FTX creditor uses NFT to collect money from a bankruptcy claim

ONE creditor of bankrupted cryptocurrency exchange FTX decided not to sit and wait to get their money back.

Instead, the unidentified creditor of a FTX bankruptcy claim worth US$31,307 converted the claim to a token on the Ethereum blockchain and sold it to a buyer who on Jun 23 used the token to borrow US$7,500 worth of stablecoin USD, according to non-fungible token (NFT) lending platform Arcade.

A number of high-profile bankruptcies in the digital-asset space, not just the FTX insolvency, has left millions of investors frustrated over how much money they’ll be able to recover. Solutions to temporarily reduce the pressures have been popular in the crypto industry.

By putting the claim on the blockchain, the ownership of the claim is represented by an NFT. Activity history on NFT marketplace OpenSea shows that the NFT was originally sold at a value worth about US$12,163.33 in a version of Ether token, at the time. The “tokenization” process was facilitated by Found, a platform that allows users to trade tokenized bankruptcy claims.

The lender of the loan ultimately decides the value of the NFT as collateral, Gabe Frank, founder of Arcade told Bloomberg News. The loan is now set to be repaid in five days, according to Arcade, and in the event of a payment default, the lender can take the NFT, therefore, the ownership of the bankruptcy claim.

“The lending part is super cool,” said Yau Teng Yan, head of NFT research at digital-asset research firm Delphi Digital, in a tweet. “It also speaks to the huge whitespace open for NFTs to represent nearly anything in the world. Digital property rights are fundamental to a vibrant economy.”

SEE ALSO

FTX’s new management recovers US$7 billion in ‘substantial progress’

FTX sues ex-Clinton aide’s investment firm for US$700 million

The tokenized claim is “revolutionary because claim holders can access loans while waiting for a greater recovery from the bankruptcy estate”, Found’s website said. “Many sell their bankruptcy claim early because they need money now. Hedge funds know this, which is why they make lowball offers on centralised marketplaces.”

According to Found’s website, the company earns 10 per cent transaction fees on every successful trade involving the tokenized bankruptcy claim.

Found is not alone in providing creditors who are in limbo an opportunity to access cash. Failed crypto hedge fund Three Arrows has invested and promoted a platform that lets investors trade bankruptcy claims from insolvent platforms and funds, including their own. BLOOMBERG