FTX Compensation Controversy: Are Chinese Creditors Facing Discrimination?

FTX has blocked Chinese creditors from compensation under the guise of so-called 'restricted jurisdictions.' What is the official reason given for this? Does this trap of refusing compensation actually hold water?

Author: FinTax

On July 3, 2025, FTX creditor representative Sunil stated on social media platform X that FTX has applied for court approval to authorize a new "Restricted Jurisdiction Procedures" in 49 jurisdictions that restrict cryptocurrency activities, including China (hereinafter referred to as "Restricted Jurisdictions"), and will no longer pay off debts owed to users in the "Restricted Jurisdictions." According to the proposed framework of the FTX Recovery trust, affected creditors who fail to respond within the deadline will completely lose their right to compensation.

FTX has blocked Chinese creditors from compensation under the guise of a so-called "restricted jurisdiction". What is the official reason they provided? Is this trap of refusal to compensate really justifiable? The following text will briefly review the FTX bankruptcy event and analyze the official reasoning.

Review of the FTX Bankruptcy Incident

From glory to bankruptcy

In May 2019, FTX was founded by Sam Bankman-Fried (SBF) and Gary Wang, quickly rising to become the world's second-largest cryptocurrency exchange with more than 1 million global users, thanks to high-leverage derivatives trading. Top institutions such as Sequoia Capital, SoftBank, and Temasek rushed to invest, with a Series B funding round of $900 million in 2021 and a Series C funding round of $400 million in 2022. SBF's personal wealth once soared to $24 billion, earning him the title of "the next Buffett."

However, on November 2, 2022, a bombshell news report turned the fate of FTX and SBF around. The well-known crypto media CoinDesk revealed the balance sheet of FTX's hedge fund Alameda Research, which showed that 60% of its $14.6 billion in assets were FTX's own token FTT, lacking real value support. On November 6, 2022, Binance's CEO Zhao Changpeng announced on Twitter that the company would liquidate all FTT tokens in its possession, totaling as much as $580 million. Although Binance initially expressed interest in acquiring FTX, it ultimately backed out. Just ten days later, this cryptocurrency exchange, which was once valued higher than Credit Suisse, collapsed dramatically and filed for bankruptcy in the U.S. on November 11.

initiate bankruptcy liquidation process

On February 18, 2025, FTX officially initiated the user asset liquidation process. According to the compensation plan, creditors with losses within $50,000 enjoy priority repayment rights, and the amount recovered is converted to approximately 119% cash compensation based on the cryptocurrency price on the day of bankruptcy. However, the regional restrictions on FTX's compensation have begun to emerge. FTX creditor representative Sunil posted on social media platform X on February 21, 2025, stating that users from China, Russia, Egypt, Nigeria, and Ukraine are temporarily excluded from this round of compensation. FTX did not specify the exact reasons for the compensation restrictions, but the cryptocurrency community generally believes that mainland China's restrictions on cryptocurrency-related business activities make FTX particularly cautious in compensating creditors from mainland China.

officially submitted "restricted handler"

On July 2, 2025, the FTX bankruptcy trust officially submitted a "Motion of the FTX recovery trust for entry of an order in support of the confirmed plan authorizing the FTX recovery trust to implement the restricted jurisdiction procedures in potentially restricted foreign jurisdictions" to the bankruptcy court in Delaware, USA. This motion was initiated by the FTX bankruptcy trust, proposing to request the court to authorize the FTX bankruptcy trust to execute the "restricted jurisdiction procedures" in specific countries and regions, according to the provisions of 11 U.S.C. § 105(a), § 1142(b), and Federal Rules of Bankruptcy Procedure § 3020(d), among others.

In the context of U.S. bankruptcy law, a motion is a "motion for authorization" submitted by a trustee to the court, requesting the court to authorize the trustee to carry out a procedure for managing bankruptcy assets. According to Section 105 of the U.S. Bankruptcy Code (a), the court may issue any order, procedure, or judgment necessary or appropriate to carry out the provisions of the bankruptcy law. Even if the parties do not raise the issue, the court may take action or make determinations on its own (sua sponte) to enforce or implement court orders or rules, or to prevent abuse of process.

The "Restricted Jurisdiction" in the document refers to the countries and regions where the FTX bankruptcy trust has investigated applicable laws and regulations globally and has not confirmed whether the "FTX bankruptcy trust and its distribution service providers" can legally make payments to creditors in that region. According to the motion attachment, there are currently 49 countries and regions listed as "Potential Restricted Jurisdictions," involving a total creditor amount of approximately 5%, with the value of Chinese creditors accounting for as much as 82%. Creditors affected by the "Restricted Jurisdiction" have the opportunity to contest the restricted status of their claims within 45 days. If no affected creditors contest this, or if the court dismisses the creditors' objections, the FTX recovery trust will no longer make distributions to creditors located in the "Restricted Jurisdiction," and any rights to the distribution funds will revert to the FTX bankruptcy trust.

FinTax Brief Review

From the wording disclosed in the motion documents, the restricted processing procedures proposed by FTX seem to be a compliant and prudent move to adhere to various countries' cryptocurrency regulatory regulations in cross-border bankruptcy distributions. However, it is difficult to hide its suspicion of evading compensation obligations for the following reasons:

Firstly, the reason behind the FTX bankruptcy trust proposing the special mechanism of "restricted jurisdictions" is hard to believe. The FTX bankruptcy trust emphasizes in its motion documents that the regulations of various "restricted jurisdictions" vary, but generally prohibit individuals or entities from engaging in any activities related to digital assets, including trading cryptocurrencies or paying cryptocurrency proceeds to residents of those regions (for example, in Macau, "financial institutions and non-bank payment institutions are explicitly prohibited by the mainland Chinese authorities from providing services for these tokens and virtual currencies." In Moldova, "providing virtual asset services is considered a crime, whether within the territory of the Republic of Moldova or as an auxiliary or supplementary activity to a primary activity."). The original document claims: "If the FTX bankruptcy trust distributes in violation of local laws, it may trigger fines, personal liability for management, or even criminal penalties, thereby harming all stakeholders; but at the same time, they cannot indefinitely withhold these distributions." "The FTX bankruptcy trust must not violate relevant laws by distributing to residents of jurisdictions where its activities are not permitted or to accounts located in prohibited areas. It is reasonable and an effective exercise of the FTX bankruptcy trust's authorization to reintegrate the funds allocated to residents of these regions back into the FTX bankruptcy trust and distribute them through the planned distribution process."

However, although mainland China does not support cryptocurrency trading activities and financial institutions providing related services, Chinese residents have never been legally prohibited from holding virtual currencies and their derivative debts. Chinese courts have also repeatedly recognized the property nature of virtual assets. Furthermore, FTX's compensation plan for users is essentially priced and settled in USD, and users should receive USD compensation, which does not directly conflict with engaging in cryptocurrency trading. More importantly, there are no legal obstacles for Chinese residents to legally hold and receive overseas USD assets within the foreign exchange quota, and it is entirely feasible through bank wire transfers. In fact, cryptocurrency platforms like Celsius, which are also under US bankruptcy proceedings, have successfully paid compensation to users, including those in China, via bank wire transfers and did not refuse payment due to so-called "regulatory constraints." It can be seen that the compliance and prudential reasons for FTX's restricted handling procedures are difficult to justify, and it resembles a practice of shirking compensation responsibilities to Chinese creditors under the guise of excessive caution.

Secondly, at the procedural level, the standard of "restricted jurisdiction" is also not fair. In the motion, FTX determines whether a jurisdiction qualifies as a "restricted jurisdiction" by stating that "if there are still doubts about a potential restricted jurisdiction, FTX will engage qualified local lawyers to provide formal legal opinions indicating whether distributions can be made legally to residents of that jurisdiction or to custodial accounts." The FTX bankruptcy trust emphasizes hiring local lawyers from restricted areas to conduct compliance due diligence but does not provide any assurances regarding the independence and fairness of the lawyers, allowing locally hired lawyers to determine "compliance risks," which lacks a mechanism for neutral oversight. This approach to due diligence raises suspicions of discrimination against Chinese creditors and is not entirely consistent with the principle of maximizing creditor interests in U.S. bankruptcy law. Furthermore, while the "restricted processing procedure" does provide creditors with the opportunity to submit written objections and self-validate their legitimacy through court relief within 45 days, this mechanism is almost meaningless for retail investors. For most scattered overseas individual creditors, hiring professional lawyers across borders, translating local laws, preparing evidence, and responding to U.S. court jurisdiction and evidence disclosure procedures within such a short time frame incurs extremely high time and financial costs.

Overall, FTX excluded some creditors, especially Chinese creditors, from normal compensation on the grounds of "restricted jurisdictions," which has serious flaws in terms of factual basis, substantive fairness, and procedural fairness. For cross-border bankruptcy distribution, maximizing the legitimate rights and interests of all creditors should be the priority principle, and any compliant arrangement should not come at the expense of the legitimate rights of a minority. Moreover, in the decentralized crypto world, equal rights are a common pursuit, and nationality and identity should not be reasons for "you have, I don't."