US Department of Justice Announces Review of Cryptocurrency Fraud Compensation Mechanism
The possibility of victims of FTX and other cases being able to reclaim their assets “at current prices” has attracted attention, but significant challenges remain in adjusting the system.
(Background: Big changes ahead! FTX plans to “repay massive creditors” $11.4 billion by the end of May. Can this become a new market momentum?)
(Context: SEC’s new nominee: Clear and precise cryptocurrency regulation! Promises to further investigate the FTX collapse)
Since the bankruptcy of FTX, investors have felt the greatest frustration from missing out on the surge in cryptocurrency prices. Now, the US Department of Justice (DOJ) has first acknowledged that it will reconsider the compensation mechanism for victims in cryptocurrency fraud cases, to determine whether it should be adjusted to “current prices.” This move undoubtedly rekindles a glimmer of hope for tens of thousands of creditors, but the underlying institutional hurdles are far more complex than expected.
Department of Justice Acknowledges: Compensation Should Not Always Depend on “Price at the Time of Incident”
This week, the DOJ released a memorandum admitting that current regulations may not adequately reflect the rapid fluctuations of cryptocurrency values, especially in cases like FTX, Voyager, and Celsius, where assets have largely rebounded after the incidents. For instance, when FTX filed for bankruptcy in November 2022, Bitcoin was only about $17,500; it has since surpassed $100,000, but creditors can only receive compensation based on the price at that time in fiat currency, prompting hundreds to petition the court.
The existing system, based on 28 C.F.R. § 9.8(c), stipulates that compensation amounts should be calculated using the “fair market dollar exchange rate” at the time of the fraud, without any interest or related fees being added. This rule applies to all forfeited properties and is not specifically designed for cryptocurrencies, making it difficult to amend for individual cases.
Why is “Current Price Compensation” So Difficult? It Involves System Fairness and Protection Mechanisms
While a system modification may seem reasonable, it actually touches upon sensitive nerves of legal and market operations. Calvin Koo, a partner at Kobre and Kim law firm, points out that if compensation is based on current prices, the court would effectively be “betting on market timing,” which could lead to procedural unfairness and allow creditors to try to influence the timing of distributions, evolving into alternative forms of speculation.
Moreover, the volatility of cryptocurrency assets means that they do not always rebound. A former DOJ insider conceded that the current system was originally designed to protect victims from the risk of “asset depreciation over the years.” Compared to a few rebound cases like Bitcoin, many assets may “go to zero” after the incident.
Taking a Step Back: Can “Original Currency Return” Be Achieved? The Reality Remains Challenging
Many FTX creditors argue for “original currency returns (physical compensation),” with one investor stating to the judge that they have long researched high-quality fundamental projects, avoiding meme coins and high leverage, yet still received only fiat currency like others, asserting that they should not be treated the same.
However, this demand is even more challenging to implement. After FTX’s bankruptcy, hackers stole $477 million in assets, and many cryptocurrencies have experienced extreme price volatility or have become unrecoverable. If the government needs to make up the difference or repurchase cryptocurrencies, it may require more public funds and time, potentially not covering it all. Additionally, once original currency returns are allowed, different return mechanisms will need to be designed for each asset, significantly prolonging judicial processes.
Is Changing the DOJ Insufficient? Bankruptcy Laws and State Governments Remain a Barrier
It is worth noting that the DOJ only handles seized assets in criminal cases; the authority over compensation in bankruptcy cases like FTX remains with the bankruptcy court and the administrators. Furthermore, different state governments may also handle cases separately. For instance, the settlement between the New York Attorney General and Gemini adopted an “original currency return” model, highlighting the system’s fragmentation.
Although the DOJ’s memorandum has directional significance, it does not outline specific reform timelines or draft proposals, only urging Congress to consider legislative changes and authorize further adjustments. In other words, if victims hope to reclaim “currency-based or current price compensation” in the short term, they may still face dual hurdles of legal and execution realities.
Heightened Expectations, but Still a Distance from Realization
The DOJ’s first acknowledgment of reviewing the “compensation valuation standard” serves as a morale boost for long-neglected victims of cryptocurrency fraud. However, from the layered obstacles of institutional adjustments to the boundaries of bankruptcy law, the path to reform remains arduous. While FTX creditors may see a glimmer of hope for systemic relaxation, achieving true compensation at current prices or in original currency still requires societal consensus, legislative breakthroughs, and accompanying institutional support.
