Proof of Case

What’s the case about?

How voluntary administrators should treat customers of Australian companies involved in a global cryptocurrency trading platform for the purposes of the administration.

Background

In Re FTX Australia Pty Ltd (admin apptd) and FTX Express Pty Ltd (admin apptd) – Judicial Directions Application [2023] VSC 788, Her Honour Justice Matthews of the Supreme Court of Victoria considered an application by voluntary administrators for directions, in particular as to how to treat customers of the relevant companies (which were entities involved in the FTX crypto trading platform) for the purposes of the administration.

FTX Australia Pty Ltd (FTX Aust) and FTX Express Pty Ltd (FTX Express) were part of the FTX Group, a transnational corporate group that provided an exchange platform for the buying and selling of crypto assets.

FTX Aust was responsible for issuing over the counter trades in crypto derivatives and related instruments and was a wholly owned subsidiary of FTX Trading Limited (FTX Trading). FTX Trading was the parent company of various national branches around the world and was incorporated and registered in Antigua and Barbuda.

FTX Express was a digital currency exchange that converted customer deposits of fiat currency into crypto assets and vice versa.

FTX Trading owned and operated the now defunct online crypto asset trading platform called FTX.

In November 2022, FTX Trading and 101 affiliated companies filed for relief under Chapter 11 of the United States Bankruptcy Code. Also in November 2022, the directors of FTX Aust and FTX Express resolved to appoint administrators to both companies.

Operations of FTX

The operations of FTX Aust and FTX Express (the Companies) related to Australian based customers of the FTX trading platform. The FTX platform provided most of the services available to Australian customers, including sending existing crypto assets to their account, converting fiat currency into crypto assets, trading in crypto assets, converting crypto assets into fiat currency and transferring crypto assets from FTX to elsewhere. The trading functions of FTX were performed by FTX Trading and did not involve FTX Aust and FTX Express.

Neither FTX Aust nor FTX Express ever held crypto assets – they were held by FTX Trading. FTX Trading held customers’ crypto assets in omnibus crypto wallets – they were not held separately from other customers.

Customers depositing AUD fiat currency did so via FTX Express, who then converted it to crypto assets held on FTX. However, when customers deposited AUD fiat, no funds were transferred from FTX Express to FTX Trading.

When customers requested withdrawals from FTX in AUD, no funds were transferred from FTX Trading to FTX Express. Rather, the funds paid to the customer came from bank accounts held in the name of FTX Express.

The dealings of Australian based customers with accounts on FTX were governed by the FTX Terms of Service, FTX Express DCE Terms of Use and the FTX Australia Terms of Service. There was also a tripartite agreement between FTX Trading, FTX Express and FTX Aust that provided for FTX Aust to enter into back to back trades with FTX Trading to hedge against any loss arising from its exposure to derivatives.

Paragraphs 13 and 14 of the judgment summarise the position at the time the administrators were appointed:

Shortly after the Chapter 11 proceedings commenced, access to FTX.com was cut off and has not been reinstated. At the time the Administrators were appointed on at 11:05am on 11 November 2022 (‘Appointment Time’), the Companies had a total of 24,656 customers (13,294 of FTX Express and 11,362 of FTX Aust).  The total value recorded (crypto-assets or fiat currency) in the Companies’ customer accounts on the FTX.com platform was AUD218.56 million (AUD186.58 million for FTX Aust customers and AUD31.97 million for FTX Express customers). 

At the Appointment Time, 747 customers (411 of FTX Aust and 336 of FTX Express) had sought to convert crypto-assets to AUD and withdraw the AUD, but which withdrawals had not yet been processed.  The total amount sought to be withdrawn was AUD28.84 million (AUD15.21 million by FTX Aust customers; AUD13.63 million by FTX Express customers).

The Proceedings

The administrators’ application related to:

• how they should treat money they had recovered from bank accounts held in the name of the Companies;
• whether they should admit certain persons, who claim to be creditors of one or both Companies, to vote at the second meetings of the Companies’ creditors; and
• other consequential relief.

The administrators sought various orders under section 90-15 of the Insolvency Practice Schedule (Corporations), which is detailed at paragraph 32 of the judgment.

The administrators were not seeking the determination of substantive rights, but rather how they were to treat particular classes of customers in the conduct of the administration, particularly in respect of voting entitlements at the second creditors’ meeting.

FTX Trading submitted that any findings of the Court should not extend to a determination or finding concerning the rights of any person against FTX Trading or any of the property of FTX Trading, given the US chapter 11 proceedings imposed a worldwide stay on pre-petition claims against FTX Trading and its property and no party sought orders against FTX Trading or its property. The Court proceeded on that basis.

The Court had previously made orders in respect of persons who wished to be heard in relation to the application (Contradictors), including that the lawyers for the administrators and Contradictors confer and file a list of agreed issues and any other issues which the parties contended ought to be determined. Ultimately there were twenty-three questions to be determined by the Court, some of which contained further sub-questions. The questions, the positions of the parties and the Court’s answers are helpfully set out in a schedule to the judgment.

FTX Trading was given leave to be heard, without being made a party to the proceeding, to answer questions from the Court and to respond to particular submissions, subject to the Court first allowing responses.

Given the judgment considered twenty-three questions, it is very lengthy (163 pages). This post only considers a selection of questions addressed by the judgment.

Claims based on assets held on FTX platform

The first question to be considered was:

Is the fact that an Australian-domiciled person had an account on the FTX.com platform, into which crypto-assets had been transferred that were still held in the account at the Appointment Time, sufficient to make the person a creditor of:

1.1      FTX Express?

1.2      FTX Aust?

The administrators submitted that both the facts and the contractual arrangements made it clear that the crypto assets held in customer accounts on the FTX platform were held by FTX Trading, not by FTX Express or FTX Aust. Accordingly, if a customer’s claims were based on the value of crypto assets or other assets held in their FTX accounts, those claims lay against FTX Trading, not the Companies.

None of the Contradictors took a contrary position and the Court found that the crypto assets were not held by FTX Aust or FTX Express, meaning that the answer to questions 1.1 and 1.2 was “No”.

Claims based on assets held on FTX platform after AUD deposit

The second question was:

Is the fact that an Australian-domiciled person had an account on the FTX.com platform, in which account crypto-assets were held (at the Appointment Time) that had been purchased following a deposit of AUD fiat by or on behalf of the person, sufficient to make the customer a creditor of:

2.1      FTX Express?

2.2      FTX Aust?

The Court found that the fact that crypto assets were purchased following a deposit of AUD fiat was of no relevance or consequence. The answer to questions 2.1 and 2.2 was ‘No’ for the same reasons associated with question 1.

Claims based on deposit of AUD

The fourth question was:

Where a customer of FTX Aust or FTX Express:

4.1       deposited AUD fiat with FTX Express (or one of its predecessors as a provider of digital currency exchange services) for use on the FTX.com platform; and

4.2       the amount of the deposit was credited to the customers’ account on the FTX.com platform (following conversion into stablecoin or otherwise),

is the fact that the customer deposited the AUD fiat sufficient to make the customer a creditor of:

4.3       FTX Aust?

4.4       FTX Express?

This question concerned the status of an Australian customer’s deposit of AUD fiat once it had been processed and credited on the FTX platform. A significant portion of the judgment addressed this question.

The administrators submitted that once the value of a customer’s fiat deposit with FTX Express was credited to the customer’s account on FTX, the customer had received that value. In that scenario, the customer had received what they had bargained for – the conversion of fiat currency to a form of digital, electronic or other form of money that is then available to the customer on FTX for the buying, selling or trading of crypto assets.

The administrators’ submissions also considered whether Australian customers may have claims arising from statements that once the amount deposited was credited to their accounts, the amount would be held in stablecoins. Various provisions of the agreements provided that fiat currency would automatically be converted to stablecoins and all such balances were held by FTX Trading in stablecoins.

While the agreements provided that would be the case, investigations undertaken by the administrators showed that:

• prior to 26 July 2022, no AUD stablecoin for FTX customers existed on any blockchain;
• on 26 July 2022, 33.8 million stablecoin tokens were minted within the FTX Group, which amount purportedly reflected the balance of AUD that FTX Trading held on that date;
• after the stablecoins were minted, no adjustments were ever made to the number of tokens to reflect changes in the amount of AUD following transactions by customers and no transfers from the wallet holding the stablecoins were shown on the blockchain;
• neither FTX Express nor FTX Trading appeared to have maintained any records reconciling the amount of AUD deposited by a customer with the number of stablecoins held for that customer against the tokens that were minted.

In those circumstances, the administrators submitted that customers may have claims against FTX Trading, FTX Aust or FTX Express for breach of contract and/or breach of statutory prohibitions against misleading and deceptive conduct. The administrators further submitted that it would be difficult to quantify such claims and customers would need to prove they had suffered loss or damage as a result of the failure to convert AUD fiat deposits into stablecoin. Loss or damage would be difficult to prove, given that the customers’ fiat deposits were credited to their accounts on FTX and were available to be used there, despite not actually being converted to stablecoin.

Digital Surge (one of the Contradictors) submitted that a positive AUD balance on the customer’s FTX account represented an AUD fiat balance. They further submitted that customers who deposited AUD prior to the appointment time and who had a positive AUD balance in their FTX account at the appointment time should be treated as creditors of FTX Aust and/or FTX Express, regardless of whether they had made a fiat withdrawal request prior to the appointment time.

In support of those submissions, Digital Surge relied on screenshots of the customer account balance on the FTX platform, which showed:

• no delineation of AUD fiat and AUD stablecoin (despite doing so for USD fiat and USD stablecoin);
• only “AUD” in a customer’s account balance under the column titled “Coin”;
• the withdrawal destination contained a narrative description rather than a blockchain address.

Digital Surge submitted that no AUD stablecoin was held in customers’ accounts on FTX and instead the account balance of any customer who made a deposit in AUD was at all times held on FTX in AUD fiat.

Digital Surge submitted that the true nature of the relationship between FTX Express and FTX Aust on the one hand and Australian customers on the other, in respect of any AUD deposits the FTX entities may have accepted, was that of debtor and creditor. It further submitted that in the banking context, a credit balance reflecting deposits into an account places the banker and client in a debtor-creditor relationship from the time of the deposit.

Digital Surge also submitted that by allowing FTX Express and/or FTX Aust to retain the AUD deposits of customers who deposited AUD fiat but not admitting such customers as creditors, FTX Express and/or FTX Aust would be unjustly enriched. That was said to be on one of three bases – that the AUD fiat balances held by FTX Express represented:

• money paid under a mistake – being the mistaken belief that conversion of AUD to stablecoins would take place and those stablecoins would be held by FTX Trading in a digital wallet;
• the payment of consideration in circumstances where there was a total failure of consideration in respect of the conversion of AUD to stablecoins; or
• consideration retained in circumstances where the customer would be justified in seeking rescission of the contract for misrepresentation at general law.

Matthews J concluded in respect of this issue that:

• FTX Express did not convert AUD fiat deposits to AUD stablecoins automatically by default;
• the customer’s account on FTX did not hold AUD fiat currency, rather it recorded a balance of value, calculated in AUD fiat, available to the customer for use on the platform or able to be withdrawn;
• once a customer’s AUD fiat deposit with FTX Express was credited to their account on FTX, the customer received equivalent value in the form of digital, electronic or other form of non-fiat currency, that was then available to be used to buy, sell or trade crypto assets. Accordingly, customers received what they bargained for, even if FTX Express failed to convert their AUD fiat deposits into AUD stablecoin. A customer would only have a claim against FTX Express if the deposit was not converted and credited to their FTX account;
• it was likely the case that Australian customers dealt with FTX Express and FTX Aust as principal entities and not as agents of FTX Trading;
• the buying, selling and trading of crypto assets took place exclusively on the FTX platform and as such Australian customers were primarily customers of FTX Trading, as the operator of FTX. FTX Express was merely acting as a service provider for the processing of deposits and withdrawals of AUD fiat. Accordingly, nothing turned on whether an agent-principal relationship existed between FTX Trading and FTX Aust or FTX Express;
• in respect of FTX Aust, there was no debtor-creditor relationship between a customer and FTX Aust, because FTX Aust was not involved in receiving customer deposits or the conversion process;
• in respect of FTX Express, its only role was to convert fiat currency into digital assets and vice versa. Once the deposit appeared in the customer’s account on FTX, the contractual obligation of FTX Express to process the deposit was fulfilled. In that way each and every deposit or withdrawal request can be seen as creating a separate contract between the customer and FTX Express. The banker-customer relationship was not analogous with the relationship between FTX Express and its Australian customer, rather customers deposited AUD into FTX Express’ bank account for the provision of a service – being the conversion of AUD into crypto assets;
• Her Honour did not accept Digital Surge’s submissions as to unjust enrichment. In that regard:
  • the assets of FTX Express or FTX Aust would pass to FTX Trading, which assets would then be subject to the US Chapter 11 bankruptcy proceedings. As such, neither FTX Express nor FTX Aust would be unjustly enriched;
  • as to the alleged payment by mistake, Digital Surge failed to identify what (if any) loss or damage flows from the payment under the alleged mistaken belief, given that customers clearly had the value of the deposit credited to their account and available for use on the FTX platform;
  • there was no total failure of consideration because customers received what they bargained for – after making a deposit through FTX Express, an equivalent value was credited to the customer’s account on FTX;
  • while there was no evidence that the AUD deposits were converted to stablecoin, what was credited to the customer’s FTX account was functionally the equivalent of what they bargained for. Therefore Digital Surge could not rescind the contract for misrepresentation.

In those circumstances, the answers to questions 4.3 and 4.4 were “No”.

Claims based on unfulfilled requests to withdraw AUD

The sixth question was:

Where a customer of FTX Aust or FTX Express requested – prior to the Appointment Time – a withdrawal of fiat currency in AUD from the customer’s account on the FTX.com platform, which request had not been fulfilled at the Appointment Time, does the customer have a claim arising from the request against:

6.1      FTX Aust?

6.2      FTX Express?

This question dealt with the scenario where a customer had made a request to withdraw AUD from their FTX account, but that request had not been fulfilled at the appointment time of the administrators.

Having regard to the contractual provisions, the administrators submitted that once a customer made a request to withdraw AUD from their FTX account, FTX Express became subject to an obligation to pay the amount to the customer. Because the obligation was to a pay a sum certain, it gave rise to a debt. If the obligation had not been performed at the appointment time, it subsisted and the customer was a creditor of FTX Express for the amount the subject of the withdrawal request.

Digital Surge made submissions against the position of the administrators on this point, namely:

• it was not necessary for a customer to have made a withdrawal request prior to the appointment time for it to be treated as a creditor;
• a customer who made a withdrawal request prior to the appointment time by means other than the FTX platform should be created as a creditor;
• Digital Surge had been dissuaded from making a withdrawal request in the period leading up to the appointment time by reason of the conduct of FTX Trading and/or FTX Aust and the availability of the FTX platform – meaning that it ought to be treated as having made a withdrawal request prior to the appointment time; and
• customers in these three situations or who had made a withdrawal request via the FTX platform prior to the appointment time should be treated as creditors of FTX Aust as well as FTX Express, on the basis that they “work hand in glove”, they were essentially all mixed up together and FTX Aust had AUD bank accounts.

In essence, Digital Surge submitted that imposing the administrators’ proposed requirements on the cut-off time (i.e. prior to their appointment time) and the method (i.e. via the FTX platform) of making fiat withdrawal requests would be contrary to authority and would not be just and equitable.

Her Honour rejected Digital Surge’s submissions in respect of question 6.1 because:

• no reasonable basis was put forward for the contention that a claim lies against FTX Aust; and
• the contractual provisions provided that the conversion of fiat currency to digital assets and vice versa is dealt with via the DCE provider (i.e. FTX Express) and that orders are placed only with the DCE provider, not FTX Trading or FTX Aust.

Her Honour also rejected Digital Surge’s submissions in respect of question 6.2, on the basis of matters which included the following:

• Digital Surge’s submissions ignored the reality of the limited role performed by FTX Express – while digital assets are held on the FTX platform and there is no conversion request, FTX Express has no role to play. Thus it is necessary for a withdrawal request to have been made for the customer to be a creditor of FTX Express as the DCE;
• to be treated as a creditor of FTX Express in the administration, the withdrawal request had to have been made prior to the appointment time – otherwise the debtor-creditor relationship did not subsist at the appointment time, such that the debt was not admissible to proof;
• the withdrawal request must be made via the FTX platform, as is clearly set out in the FTX trading terms;
• there was no evidence that FTX Express or FTX Aust operated in a way so as to accept withdrawal requests made by other means such as SMS or email;
• there was no evidence of “poor availability” of the FTX platform in the lead up to the administrators’ appointment. Rather the evidence was that withdrawal requests were pending or had not been fully processed;
• Digital Surge’s submission that the size of the class of creditors to be shut out is likely large was not relevant to the question of whether such persons actually are creditors of FTX Express.

Accordingly, the court answered question 6.1 as “No” and question 6.2 as “Yes”.

Other questions

The Court also considered further questions, including:

• the amount for which customers falling within the category described in question 6 (those who made withdrawal requests that were not performed by the appointment time) should be able to claim and the process of determining that amount. This required the Court to consider a process proposed by the administrators to determine the relevant amount. This is covered in paragraphs 214-223 of the judgment and the Court accepted that the proposed process was appropriate;
• whether the deposit, by a customer of FTX Aust or FTX Express, of fiat currency other than AUD with a banking partner of FTX Trading that was credited to the customer’s FTX account was sufficient to make the person a creditor of FTX Aust or FTX Express? This is covered in paragraphs 224-235 of the judgment and the Court determined the answer to this question was “No” for both Companies;
• where a customer of FTX Aust or FTX Express requested, prior to the appointment time, a withdrawal of fiat currency other than in AUD, which request had not been fulfilled at the appointment time, did the customer have a claim against FTX Aust or FTX Express? This issue required the consideration of a construction argument, implied terms and estoppel and is covered in paragraphs 236 to 388 of the judgment. The Court determined the answer to this question was “No” for both Companies;
• whether a customer of FTX Aust who had entered a derivative trade or position with FTX Aust, which trade or position had not closed at the appointment time, had a claim against FTX Aust in relation the trade or position? This is covered in paragraphs 395 to 433 of the judgment and the Court determined the answer was “No”;
• whether a customer of FTX Aust who had entered into a derivative trade or position with FTX Aust, which trade or position had closed before the appointment time, but the customer had not made a withdrawal request from the FTX platform before the appointment time had a claim against FTX Aust in relation to the trade or position? This is covered in paragraphs 434 to 441 of the judgment and the Court determined the answer was “No”;
• whether the administrators were justified and acting reasonably in treating derivative contracts or positions to which FTX Aust was a party that were not closed at the appointment time as closed with effect from the appointment time? This is covered in paragraphs 455 to 472 of the judgment and the Court determined the answer was “Yes”;
• whether funds the administrators recovered from bank accounts held by FTX Express and FTX Aust were assets of those companies? This is covered in paragraphs 473 to 481 and 482 to 487 respectively of the judgment and the Court determined the answer was “Yes”;
• whether there were any other categories of customer who may have claims against FTX Aust or FTX Express? This is covered in paragraphs 492 to 501 of the judgment and the Court determined the answer was “No”; and
• on a proper construction of the contractual terms, or alternatively by an implied term, was FTX Express obliged to remit the amount requested to be withdrawn from the FTX platform in a denomination other than AUD to the Australian customer? If so, should the claims of the Australian customers be admitted as creditors of FTX Express? This is covered in paragraphs 502 to 515 of the judgment. The Court was of the view that these questions were unnecessary to answer, as they had been fully considered in answering other questions, particularly questions 6.2, 9.1 and 9.2.

Take aways

This decision is helpful because:

• each of the parties was legally represented and the judgment proceeds by identifying specific questions, the parties’ submissions on the question and the Court’s determination of the question;
• the questions, the parties’ positions and the Court’s determination of the questions are set out in a separate schedule to the judgment. It is a lengthy judgment, which gives detailed consideration to each of the questions and submissions made;
• the decision highlights the importance of having comprehensive written agreements in place which provide for the operation of a crypto exchange and the conversion of fiat currency to crypto and vice versa – both with a customer and as between entities involved in the operations. The decision also identifies important issues which should be captured by such agreements;
• the judgment will be helpful to administrators, liquidators and insolvency practitioners, both as to identifying the types of issues to be considered if they are appointed to companies which operate or are involved in a crypto exchange and how those issues may be determined by a Court; and
• the judgment identifies various potential claims which customers may have against companies which conduct or are involved in crypto trading.

Where can I find the case? [2023] VSC 788