FTX Compensation Controversy: Are Chinese Creditors Facing Discrimination?
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FTX Compensation Controversy: Are Chinese Creditors Facing Discrimination?
Does this rationale for denying compensation hold up?
Navigating Web3 tides with focused insightsBy FinTax
On July 3, 2025, Sunil, the representative for FTX creditors, posted on social media platform X that FTX had petitioned the court for approval to implement a new "Restricted Jurisdiction Procedures" in 49 jurisdictions where cryptocurrency activities are restricted—including China—thereby ceasing repayment obligations to users from these so-called "restricted jurisdictions." Under the proposed framework by the FTX Recovery Trust, affected creditors who fail to respond within the specified timeframe will completely forfeit their right to recovery.
What official justification does FTX provide for excluding Chinese creditors under the guise of “restricted jurisdictions”? And is this rationale truly defensible? The following section briefly reviews the FTX bankruptcy case and analyzes the validity of FTX's stated reasons.
Review of the FTX Bankruptcy Event
From Glory to Collapse
In May 2019, FTX was founded by Sam Bankman-Fried (SBF) and Gary Wang. It rapidly rose to become the world’s second-largest cryptocurrency exchange thanks to its high-leverage derivatives trading, amassing over one million global users. Top-tier institutions such as Sequoia Capital, SoftBank, and Temasek rushed to invest: $900 million raised in Series B funding in 2021, followed by $400 million in Series C in 2022. At his peak, SBF’s personal wealth soared to $24 billion, earning him the nickname “the next Buffett.”
However, on November 2, 2022, a bombshell report changed the fate of FTX and SBF. CoinDesk, a leading crypto news outlet, exposed Alameda Research’s balance sheet—the hedge fund affiliated with FTX—revealing that 60% of its $14.6 billion in assets consisted of FTX’s native token FTT, which lacked real underlying value. On November 6, 2022, Changpeng Zhao (CZ), CEO of Binance—the world’s largest cryptocurrency platform—announced he would liquidate all FTT holdings worth up to $580 million. Although Binance initially expressed interest in acquiring FTX, it ultimately backed out. Within just ten days, this crypto exchange once valued higher than Credit Suisse collapsed and filed for bankruptcy in the U.S. on November 11.
Initiating Bankruptcy Liquidation Process
On February 18, 2025, FTX officially launched its user asset repayment process. According to the distribution plan, retail creditors with losses under $50,000 received priority status, recovering approximately 119% of their claims when calculated at market prices on the day of bankruptcy. However, geographic restrictions on payouts were already emerging. On February 21, 2025, Sunil, FTX’s creditor representative, posted on X that users from China, Russia, Egypt, Nigeria, and Ukraine were temporarily excluded from this round of compensation. While FTX did not explicitly state the reason for the restriction, the crypto community widely speculated that regulatory constraints on cryptocurrency-related business activities in mainland China made FTX particularly cautious about compensating Chinese creditors.
Formal Submission of the “Restricted Jurisdiction Procedures”
On July 2, 2025, the FTX Recovery Trust formally submitted a motion titled *Motion of the FTX Recovery Trust for Entry of an Order in Support of the Confirmed Plan Authorizing the FTX Recovery Trust to Implement the Restricted Jurisdiction Procedures in Potentially Restricted Foreign Jurisdictions* to the U.S. Bankruptcy Court in Delaware. Initiated by the FTX Recovery Trust, the motion seeks judicial authorization under Section 105(a), Section 1142(b) of the U.S. Bankruptcy Code, and Rule 3020(d) of the Federal Rules of Bankruptcy Procedure to implement the "Restricted Jurisdiction Procedures" in specific countries and regions.
In the context of U.S. bankruptcy law, a "motion" is a formal request filed by a trustee asking the court to issue an authorization order—specifically, to permit the trustee to carry out certain administrative procedures regarding estate management. Under Section 105(a) of the U.S. Bankruptcy Code, courts may issue any orders, processes, or judgments necessary or appropriate to carry out provisions of the Bankruptcy Code. Even without party initiation, courts may act sua sponte to enforce or implement court orders or rules, or prevent procedural abuse.
The term "restricted jurisdiction" in the filing refers to countries or regions where the FTX Recovery Trust, after conducting legal research globally, has not yet confirmed whether it or its distribution service providers can legally make payments to creditors in those areas. According to the motion’s appendix, there are currently 49 jurisdictions listed as “potentially restricted,” accounting for about 5% of total claims, with Chinese creditors representing as much as 82% of that amount. Affected creditors in these "restricted jurisdictions" have a 45-day window to file objections regarding their restricted status. If no affected creditor files an objection, or if the court dismisses any objections, the FTX Recovery Trust will cease distributions to creditors located in these jurisdictions, and any rights to such distributions will revert back to the FTX Recovery Trust.
FinTax Commentary
Judging from the language used in the motion documents, the "Restricted Jurisdiction Procedures" proposed by FTX appear, on the surface, to be a compliance-driven and prudent measure aimed at respecting diverse national crypto regulations during cross-border bankruptcy distributions. In reality, however, they raise strong suspicions of being a mechanism designed to evade liability toward certain creditors—particularly those in China—for the following reasons:
First, the rationale offered by the FTX Recovery Trust for establishing this special mechanism concerning "restricted jurisdictions" is unconvincing. The motion emphasizes that laws across various "restricted jurisdictions" differ significantly but generally prohibit individuals or entities from engaging in any activity related to digital assets—including trading cryptocurrencies or disbursing crypto-related proceeds to residents in these areas. For example, according to the document: “In Macau, financial institutions and non-bank payment institutions are explicitly prohibited by mainland Chinese authorities from providing services involving tokens and virtual currencies.” Similarly, in Moldova: “Providing virtual asset services constitutes a criminal offense, whether conducted within the Republic of Moldova or as a supplementary or ancillary activity.” The filing further states: “If the FTX Recovery Trust violates local laws through distributions, it could face fines, personal liability for management, or even criminal penalties, thereby harming all stakeholders; however, it also cannot indefinitely withhold these distributions.” It adds: “The FTX Recovery Trust must not distribute funds to residents of jurisdictions where such activities are prohibited or to accounts located in banned zones. Reverting funds intended for residents of these areas back into the FTX Recovery Trust and redistributing them through the plan’s established distribution process is reasonable and constitutes a proper exercise of the Trust’s authority.”
Yet while mainland China indeed restricts cryptocurrency trading and prohibits financial institutions from offering related services, Chinese residents’ legal ownership of virtual currency and associated creditor rights have never been outlawed. Chinese courts have repeatedly recognized the property nature of virtual assets. Moreover, FTX’s compensation scheme is fundamentally denominated and settled in U.S. dollars—creditors receive dollar payouts—not directly tied to cryptocurrency transactions. Crucially, Chinese individuals lawfully holding and receiving overseas USD assets within foreign exchange quotas pose no legal barrier and can be accomplished via bank wire transfer. Indeed, other crypto platforms undergoing U.S. bankruptcy proceedings—such as Celsius—have successfully distributed compensation to users in China and elsewhere via international bank transfers, without citing “regulatory restrictions” as grounds for withholding payment. Therefore, FTX’s claim of regulatory prudence lacks internal consistency and appears more like a pretextual excuse to shirk its repayment responsibilities toward Chinese creditors.
Second, the procedural standard defining “restricted jurisdictions” is inherently unfair. In the motion, FTX determines whether a jurisdiction qualifies as “restricted” by assessing whether “any lingering uncertainty remains” regarding local legality. If uncertainties persist, the FTX Recovery Trust says it will hire qualified local counsel to issue formal legal opinions on whether distributions to residents or custodial accounts in that region are permissible under local law. While the Trust stresses conducting compliance due diligence through locally appointed lawyers, it offers no safeguards ensuring the independence or impartiality of these legal advisors. Entrusting self-hired local attorneys to assess “compliance risk” creates a conflict of interest and lacks neutral oversight—raising concerns of discriminatory treatment against Chinese creditors. This approach also diverges from the core principle of U.S. bankruptcy law, which prioritizes maximizing creditor recoveries. Furthermore, although the "Restricted Jurisdiction Procedures" do grant creditors a 45-day period to submit written objections and seek judicial remedies to prove eligibility, this mechanism is practically inaccessible to most retail investors. For scattered individual overseas creditors, the time and cost required to engage specialized attorneys across borders, translate local laws, compile evidence, and navigate U.S. court jurisdiction and discovery procedures within such a short window are prohibitively high.
In conclusion, FTX’s exclusion of certain creditors—especially those in China—from normal compensation based on the concept of “restricted jurisdictions” suffers from serious flaws in factual basis, substantive fairness, and procedural justice. In cross-border bankruptcy distributions, the paramount principle should be maximizing legitimate rights and recoveries for all creditors. No compliance arrangement should come at the expense of sacrificing the lawful entitlements of a minority group. Especially in the decentralized world of crypto, equality of rights is a shared ideal—geography and identity should never justify “you get paid, I don’t.”
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