The FTX Bankruptcy: A Final Battle Over a Form That Could Cost Millions

**Less than 48 hours before the final hearing in the FTX bankruptcy, a single claim could define the fate of thousands of creditors. The dispute over a late Know Your Customer (KYC) verification comes before Judge Karen B. Owens, as the estate prepares to close with payments of up to 120% in some categories. But for those who missed the deadlines, the lesson is harsh: a forgotten form can cost a fortune.

• Final Dispute: The hearing on August 19 will decide whether a customer with late verification gets a second chance, while hundreds of thousands of claims have already been dismissed for failing to pass KYC checks.**
• Unequal Payments: Those who completed the paperwork recovered up to 120% of their claims in the fourth round of reimbursements, while the latecomers could lose everything.**
• Closure of the Process: The estate has reduced its reserve for disputed claims from USD $2.4 billion to USD $1.8 billion, signaling that the liquidation of FTX is entering its final phase.**

A Final Battle Over a Forgotten Form

The bankruptcy of FTX, the once-giant of crypto assets that collapsed in November 2022, is about to close its final chapter with a dispute that seems minor but has million-dollar implications. The hearing scheduled for Wednesday, August 19 at 9:30 a.m. (Eastern Time) will put a single motion on the table: the one presented by customer Daizhuo Chen, who seeks to have Chief Judge Karen B. Owens allow him to complete his identity verification late. This case has become a symbol of what many consider the most costly bureaucratic trap of the process.

Chen filed his motion on March 27, relying on Federal Rules of Civil Procedure 59(e) and 60(b)(2), which allow a judge to reopen a decision if new evidence emerges. In his argument, Chen claims he did not meet the deadlines due to circumstances beyond his control, although the judge has yet to rule on whether there is new evidence justifying a second chance. The court agenda for Monday made it clear that this is the only significant dispute in a hearing that will otherwise be filled with formalities and routine approvals.

Identity verification, which includes KYC checks, tax form submissions, and registration on platforms like BitGo, Kraken, or Payoneer, has become the gateway to payment. FTX set the start of verification before March 1, 2025, and completion before June 1, both at 4:00 p.m. Eastern Time. The estate, now under the management of the FTX Recovery Trust, has been relentless: hundreds of thousands of customer claims have already been discarded for failing these checks, and the gap between those who complied and those who did not is vast.

The decision Owens makes on Wednesday will be closely watched not only by Chen but by all those who, for one reason or another, missed the deadlines. Any sign of flexibility could open a door for thousands of late claims, while a denial would confirm the Trust's hardline policy. In this context, Chen's case is a test of the limits of judicial mercy in a process that has prioritized efficiency over leniency.

The Context: The Fall of FTX and the Liquidation Process

FTX was once the second largest cryptocurrency exchange in the world, valued at USD $32 billion at its peak, before collapsing within days under the weight of mismanagement and the revelation that customer funds had been mixed and lost in a web of subsidiaries. The collapse dragged down thousands of investors and triggered one of the largest bankruptcies in cryptocurrency history, with its founder, Sam Bankman-Fried, facing criminal charges that culminated in a 25-year prison sentence. His appeal was denied in June, and his appeal mandate was issued in August, definitively closing his case in the Second Circuit.

Since then, the bankruptcy process has progressed in phases, aiming to return funds to creditors as quickly and fairly as possible. The results, however, have been mixed: while some creditors received up to 120% of their claims, others are still waiting for news. The fourth round of reimbursements, on March 31, sent around USD $2.2 billion to creditors, followed by a smaller distribution of approximately USD $900 million on July 31. Despite these payments, the estate continues to hold money for disputed claims, with a reserve that the Trust has requested to reduce by USD $600 million, from USD $2.4 billion to USD $1.8 billion.

The disparity in payments has generated criticism and frustration among creditors, especially those who could not complete verification on time. For many, the KYC process has become a bureaucratic hurdle that can mean the difference between recovering their investment or losing it entirely. The FTX Recovery Trust, however, defends that these checks are necessary to comply with anti-money laundering regulations and to ensure that funds reach the right people. The tension between efficiency and victimization is palpable, and Chen's case could be a turning point.

The Case of Daizhuo Chen and Other Pending Claims

Daizhuo Chen is not the only creditor facing the Trust's denial. The D1 Ventures fund also filed a claim for USD $251,000 in USDC and USDT since December 2022, arguing that their account also did not pass verification. Their motion, like two other lawsuits, was deferred without a new date, leaving those affected in limbo. These cases, although individually small compared to the total estate, represent the last bastion of a hearing that would otherwise be purely ceremonial.

The Trust's stance has been firm: deadlines are deadlines, and verification is an unavoidable requirement. In its objection filed on July 16, the Trust reiterated its position, stating that there have been no procedural errors justifying reopening the case. However, Chen's lawyers argue that their client deserves a second chance, especially considering the significant impact the amount in question has for an individual. The judge will have to weigh these arguments against the impending conclusion of the liquidation.

The outcome of this case could set an important precedent for the thousands of creditors who did not complete their verification on time. If Owens grants Chen's motion, many may attempt to reactivate their claims, which could complicate the closure of the process. On the other hand, if she denies it, the message will be clear: the window of opportunity has closed, and the fault lies with the claimant for not meeting the requirements. The decision, therefore, has implications that go beyond Chen's individual case.

The Future: The Closure of the Liquidation and the Legacy of FTX

The final fee request submitted by Ernst & Young, the firm hired to manage the liquidation, is a sign that the process is nearing its end. Lawyers are expected to present the orders without debate, and the judge is likely to approve them routinely. The Trust, for its part, has requested to reduce the reserve for disputed claims, suggesting that it is confident in having resolved most of the disputes. However, the decision regarding Chen's case could alter this timeline.

Wednesday's hearing will be streamed via Zoom, and Owens is expected to deliver her ruling from the bench. Her response will not only determine the fate of the claimant but will also serve as an indicator for other creditors facing similar situations. The atmosphere is one of anticipation, but also resignation: most creditors have already accepted the outcome of their verification, and only a few have decided to fight for a second chance.

The collapse of FTX has left a bitter lesson for the cryptocurrency industry: security and regulation are fundamental, but transparency in liquidation processes is also crucial. Meanwhile, Sam Bankman-Fried is serving his sentence, and the market continues its course, with Bitcoin and other cryptocurrencies regaining ground. But for the lagging creditors, the story is not over yet, and Judge Owens' decision could be the epilogue of a tragedy that left many without their money. The final battle is being fought in a courtroom, and the verdict will be known in a matter of hours.