The Loophole Desperate Investors Are Using To Scramble Out Of FTX

• NFT loophole allows FTX investors to reclaim their funds
• Desperate measures appear to be the only option for beleaguered FTX investors
• Claims of a $1.7bn accounting black hole at the exchange are grim reading for those who didn’t get out in time

One of the fundamental rules relating to a firm going bankrupt is for investors to get their money out as soon as possible. The FTX debacle identified last week is turning into one such case. With the firm restricting most clients from making withdrawals, some are exploiting a loophole to reclaim their funds.

Accounting Black Holes Found At FTX

It’s worth pointing out that investors need to be very concerned about whether they’ll ever get their money back. As an unregulated exchange, FTX doesn’t provide its clients with the same amount of cover as multi-asset brokers.

The situation is made worse by revelations that this could be more of a case of investors waiting for an orderly liquidation of assets. Standing in line to get your money back can take months, if not years. Plus, it appears the claims made by FTX head Sam Bankman-Fried last week don’t stack up.

Last week, Bankman-Fried commented on Twitter: “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries). We have been processing all withdrawals and will continue to be.”

Unfortunately, claims by Reuters extend to FTX insiders, revealing a black hole in the accounts, which is approximately $1.7bn in size. The additional suggestion that there was an accounting “back door” that allowed client funds to be mismanaged hints that as investigations continue, that number will grow.

Using NFTs to Withdraw Funds From FTX

Non-Fungible Tokens (NFTs) might be seen by many as an extreme extension of the debate as to whether digital assets have any actual value. Even some hardcore crypto enthusiasts shun them. But it appears that in recent days some investors have been trading in them to reclaim the funds they hold at FTX.

One rule that FTX still has to comply with is that those in the Bahamas can still make withdrawals. This stems from the firm having its registered office on the island. It also explains why some NFT assets have recently experienced phenomenal price rises.

Reports on Twitter highlight how nearly worthless NFTs are bought for a few dollars and sold for millions. The beneficiaries of these trades appear to be Bahamian residents doing a deal with offshore FTX clients. They process the transaction, return some of the sale proceeds to the buyer, and take a cut.

The desperate measures being taken highlight how hard it can be to get your money back when an unregulated broker goes bust. There is also another party that benefits, FTX. The exchange charges a 2% fee on NFT transactions, so it is profiting from the rush for the door.

Crowdsourcing information about scam brokers can help others avoid falling into the traps set by disreputable brokers and you can share your experiences here. If you would like to know more about this particular topic, or have been scammed by a fraudulent broker, you can also contact us at [email protected]

About the author: Justin Freeman

Justin is an active trader with more than 20-years’ industry experience of working for big banks and hedge funds. He has an inside knowledge of how the financial markets work, thanks to roles including trader on a $750m Event-Arbitrage desk and CRO and COO of hedge funds running a variety of strategies. From stat-arb and trend-following CTA to fixed-income relative value. Firm’s he has worked at include big banks like Citi, and prominent hedge funds including D. E. Shaw and Millennium Capital Management.

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