The cryptocurrency market is attracting more and more investors. However, with the enormous opportunities that blockchain technology brings, there are also significant risks. In recent years, several significant scandals and collapses of cryptocurrency platforms have shaken the market, leaving many investors in a difficult situation.
In this article, I will look at the current state of compensation payments to investors affected by the collapses of the largest companies in the industry, as well as what actions are being taken to redress their losses.
Mt. Gox
The Mt.Gox saga, one of the biggest disasters in cryptocurrency history, is slowly coming to an end. The company is still working on paying out compensation to its creditors. They are scheduled to receive their compensation in bitcoin and bitcoin cash later this year. The transfers, worth around $9 billion, are to be made in several tranches, with the plan set to be completed by October 2024.
If you’re unfamiliar with the story, Mt.Gox was once the world’s largest cryptocurrency exchange, handling about 70% of all bitcoin transactions. However, in February 2014, the exchange filed for bankruptcy, claiming it had lost about 850,000 BTC (then worth about $450 million) due to alleged hacks.
Compensation payments
After years of legal battles, including numerous delays and turmoil, a Tokyo court approved a civil rehabilitation plan that allows for compensation to be paid to injured creditors. The process of paying out is complicated and spread over several tranches to ensure that all claims are properly verified and addressed.
Under this plan, creditors can choose whether to receive their funds in a cryptocurrency of their choice or in fiat currency. According to current plans, the last tranche of compensation is to be paid by October 2024. This means that injured creditors can expect the case to be completed in the coming months. The entire process is being closely monitored by courts and specially appointed legal teams to ensure its transparency and compliance with regulations.
FTX and its subsidiaries
FTX, whose spectacular collapse rocked the cryptocurrency market, has made significant progress in its restructuring process. The platform, which collapsed in November 2022, was in the spotlight due to massive losses and scandals related to the management of customer funds. The collapse of FTX led to a global crisis of confidence in the cryptocurrency market, as well as numerous lawsuits and accusations against its founder, Sam Bankman-Fried.
Repayment process
FTX plans to pay out around 90% of its available assets to its clients, which is approximately $8.9 billion for FTX.com clients and $166 million for FTX.US clients. Clients have the option to choose between cash or cryptocurrency withdrawals at current market values. The withdrawal process is also expected to be completed this year.
Interestingly, those who withdrew funds in the nine-day period prior to the bankruptcy will have to pay an additional 15% fee. Clients who withdrew less than $250,000 will not be subject to this reduction. In addition, FTX may exclude from settlements those who have knowledge of irregularities related to the management of funds.
Derivative companies
The collapse of FTX also affected offshoot companies such as Alameda Research, which were closely linked to the exchange. Alameda Research was accused of mismanaging client funds and using the funds for its own speculations, which led to its bankruptcy. Legal proceedings against the former managers of FTX and Alameda Research are still ongoing, and their results could obviously have a significant impact on the future of the cryptocurrency market.
LUNA and Do Kwon
The collapse of the Terra ecosystem in May 2022 was another of the most dramatic events in the cryptocurrency market. The project, founded by Do Kwon, was based on the algorithmic stablecoin TerraUSD (UST) and the cryptocurrency LUNA. As a result of the rapid decline in the value of UST, which led to the death spiral of luna, investors suffered huge losses, amounting to billions of dollars.
Causes of the Fall
Luna’s problems began when the algorithmic stablecoin UST, which was supposed to maintain a constant value of $1, lost its stability. As a result of panic selling, the value of UST plummeted, which in turn caused a massive depreciation of luna, whose price fell from over $100 to fractions of a cent in a matter of days. The losses for investors were catastrophic, as it was one of the most popular projects.
Do Kwon, the founder of Terraform Labs, the company behind the Terra project, is facing numerous legal charges. Authorities in South Korea have issued an arrest warrant accusing him of financial fraud and violating capital markets laws. Do Kwon initially evaded arrest by staying in different countries, but in March 2023 he was arrested in Montenegro.
No compensation?
There is currently no concrete information on compensation payments for affected Luna investors. While some investor groups are attempting to pursue their rights in court, the processes are complicated and lengthy. Terraform Labs and Do Kwon are under intense legal scrutiny and have had their assets frozen in many cases, making it difficult to quickly resolve compensation issues.
Legal proceedings against Do Kwon and others associated with the Terra project are ongoing. It is possible that courts could order compensation to be paid to affected investors, but the scale of the losses and the complexity of the case mean that full compensation may be difficult to achieve.
Celsius
Celsius Network, one of the largest lending platforms in the cryptocurrency ecosystem, ran into financial trouble due to the sharp decline in the value of cryptocurrencies, poor investment decisions, and mismanagement of customer funds. As a result, the company filed for bankruptcy in 2022, and legal processes regarding its restructuring lasted throughout 2023.
In 2024, the company was approved to emerge from bankruptcy, with a restructuring plan approved by the court. Celsius customers are to receive shares in the new company, which will be managed by Fahrenheit Holdings. Additionally, partial cryptocurrency refunds are expected, totaling about $2 billion.
New company
Fahrenheit Holdings, the new manager of the company that emerged from the restructuring, plans to focus on bitcoin mining and generating income from staking. This strategy aims to create a sustainable business model that will help rebuild investor confidence and ensure financial stability for the new entity.
Voyager Digital
Voyager Digital, a platform that was a popular place to trade cryptocurrencies, went bankrupt due to financial problems, including insolvency, which, like Celsius, was due to mismanagement of client funds and unfavorable market conditions.
Restructuring
After filing for bankruptcy in July 2022, Voyager Digital went through a lengthy legal process to restructure and compensate affected investors.
Voyager Digital’s restructuring plan includes selling the company’s assets to cover its obligations to creditors. Payouts began in 2024. Customers can expect to see a portion of their funds returned in both cryptocurrency and cash, although full recovery of losses is unlikely.
BlockFi
BlockFi, like many other cryptocurrency companies, was hit by the sharp decline in cryptocurrency values in 2022. Additionally, the insolvency of business partners such as FTX, with which BlockFi had significant financial ties, contributed to the deterioration of the company’s financial situation.
Compensations
BlockFi plans to begin disbursing its creditors in the second half of 2024. The process aims to return a portion of the funds deposited by customers in the form of cryptocurrencies and cash, depending on the preferences of the creditors and available resources. Disbursements are to be made in stages to ensure fair and efficient distribution of funds. The process is expected to be fully completed in 2025.
Final Thought
The collapses of companies like Mt.Gox, FTX, Luna, Celsius Network, Voyager Digital, and BlockFi have shaken the cryptocurrency market, exposing serious deficiencies in the governance and structures of these organizations. Many of these companies went bankrupt during the bear market, showing how sensitive the cryptocurrency market is to negative changes and how quickly even the biggest players can fall.
The restructuring processes and compensation payments to creditors are lengthy and complicated, which further highlights the importance of solid financial and operational foundations in companies operating in the cryptocurrency sector. These cases should remind you how important it is to thoroughly research companies before investing – not only for promises of high returns, but also for governance structure, operational transparency and financial stability.
In times of market uncertainty, companies emerge with solid foundations that can weather the storms. Therefore, to minimize investment risk, it is always worth taking a closer look at the company’s fundamentals, risk management strategies, and transparency of operations.
