Unverified FTX Customers at Immediate Risk of Losing Millions

Hundreds of thousands of FTX account holders risk losing their right to collect against the defunct cryptocurrency platform in the coming days, and many are scrambling without attorneys to figure out what to do.

FTX Trading Ltd. bankruptcy creditors who haven’t verified their claims—necessary to comply with anti-money laundering laws and other regulations—should be putting large circles on their calendars around March 1 and June 1. Failing to commence the “know your customer” process by March 1 and complete it within 92 days will leave holders unable to reclaim any value for cryptocurrency trapped on the shuttered exchange.

When FTX sought bankruptcy court approval in late November to set a claim verification deadline, more than 450,000 customers had yet to start the process, according to its court filings. Another 30,000 had begun but didn’t finish. As of Jan. 21, 460,000 customer claims—more than half of those deemed large enough for compensation—were still unverified.

Account holders across the world have flocked to message boards and social media sites seeking advice on navigating the process, with many having trouble understanding what’s needed of them and whether they’ve satisfied the requirements. Language barriers and lack of awareness have put some at jeopardy of losing everything they earned trading on FTX.

“You have a very large number of small creditors and they don’t know what’s going on,” said Vladimir Jelisavcic, manager and founder of bankruptcy claims broker Cherokee Acquisition. If they fail to act on time, “the value will be completely and irrevocably lost.”

Jelisavcic and other knowledgeable professionals with a soft spot for confused FTX customers navigating the process without an attorney are offering free assistance and boosting a call to action for people who have been waiting for years to recoup after the fallout of Sam Bankman-Fried’s fraud scheme.

“People really need help in this case,” said Nicholas Hall, a Texas-based solo bankruptcy practitioner who last year built and launched a free online AI tool for FTX creditors that has attracted thousands of users. The service is intended to help “if you’re going to lose your entire claim,” he said.

KYC Compliance

FTX last year won approval from the US Bankruptcy Court for the District of Delaware to liquidate in Chapter 11 and distribute between $12.6 billion and about $16.5 billion to customers. The estate, which benefited from a resurgence in crypto prices during the bankruptcy, is providing full cash recoveries to creditors based on the value of their digital currency holdings when the platform collapsed.

But administrators first need to confirm customer identities to avoid making distributions to hackers with stolen account credentials and to ensure that transfers comply with money laundering laws and regulations. Because the company previously operated under leaders who “failed to perform basic due diligence on customers” and often “failed to collect information about the source of funds” sent on the exchanges, strict KYC procedures had to be implemented, FTX lawyers said in court papers.

“The need here for the KYC procedures are very much in line with what’s expected internationally,” said Vanderbilt University law professor Yesha Yadav. “This system is designed to prove that you are who you say you are.”

Imposing KYC submission deadlines was also needed to facilitate the distribution process, which began in earnest earlier this month.

‘Zeroed Out’

The Chapter 11 megacase for FTX and the rest of Bankman-Fried’s crypto empire was one of the largest bankruptcies of 2022. The nature of the business and its extensive web of international creditors has made it especially complex to resolve.

Of about 1.9 million customer claims against the company, roughly 1.2 million were worth less than $10 and deemed too small for distribution. As of late January, unverified claims eligible for compensation were collectively worth about $1 billion, according to calculations by Jelisavcic’s firm.

FTX vendors have sent multiple notices to customers reminding them to commence the KYC process, while the estate has maintained a customer support service and taken to X on several occasions to get the word out.

But still, “large numbers of creditors haven’t done anything,” Jelisavcic said. “You need to respond to these requests. If you don’t, you will be zeroed out.”

FTX declined to comment on the KYC process.

Online Resources

Completing the process requires proof of identification and address. Some customers may also have to document the source of funds they used to trade on the platform.

Customers in some places may not have a photo ID or access to traditional banking systems, Yadav said. “So potentially for those folks there may be significant hurdles for them to comply.”

Traders seeking answers to questions about their claims and the KYC process have found one another on Reddit, Telegram, and X. But there are limitations to the support that can be provided on those platforms.

For Hall, an attorney who has assisted FTX creditors and also posts frequently about the case, the volume of online questions he started to receive last year became so overwhelming that he decided to develop an AI chatbot and tool for FTX customers “who wouldn’t even know where to start to talk with a lawyer.”

Hall, who also founded bankruptcy claim selling platform Found.xyz, launched FTXclaims.com in July after spending multiple hours a day for months training the tool to answer questions about the case, and to help customers trade claims and fill out paperwork.

More than 7,000 users from over 100 countries have used the site, Hall said, with most trying to find out when and how they’re going to get paid. But about 70% of the use is based around the KYC issue, he said.

“People throughout the world are going there,” he said. There’s a “stark reality of hundreds of thousands of people who need lawyers.”