The insolvent cryptocurrency exchange, FTX, is actively exploring avenues to rejuvenate its operations and settle its debts. Recent court documents reveal its intention to engage Galaxy Digital, under the guidance of Mike Novogratz, as a strategic advisor in this endeavor.
FTX, which endured a catastrophic collapse late last year, is eager to devise a plan that will enable it to reimburse creditors in traditional fiat currencies, as opposed to cryptocurrency assets such as Bitcoin or Ethereum. The primary objective is to minimize any adverse impact on its extensive crypto holdings, which are valued at an impressive $3 billion.
However, FTX’s plan encountered resistance from the U.S. trustee, who argued that the crypto exchange had violated Local Rule 4001-2, a regulatory requirement applicable to cash collateral and financing requests pursuant to sections 363 and 364 of the U.S. Bankruptcy Code. This motion is scheduled for a hearing on Sept. 13, 2023, during which the fate of FTX’s proposed strategy will be determined.
In earlier filings from April, FTX disclosed its possession of major, highly liquid crypto assets worth $3.4 billion. In a subsequent announcement in July, the exchange expressed its intention to convert these crypto holdings into cash before repaying its clients. International customers may potentially regain access to a restructured exchange in the future.
Court records confirm that Galaxy will assume responsibility for managing and trading specific digital assets owned by FTX, with the aim of converting the assets into fiat currency or stablecoins. Furthermore, Galaxy will implement hedging strategies to mitigate FTX’s exposure to the volatile cryptocurrency market, which includes Bitcoin and Ethereum.
Galaxy’s compensation structure includes a monthly management fee, which is supplemented by a hedging fee determined by the average net asset value of the assets being hedged, along with a liquidation fee calculated based on the total proceeds from the sale of assets. This arrangement underscores Galaxy’s commitment to acting in FTX’s best interests while adhering to stringent policies and procedures to prevent conflicts of interest.
Simultaneously, FTX has sought court approval for guidelines that govern the management and sale of a substantial portion of its digital asset holdings, potentially connected to the partnership with Galaxy. These guidelines grant FTX the authority to liquidate up to $100 million worth of digital assets weekly with a temporary cap of $200 million.
Ultimately, the decision to retain Galaxy Digital as an investment manager lies within the purview of the bankruptcy court, with the paramount concern being the alignment of this partnership with the best interests of FTX and its creditors.
Crypto industry players such as Bit Mining Ltd. (NYSE: BTCM) will look back on the events that led to the collapse of FTX and strengthen their resolve to weather any storm that come so that blockchain technology can deepen its penetration in all spheres of modern life.
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