures on distributions targeted towards creditors situated in “potentially restricted foreign jurisdictions.”
A List of Concern
The 49 jurisdictions identified in this motion feature unclear or restrictive laws regarding cryptocurrency, thereby introducing complex cross-border legal risks.
The filing explicitly states: “Distributions made by or on behalf of the FTX Recovery Trust into jurisdictions in violation of these legal restrictions may trigger fines and penalties, including personal liability for directors and officers, and/or criminal penalties up to and including imprisonment.”
China and Russia Among Notable Jurisdictions
Recognizing the global distribution of its creditors, the FTX bankruptcy estate is proceeding intentionally to ensure adherence to local legal frameworks before releasing cryptocurrency distributions.
The estate clarifies that while these 49 countries exhibit regulatory variation, they broadly share prohibitions on activities involving digital assets. This typically includes restrictions on both the trading of cryptocurrencies and the distribution of crypto-related proceeds to residents within those territories.
The filing provides an example in Macau: “financial institutions and non-bank payment institutions are prohibited explicitly by mainland authorities from providing services for these tokens and virtual currencies.”
The documentation further identifies jurisdictions with similar constraints, including but not limited to China, Egypt, Iran, Russia, Saudi Arabia, and Ukraine.
Seeking Clarity Amidst Complexity
Although FTX is highlighting these restrictions, the estate is not definitively blocking payouts to these specific countries.
According to the FTX estate, these distributions are currently being withheld pending finalization of the resolution process, with the potential for payouts to proceed as clarity emerges.
Citing internal analysis, the estates statement indicates that China stands out significantly, accounting for roughly 82% of the claim values impacted by these restrictions within potentially affected foreign jurisdictions.
China remains a focal point in global crypto regulatory debates, given the strict prohibitions on crypto transactions by authorities, while notably stopping short of an explicit nationwide ban on individual asset holding itself. Pro-crypto neighboring regions like Hong Kong have concurrently established regulatory frameworks permitting certain crypto products.
The court’s consideration and approval of the restricted jurisdiction procedures is consistent with, and in furtherance of, implementation of the plan.
This particular measure is being assessed within the context of providing procedural certainty for FTX Recovery Trust operations. Some members of the cryptocurrency community have expressed opposition to the segregation strategy; however, others believe the cautious approach is reasonable given the legal ambiguity.
“When it comes to token distributions in bankruptcy, there is still significant legal uncertainty… it doesn’t surprise me that the FTX estate might not make distributions in countries where such distributions might be illegal,” noted Aaron Brogan, founder and managing attorney at Brogan Law.
