The center of the storm in the crypto market over the past few days has undoubtedly been the FTX event.

In the early morning of November 8, Binance founder Zhao Changpeng (CZ) issued a document saying, "Binance intends to completely acquire FTX." Just two days later, the wind turned again, and Binance officially issued a statement saying that based on the results of the company’s due diligence, as well as the latest news reports about the mishandling of customer funds and the investigation of the so-called US agency, it decided not to pursue a potential acquisition of FTX.com.

In addition, Bloomberg quoted people familiar with the matter as saying that FTX faces a funding gap of up to US$8 billion and is trying to raise funds through debt, equity or a combination of the two; FTX has serious financial loopholes, saying that without capital injection, FTX will File for bankruptcy.

Once bankruptcy and liquidation, how can users on the FTX platform get back their encrypted assets? As a multinational blockchain group, how should creditors use legal weapons to protect their legitimate rights and interests? Do previous FTX investors need to bear related liabilities for related debts? Odaily contacted two lawyers to explain the above legal issues for readers, namely: Xiao Sa, director of the China Banking Law Research Association, and the lawyer of the US Vault 30 law firm, LegalDAO Builder Cosmeticfish.

Cosmeticfish lawyers believe that for a multinational exchange such as FTX, it is often necessary to apply for bankruptcy in multiple jurisdictions, which also increases the difficulty of future settlement. Moreover, the creditor priority of ordinary users on the platform may not be high, ranking behind other creditors.

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The following is the lawyer's interpretation, organized by Odaily:

Odaily: The latest news is that Binance has decided against a potential acquisition of FTX.com. In addition, Bloomberg quoted people familiar with the matter as saying that SBF said that FTX has a funding gap of US$8 billion, and that it will file for bankruptcy if there is no capital injection. For a multinational blockchain group like FTX, what is the process of filing for bankruptcy liquidation? (Are there any reference cases and how long it takes.)

Cosmeticfish：For a multinational exchange like FTX, it is often necessary to apply for bankruptcy in multiple jurisdictions, which also increases the difficulty of future settlement. For example, the Bitcoin exchange Mt. Gox filed for bankruptcy in Japan and the United States in 2014, and their creditors did not enter the compensation process until 2022.

Odaily: Encrypted assets have their particularities. It is difficult to trace assets on the chain. How to determine the remaining assets during liquidation?

Cosmeticfish：First of all, according to legal requirements, the debtor needs to truthfully declare the assets. Violators face fines and even criminal penalties. As the actual controller of FTX, SBF needs to declare truthfully, otherwise it may face prison. Second, the bankruptcy administrator can apply to verify the assets of the bankruptcy applicant. Now there are also many on-chain analysis agencies who have a lot of experience in asset tracing, and they can assist in the investigation as a third party.

Odaily: At present, the FTX platform has stopped withdrawing coins. How should these ordinary users with small funds get back their encrypted assets? In bankruptcy liquidation, how is the priority of creditors ranked?

Cosmeticfish：Taking the U.S. bankruptcy law as an example, secured claims > unsecured priority claims (bankruptcy administrator's fees + tax claims + employee salary claims) > unsecured common claims.

In the FTX Terms of Service, FTX clearly stated that the ownership of user assets is the user itself, in other words, FTX is the custodian of user assets. Therefore, user assets will not be included in the liquidated assets. This is a good thing for users. However, there have also been reports recently that FTX has misappropriated customer funds. If it is verified, user assets that cannot be repaid may be changed into unsecured claims.

Odaily: Once the bankruptcy liquidation is carried out, will the investors of FTX’s previous rounds of financing (such as Redshirt Capital) be listed as one of the debtors, and will be responsible for the relevant compensation for FTX-related debts?

Cosmeticfish：Generally not. Investors have limited liability and are only liable for the company's debts to the extent of their contribution.

Odaily: After Binance abandoned the acquisition, FTX must find new investors to inject capital as soon as possible to save the building that will collapse. In a letter from SBF to internal employees, it stated that FTX is still theoretically possible to raise funds, which is FTX's top priority next week. At the same time, Sun Yuchen, as a potential funder, is already in dialogue with him. Can the two lawyers please introduce to us first, what steps need to be taken if we want to realize the process of completely acquiring another company? How long will the entire acquisition cycle take? If the cycle is too long, will it deepen FTX's liquidity crisis?

Cosmeticfish：In terms of time, it may be as fast as 20 weeks, or as slow as more than a year. It also depends on the specific timing terms negotiated in the LOI. If the current market environment continues to be depressed, the crisis will indeed deepen, mainly because the market sentiment is focused on this point, and there is no information explosion to divert attention like a bull market. If the market turns better, it is possible that FTX's liquidity crisis can be alleviated through other direct or indirect means.

Xiao Sa:(1) Normally, the acquisition process of a company includes the following links:

The first step is the initial negotiation between the two parties to the transaction, reaching a preliminary intention on the acquisition and signing an agreement of intent. For acquisition projects that must be disclosed or subject to pre-examination by regulatory agencies, the parties need to disclose and submit for approval at the stage of signing the agreement of intent;

In the second step, the acquirer conducts business, financial, and legal investigations on the target to be acquired, and evaluates the asset value and acquisition risks of the target to be acquired; Fulfill the required internal decision-making (such as shareholder (general) meeting, board of directors decision-making), external approval procedures;

The third step is to conduct consultations and negotiations on the acquisition method, acquisition conditions and transaction documents according to the investigation, evaluation, decision-making and approval results;

The fourth step is to sign the acquisition contract and revise the articles of association; the acquisition contract usually stipulates the effective conditions, and the common effective conditions include the internal decision-making and external approval procedures required by all parties to complete the acquisition;

The fifth step is delivery; including payment, replacement of directors, supervisors and senior managers, handover of seals and certificates and other management rights transfer, handling equity or property ownership change registration, filing procedures, etc.

The above steps can be combined or further subdivided. The first four steps may be started successively or at the same time, which need to be handled flexibly according to the specific circumstances of the acquisition project.

(2) The length of the acquisition cycle varies from project to project. If the transaction method is simple and the situation of the acquisition target is clear, the delivery may be completed in one or two months; but if the transaction model is complex, the acquisition target is large-scale or the situation is complex, and the decision-making and approval procedures to be performed are complicated, etc., the entire acquisition cycle It may take several years.

(3) FTX is a cryptocurrency trading platform, and its liquidity crisis is closely related to its issued tokens, its own asset-liability structure, and external factors such as the token market environment. The long acquisition cycle may affect it in many ways. Whether it will affect its liquidity needs to be considered comprehensively in combination with internal conditions, external environment and other factors. But on the whole, if the acquisition cycle is too long, FTX will face more uncertainties, which may deepen its liquidity crisis, but it is not absolute.

Odaily: Many people have also noticed that Binance signed a letter of intent with FTX before, and Changpeng Zhao (CZ) also stated that Binance has the right to withdraw from the transaction at any time. We want to know, how effective is the legal effect of this kind of acquisition letter?

Xiao Sa:After the acquisition letter of intent meets the conditions for the establishment and effectiveness of the contract, it is a contract that is legally binding on the signing parties. As for its effectiveness, it needs to be judged according to the content of the letter of intent. Changpeng Zhao (CZ) said that Binance has the right to withdraw from the transaction at any time. If the situation is true, it is most likely because they agreed on the mechanism for Binance to withdraw at any time in the acquisition letter of intent, which is also relatively common in acquisition transactions.

Odaily: Combined with the public opinion in the past few days, many people think that the sharp drop in crypto finance is because Binance suppressed FTX to achieve a hostile takeover? How is hostile takeover legally defined? Does Binance’s behavior fit this criteria?

Xiao Sa:Takeovers of control between industry leaders can often have a significant impact on the entire industry, not just the cryptocurrency industry. However, it does not constitute a hostile takeover, which needs to be judged according to the specific circumstances of the transaction and the applicable laws.

Hostile takeover usually refers to the acquisition of the acquiree by the acquirer bypassing the acquiree's decision-making body. The more common hostile takeover is to acquire shares through the stock market to control the acquiree. Whether Binance’s acquisition of FTX constitutes a hostile takeover depends on factors such as whether the acquisition method is friendly, the acquired party FTX’s decision on the transaction, etc. However, since Changpeng Zhao (CZ) publicly stated that the two parties have signed an agreement of intent and are ready to conduct due diligence, it may mean that the two parties are carrying out the acquisition in a state of friendly negotiation, and it cannot be asserted that it is a hostile acquisition.

Odaily: A few days ago, there was a view that Binance’s acquisition of FTX may lead to antitrust investigations by regulators. Because currently Binance is the largest cryptocurrency exchange in the world by trading volume, and FTX is in the top five. What are the conditions for triggering an antitrust investigation? Does this mean that none of the leading exchanges can acquire FTX in the future, otherwise it will trigger an anti-monopoly investigation?

Cosmeticfish：First of all, I personally think that this type of acquisition is unlikely to trigger an antitrust investigation. Of course, I am referring to the antitrust in the United States. Antitrust in the United States can basically be simplified to two starting points: 1. Per se illegal (in itself illegal) 2. Rule of reasoning (rational rules). If the first two are triggered, then the Ministry of Justice will definitely intervene. As for the ROR part, the Ministry of Justice needs to make a judgment first.

Although Binance is the industry leader in terms of trading volume and number of users, FTX is the fourth in the industry, but in fact, the sum of the two will exceed 60%. Will 60% of the market be defined as possess within the scope of the large market? Market power (the power to manipulate the market) is actually hard to say.

It can be seen that now that so many large CEXs are in power, there are still many entrepreneurs entering this track, which shows that at least this track has not yet been monopolized. Of course, how to define the market will be another issue. If the Ministry of Justice can find a small market perspective, such as the futures contract market, to determine that this merger will manipulate the market, it may also lead to US antitrust investigations.

Xiao Sa:The implementation of monopolistic behavior should be declared according to the law, but failure to declare may trigger anti-monopoly investigations, and the types of monopolistic behavior mainly include monopoly agreements, abuse of market dominance, concentration of operators, abuse of administrative power to exclude or restrict competition, etc., which are most directly related to Binance’s acquisition of FTX What is relevant is the concentration of operators. Whether there may be other types of monopoly behavior needs to be judged according to the specific circumstances of the acquisition.

As you said, both Binance and FTX are cryptocurrency exchanges, and Binance’s spot trading market share exceeds 50%. This acquisition of control is a typical horizontal acquisition, so the direct impact of the acquisition is Binance’s market Share expansion, reduced competition, and more obvious market dominance will, with a high probability, be identified as a concentration of undertakings, which need to be declared in accordance with the Monopoly Law. Failure to declare in accordance with the law will trigger an anti-monopoly investigation.

Odaily: Once it is determined that the anti-monopoly law is punished, what kind of punishment may it face? As a multinational blockchain group, which country's agency can initiate an investigation?

Xiao Sa:Different jurisdictions have different administrative penalties and penalties for violations of anti-monopoly laws. Cryptocurrency trading is a global market, and Binance and FTX also serve global customers. Therefore, once Binance succeeds in acquiring FTX, it may trigger antitrust reviews in multiple countries or regions. Taking the United States as an example, according to the US Sherman Act, if a company seriously violates the anti-monopoly law and implements monopolistic behavior, it may face a fine of hundreds of millions of dollars. If it violates the law in the United States and is fined, then Binance and Mr. Zhao himself may be "unwelcome" for activities in the United States. In our opinion, perhaps this is also a reason for the eventual abandonment of the acquisition.

Odaily: Reuters reported that the immediate cause of the FTX liquidity crisis was that FTX embezzled more than $4 billion to bail out Alameda Research. The financial relationship between the two is relatively complicated. How to achieve penetrating supervision under such circumstances?

Xiao Sa:How to realize penetrating supervision is a very grand issue. Because regulatory agencies in various countries and regions may have different attitudes towards digital currency transactions and implement different regulatory policies at different times. Traditional penetrating supervision usually checks the source of funds according to the map, and the digital currency trading platform based on blockchain technology should be able to rely more on big data, algorithms and other digitization, intelligent technology analysis and analysis on the basis of sufficient information. Identify risks.