Many buyers consider buying an ‘irreversible’ FTX and restarting it

Lawyers handling FTX's bankruptcy case are considering possible offers to finally restart the troubled exchange.

In an Oct. 24 hearing in the United States Bankruptcy Court for the District of Delaware, Kevin Kofsky revealed that Perella Weinberg Partners is negotiating with several parties interested in buying the company.

Kofsky, an attorney who specializes in structuring and liability management, told Judge John Dorsey that the initial 70 requests were narrowed down to three final buyers. But the exact structure of the sale and what kind of exchange can happen after that is not clear.

Any re-launch of the company will have to contend with the heavy reputation it has received. Because of this, industry experts doubt that even a simple reset of FTX is possible.

Debra Nita, senior crypto PR strategist at Yap Global – a global PR agency specializing in crypto, Web3 and decentralized finance – believes the FTX brand has a long way to go to recover.

“The reputation and viability of FTX may be irreparable at this stage,” Nita told Cointelegraph. “Brand resilience comes down to a number of factors, primarily the nature and size of the scandal. Secondary factors include stability and resilience when businesses fail and the response after the initial failure.”

With millions of customers out of pocket and former CEO Sam Bankman-Fried pleading guilty to seven counts of fraud, the damage to FTX is dire. Past examples of financial mishaps or recklessness show how difficult it is to regain investor confidence.

Damaged beyond repair.

In January 2019, New Zealand exchange Cryptocurrency suffered a series of attacks worth $30 million.

Crippia was down for two months while the founders came up with a rescue plan. Even as they removed the ash, executives assured customers that the damage was minimal. According to Crippia, the amount lost was only 9.4% of its total funds, which was the “worst case”.

In March and April of the same year, the exchange continued, with various services relaunching online. By May, it was all over. The damage to Cryptopia's systems, as well as its reputation, was simply too much to overcome.

Cryppia is far from an isolated case. Enron, MF Global, and Mitt Gox are further examples of companies that were completely devastated by their respective failures and had no real hope of recovery.

“Due to the scale of the damage, no matter how positively the companies responded after the scandal, they could not recover,” Nita said.

Miraculous recoveries

On the other hand, there are examples of organizations that have been able to recover from severe failures.

Wells Fargo, the American multinational bank, is one such case. In the year In 2016, the company was embroiled in a significant credit card sales scandal. The bank issued credit cards and other lines of credit to its existing customers without asking for approval.

Executives initially tried to blame middle managers and entry-level employees, but the root cause of the system's dysfunction was unreasonable expectations from top management, which created intense top-down pressure.

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“Following this scandal, they compensated their affected customers and introduced internal ethics procedures and their share price and reputation have been restored,” Nita said. “The strength of their business and their responsible responses was evident afterwards. [Wells Fargo] Reputation Recovery”

The Consumer Financial Protection Bureau fined Wells Fargo $185 million, and CEO John Stump resigned. The company settled the class-action lawsuit for $575 million.

In the same year as the Wells Fargo scandal, a major crypto exchange suffered a security breach. In the year In August 2016, Bitfinex lost 119,756 Bitcoins (BTC) to a $72 million hack. Bitfinex stopped all trading, and the severity of the hack caused havoc in the markets, the price of Bitcoin fell by 20%.

To deal with the issue, Bitfinex decided to charge all customers a 36% haircut. This applied to all accounts, even those not affected by the hack. The exchange has also issued a rights recovery token in an effort to make customers whole.

Bitfinex's recovery was by no means guaranteed after the hack, but swift (albeit unpopular) action by management helped the exchange weather the storm.

Possible options for FTX “Reset”.

Kofsky's testimony highlighted several possible forms that FTX could take in the future depending on the sale situation.

“Regarding the initiation of the exchange, we have been in the process of reaching out to several interested parties to acquire the assets of the exchange and/or partnering with the borrowers. We have been evaluating that process in terms of the potential to organize the assets separately.

“I'm hopeful that on or before December 16th we will have a restructured exchange plan, or a partnership agreement, or a stallion for sale,” Kofsky said.

Although discussions have begun, not all prospective buyers want to use the FTX brand. Kofsky explained that one of FTX's most valuable assets is its list of 9 million customers. One option is to simply sell the listing to another exchange and dump the FTX brand entirely.

To make that sale possible, the buyer needs to know how many FTX customers are unique to any counterparty. According to Kofsky, in this case, the FTX database needs to be compared to the customer database without revealing the identity of anyone in either database.

Kofsky didn't make it clear how that process would be accomplished, but the test appears to be a case in point that could be used for zero-knowledge assertions.

A fly in the ointment

Kofsky emphasized the importance of protecting the anonymity of FTX customers, but the position is still being debated in court.

Attorney Katie Townsend, representing the Committee for Freedom of the Press, argued that the public has a “compelling and legitimate interest” in knowing the names of those affected by the FTX collapse.

Kofsky's argument so far has convinced Judge Dorsey that releasing this information would jeopardize sales, driving the price to near zero. At each point, Kofsky was able to extend the defamation decision, but the case is by no means closed.

“The value of the estate will depend on the extent to which customers will exchange in the future or be accessible to others,” Kofsky testified.

“After the conclusion of the case, I think that the exchange rate of the customers will continue,” he said.

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In a question, Townsend asked how Kofsky could be sure clients would want to trade on any future version of FTX.

“I don't know how we're going to do it without talking to those customers,” Kofsky replied.

The introduction shows how complicated any FTX sale can be.

Careful buyers may want to split the purchase of FTX into several installments, the final price of which depends on their ability to change the customer database – which will not work for more than a year at the time of any sale. – Return to active customers.

Achieving that goal in terms of history education will not be an easy task.