On July 3, 2025, Sunil, a representative of FTX creditors, stated on social media platform X that FTX applied for court approval to implement a new "Restricted Jurisdiction Procedures" in 49 jurisdictions that limit cryptocurrency activities, including China (hereinafter referred to as "Restricted Jurisdictions"). This procedure would deny repayment to users from "Restricted Jurisdictions." According to the proposed framework by the FTX Recovery Trust, affected creditors who fail to respond within the given timeframe will completely forfeit their rights to compensation.
FTX, under the guise of "Restricted Jurisdictions," has shut the door on compensation for Chinese creditors. What is the official reasoning behind this decision, and does this justification hold water? The following will briefly review the FTX bankruptcy event and analyze the official reasoning.
A Review of FTX’s Bankruptcy
From Glory to Bankruptcy
In May 2019, FTX was founded by Sam Bankman-Fried (SBF) and Gary Wang. With high-leverage derivative trading, it quickly rose to become the second-largest cryptocurrency exchange in the world, with over one million global users. Top institutions such as Sequoia Capital, SoftBank, and Temasek invested heavily. In 2021, the company raised $900 million in its Series B funding round and $400 million in Series C funding in 2022. SBF's personal wealth soared to $24 billion at its peak, earning him the title of the next Warren Buffett.
However, on November 2, 2022, a bombshell news story turned FTX and SBF's fate upside down. Renowned crypto media outlet CoinDesk revealed the balance sheet of FTX's hedge fund Alameda Research, showing that 60% of its $14.6 billion assets were in FTX's own token, FTT, which lacked real value backing. On November 6, 2022, Binance CEO Zhao Changpeng announced on Twitter that Binance would liquidate all of its FTT tokens, worth up to $580 million. Although Binance initially expressed interest in acquiring FTX, it eventually backed out. Within ten days, the cryptocurrency exchange, which had once been valued higher than Credit Suisse, collapsed and filed for bankruptcy in the United States on November 11.
Initiating the Bankruptcy Liquidation Process
On February 18, 2025, FTX officially began the asset compensation process for its users. According to the compensation plan, creditors with losses under $50,000 are prioritized for repayment, receiving approximately 119% in cash based on the bankruptcy day’s exchange rate. However, geographic restrictions on FTX's compensation began to surface. On February 21, 2025, FTX creditor representative Sunil posted on social media platform X, stating that users from China, Russia, Egypt, Nigeria, and Ukraine were temporarily excluded from this round of compensation. FTX did not provide a specific explanation for the compensation restrictions, but the crypto community widely believed that the restrictions on cryptocurrency-related business activities in Mainland China made FTX particularly cautious about compensating Chinese creditors.
Official Submission of Restricted Procedures
On July 2, 2025, FTX Recovery Trust officially filed a motion with the U.S. Delaware Bankruptcy Court 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. This motion, initiated by FTX Recovery Trust, requests the court to authorize the implementation of the "Restricted Jurisdiction Procedures" in certain countries and regions based on sections 105(a) and 1142(b) of the U.S. Bankruptcy Code, as well as Rule 3020(d) of the Federal Rules of Bankruptcy Procedure.
In the context of U.S. bankruptcy law, the motion is a formal request made by the trustee to the court, seeking authorization for the trustee to carry out a process for managing the bankruptcy estate. According to Section 105(a) of the U.S. Bankruptcy Code, the court may issue any orders or judgments necessary or appropriate for carrying out the provisions of the Bankruptcy Code. Even if no party requests it, the court can act on its own (sua sponte) to enforce or implement its orders or rules, or prevent abuse of process.
The term "Restricted Jurisdictions" in the document refers to countries and regions where, after investigating the applicable laws and regulations globally, the FTX bankruptcy trust has yet to confirm whether it is legally allowed to make payments to creditors in these jurisdictions. According to the motion’s appendix, there are currently 49 jurisdictions listed as "Potential Restricted Jurisdictions," accounting for about 5% of the total claims, with Chinese creditors making up as much as 82% of the claims. Creditors affected by the "Restricted Jurisdictions" will have 45 days to file objections regarding the restricted status of their claims. If no affected creditors raise objections, or if the court rejects the creditors' objections, the FTX recovery trust will cease making distributions to creditors in the "Restricted Jurisdictions," and any rights to the distribution will revert to the FTX bankruptcy trust.
FinTax Commentary
From the wording disclosed in the motion, FTX's proposed "Restricted Jurisdiction Procedures" appear to be a prudent compliance measure in cross-border bankruptcy distributions, following the cryptocurrency regulatory laws of various countries. However, it is difficult to ignore the suspicion that this is an attempt to avoid compensation obligations, for the following reasons:
The reason for introducing the "Restricted Jurisdictions" mechanism by the FTX bankruptcy trust is hard to accept. In the motion, the FTX bankruptcy trust emphasizes that the regulations in each "Restricted Jurisdiction" are different, but generally, they prohibit individuals or entities from engaging in any activity related to digital assets, such as trading cryptocurrencies or making cryptocurrency payments to residents in these regions (for example, in Macau, "financial institutions and non-bank payment institutions are explicitly prohibited by Chinese authorities from providing these tokens and virtual currency services." In Moldova, "providing virtual asset services is considered a crime, whether within the territory of Moldova or as a primary or supplementary activity"). The motion claims: "If the FTX bankruptcy trust distributes in violation of local laws, it may incur fines, personal liability for the management, or even criminal penalties, thereby harming all stakeholders; however, they also cannot indefinitely withhold these distributions." "FTX bankruptcy trust must not violate relevant laws by distributing to residents or accounts in prohibited jurisdictions. Reverting the funds distributed to residents of these regions back into the FTX bankruptcy trust for distribution through the planned process is reasonable and is an effective exercise of FTX bankruptcy trust's authority."
However, although Mainland China does not support cryptocurrency trading activities and financial institutions providing related services, Chinese residents' legal ownership of virtual currencies and their derived claims has never been prohibited by law, and Chinese courts have repeatedly recognized the property status of virtual assets. Furthermore, FTX’s compensation scheme is essentially denominated and settled in U.S. dollars, and users should receive U.S. dollar compensation, which does not conflict directly with whether or not they are involved in cryptocurrency trading. More importantly, Chinese residents can legally hold and receive overseas U.S. dollar assets within their foreign exchange quotas, and bank wire transfers are entirely feasible. In fact, Celsius, another cryptocurrency platform undergoing U.S. bankruptcy proceedings, successfully paid compensation to users, including those from China, via bank wire transfers without refusing payments due to "regulatory restrictions." Thus, FTX’s justification for the "Restricted Jurisdiction Procedures" being a compliance measure is difficult to justify and appears to be an excuse for avoiding compensation responsibilities to Chinese creditors under the guise of excessive caution.
On the procedural side, the standards for determining "Restricted Jurisdictions" are also unfair. In the motion, FTX states that if there is still doubt regarding a potential restricted jurisdiction, the FTX recovery trust will hire qualified local lawyers in that region to provide formal legal opinions explaining whether it is legally possible to make distributions to residents or accounts in that jurisdiction. The FTX bankruptcy trust emphasizes hiring local lawyers in restricted jurisdictions to conduct compliance due diligence but has not provided any safeguards regarding the independence or fairness of these lawyers. The process of having local lawyers, who are hired by FTX, assess the "compliance risk" lacks neutral oversight, which raises concerns of discrimination against Chinese creditors and does not fully align with the U.S. bankruptcy law's principle of maximizing creditors' interests. Moreover, while the "Restricted Jurisdiction Procedures" does provide creditors with the opportunity to file written objections within 45 days and seek legal relief to prove the legitimacy of their claims, this mechanism is virtually meaningless for retail creditors. For most individual foreign creditors, the time and financial costs involved in hiring professional lawyers across borders, translating local laws, preparing evidence, and dealing with U.S. court jurisdiction and evidence disclosure procedures are prohibitively high.
Overall, FTX's use of the "Restricted Jurisdictions" rationale to exclude certain creditors, particularly Chinese creditors, from normal compensation is seriously flawed, both in terms of factual basis, substantive fairness, and procedural justice. For cross-border bankruptcy distributions, maximizing the legitimate rights of all creditors should be the primary principle, and any compliance arrangements should not come at the expense of the legitimate rights of the minority. Moreover, in the decentralized world of cryptocurrency, equal rights are a shared pursuit, and nationality and identity should never be used as a reason for "what you have, I don't."
References:
1. https://news.cctv.com/2022/11/14/ARTIBOfLUkqxACm1fEMcnSW3221114.shtml
3. https://mp.weixin.qq.com/s/RUpO1anarfHRzJzWJM9NPA
4. 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.issued by LANDIS RATH & COBB LLP,SULLIVAN & CROMWELL LLP
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