FTX begins talks about rebooting amid regulatory crackdown on crypto exchanges

The crypto company has had early talks with investors about supporting a potential reboot of the FTX.com exchange through structures including a joint venture, people familiar with the discussions said.

FTX would likely be rebranded as part of a reboot, these folks said. The talks include possible compensation for certain existing customers, possibly by offering them interests in a reorganized entity, the people said.

Blockchain tech firm Figure has indicated its interest in supporting an FTX reboot, people familiar with the matter said. Figure was part of an investment group that bid for the rights to reboot Celsius Network, another bankrupt crypto company, but lost to a consortium backed by Fortress Investment Group.

Other parties that may want to help fund or participate in the FTX relaunch should present initial indications of interest to the company and its advisers this week, people familiar with the matter said.

“I think the reboot of FTX is quite a tall order given the recent enforcement action against US crypto companies and the major reputational damage FTX has suffered,” said Thomas Braziel, partner at 507 Capital, a fund that has become a creditor to bankrupt crypto companies. including FTX and Celsius after buying tens of millions of dollars worth of customer claims.

In January, Ray told the Journal that despite alleged criminal behavior at FTX, customers and other stakeholders said the exchange’s business model was fundamentally viable, and that he was setting up a task force to investigate the exchange’s reboot.

FTX is trying to come up with a reorganization plan that will keep its flagship exchange alive in hopes that it will be a better outcome than closure for its millions of customers. But amid a growing crackdown on crypto by US regulators and new allegations of past misconduct at FTX, participants in the exchange’s bankruptcy say a reboot is far from guaranteed.

FTX’s efforts to reboot will unfold as US regulators, who have criticized the business models of some of the crypto sector’s biggest firms, begin to rein in the industry.

Earlier this month, the Securities and Exchange Commission sued Binance, the world’s largest crypto platform, and Coinbase,
the largest US platform, separately, claiming they operated as stock exchanges without properly registering their business with the SEC.

While many of the world’s cryptocurrency exchanges operate in offshore jurisdictions such as the Bahamas, regulators in the US have a number of ways to potentially claim jurisdiction over foreign operations, according to Todd Phillips, a fellow at the Roosevelt Institute, a think tank.

“Securities laws can be applied and enforced as far as there is an affiliation with people or entities based in the United States,” Phillips said. “Even if FTX reboots overseas and only allows transactions between non-U.S. citizens, it could impact its ability to operate if the SEC determines that an exchange-traded token is a U.S. security.”

FTX’s reboot is also based in part on the exchange’s ability to recover mis-spent customer funds, which it could use to pay back a portion of the $11 billion customers thought was safe on the exchange stored. Those efforts have so far proved challenging.

Investigations led by Ray revealed new details about how FTX spent customer money without their knowledge, investing millions of dollars ranging from Robinhood Markets,
the publicly traded exchange app, to Modulo Capital, a little-known cryptocurrency hedge fund founded by employees of FTX co-founder

Sam Bankman Fried.

Ray and his legal and financial advisers have also hinted that much of the embezzled money may be irretrievable. In the first months after the acquisition, Ray’s team completed a forensic audit of FTX’s assets and discovered a shortfall of approximately $9 billion in clients on the major international exchange, based on $2 billion in assets and $11 billion in client accounts .

“FTX has a long way to go to raise money, pay off debt and gain trust,” said Louise Abbott, a partner at UK law firm Keystone Law, who represents some clients who have money tied up in the FTX exchange.

To make up for the $9 billion shortfall, FTX’s managers have been selling assets and trying to recover donations and investments made with clients’ money. However, many of the investments Bankman-Fried made in the months before the stock market crash turned out to be worth significantly less than FTX paid for them.

The company recently received approval to sell US derivatives exchange LedgerX for $50 million, a fraction of its original purchase price of $298 million. FTX is trying to recover money from the stock trading platform Embed, which it bought for $240 million last year. Today, FTX’s executives estimate that Embed could be sold for no more than $1 million.

FTX’s plan to reboot offers some hope. In general, bankruptcy creditors are better off when the underlying business is rebooted rather than sold for parts. This is especially true for FTX: one of the largest pools of crypto assets that can be distributed to customers is FTT, FTX’s own internal token that customers used to help pay for transactions and trade with each other on the platform . Without an exchange resurgence, the FTT tokens likely have no use case and could eventually become worthless.

The company has yet to resolve its dispute with Bahamian liquidators, who seized about 195 million FTT tokens from the exchange’s accounts in November. A settlement framework with the Bahamian liquidators failed, leading to more lawsuits over the rightful owners of the assets.

The restructuring efforts and related litigation are costly. By April, the company had racked up about $200 million in professional fees, which must be paid up front to the client before exiting Chapter 11. FTX is on track to present a formal reorganization plan in July, which includes an initial assessment the company would seek to compensate creditors.

“Let’s try to find a way to work together,” Judge John Dorsey of the U.S. Bankruptcy Court in Delaware said at a recent hearing. “The clients’ assets are wasting each day we remain bankrupt.”

—Peter Rudegeair contributed to this article.

Write to Alexander Saeedy at alexander.saeedy@wsj.com