If we rewind time to 2022, the FTX exchange founded by Sam Bankman-Fried was undoubtedly one of the benchmarks in the cryptocurrency market. Of course, everyone knows the fate of FTX that followed. The Sa Jie team has written several articles about the FTX exchange. With the dramatic downfall of FTX, one of the largest bankruptcy liquidation cases in cryptocurrency history has attracted the attention of investors worldwide.

After more than two years of bankruptcy restructuring, the FTX compensation plan has finally reached the execution stage. The first round of compensation officially started on the 18th of this month. According to FTX's established compensation plan, users with claims under $50,000 will be prioritized to receive approximately 119% cash compensation based on the cryptocurrency prices from November 2022. This category of users accounts for about 98% of the total user base. According to the latest reports, the first batch of $800 million has been paid to 162,000 accounts, and the remaining funds will be distributed gradually.

01. Can users from mainland China receive FTX compensation?

However, just as everything seemed to be developing positively, FTX creditor representative Sunil published a statement clearly indicating that users from five countries, including China, Russia, and Ukraine, "cannot participate" in the bankruptcy distribution. Although users from these five countries cannot participate in the bankruptcy distribution, given that the proportion of FTX users from Ukraine, Russia, Nigeria, and Egypt is negligible, while users from mainland China account for as much as 8% of the platform's total user base, it can be said that this "inability to participate" in the bankruptcy distribution affects a large number of people and involves significant amounts of money. Although Sunil stated that users from the five countries, including China and Russia, cannot participate in the bankruptcy distribution, he did not explain the reasons for this exclusion. Speculations about political factors, international relations, and judicial jurisdiction are rampant and inconsistent.

02. Speculations on the reasons for exclusion from compensation

In fact, the reasons circulating online regarding FTX's refusal to compensate users from China, Russia, and other countries do not sound credible. The Sa Jie team will briefly analyze the possible factors from legal and financial regulatory perspectives. In summary: First, the inability of users from China, Egypt, and Nigeria to receive compensation from the FTX liquidation team is likely related to judicial jurisdiction and compliance risks; second, the inability of users from Russia and Ukraine to receive compensation from FTX is likely related to SWIFT sanctions and wartime financial controls. Below, the Sa Jie team will provide a detailed analysis for our friends.

Judicial jurisdiction barriers and significant compliance risks

China, Egypt, and Nigeria share a significant commonality in their regulatory models for virtual assets—they have adopted prohibitive regulatory approaches. As early as 2017, mainland China issued a notice titled "Notice on Preventing Risks of Bitcoin and Other So-Called 'Virtual Currencies'," which can be seen as an implicit ban on virtual currency trading from an official level; in 2021, the People's Bank of China and ten other ministries issued a notice that explicitly stated that virtual currencies do not have the same legal status as fiat currencies… Activities related to virtual currencies are considered illegal financial activities. This notice directly established the regulatory attitude of our country's regulatory authorities towards virtual currencies—namely, adopting a prohibitive regulatory model, where activities related to virtual currencies are illegal and not protected by law.

Egypt's regulation of virtual currencies is similar to that of China. Article 4205 of Egypt's religious law explicitly states that any commercial transactions based on virtual currencies like Bitcoin are considered "haram," which means actions that violate Islamic law. Therefore, commercial transactions based on virtual currencies are illegal financial activities in Egypt.

The situation in Nigeria is even more complex. As early as February 2021, the Central Bank of Nigeria announced that virtual currencies represented by Bitcoin "violate existing laws," and prohibited commercial banks from engaging in virtual currency transactions, deeming financial activities related to virtual currencies as illegal. However, due to the weakness of Nigeria's financial regulation, the country has effectively become the second-largest user of Bitcoin and a hotspot for virtual currency money laundering and terrorist financing.

From the virtual currency regulatory policies and usage situations in these three countries, it can be seen that if FTX compensates users from these three countries, it would actually contradict the prohibitive regulatory policies regarding virtual currencies in these countries, likely leading to significant compliance risks, which the FTX liquidation team would naturally be cautious about. Especially for Nigeria, the FTX liquidation team cannot guarantee whether Nigerian users will use the platform for money laundering and terrorist financing. Therefore, in the view of the Sa Jie team, users from mainland China and Egypt may still have a chance for compensation in the future, while Nigerian users are definitely in for a long wait.

SWIFT sanctions and wartime financial controls

The remaining issue involves the old adversaries, Russia and Ukraine. Unlike the prohibitive regulatory models of China, Nigeria, and Egypt, both Russia and Ukraine have adopted a more welcoming attitude towards virtual currencies. However, both countries have their own issues. First, due to a well-known reason, on February 26, 2022, the United States, the United Kingdom, the European Union, and Canada jointly announced the removal of major Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunications) system.

SWIFT's function is to connect the payment and clearing systems of different economies, linking entities with financial transaction needs through its financial information transmission network. Although strictly speaking, Russia can still conduct cross-border fund payments and clearances through one-on-one transactions and by connecting with other financial institutions to the SPFS system, the convenience and applicability would undoubtedly be significantly reduced. Moreover, because of being removed from the SWIFT system, even if the FTX liquidation team compensates Russian users, it would not be able to resolve the payment issues in the short term. This may be the main reason why the FTX liquidation team cannot compensate Russian users.

For Ukrainian users, the inability to receive compensation is likely related to Ukraine's wartime financial controls. Due to wartime financial control policies, the approval process for large cross-border remittances and large cross-border fund flows has essentially come to a standstill, directly leading to the FTX liquidation team being unable to compensate Ukrainian users.

03. In conclusion—What should Chinese users do?

The Sa Jie team remains relatively optimistic about this situation. In the future, the FTX liquidation team may establish special clearing channels for countries with prohibitive regulatory models (mainland China, Nigeria, Egypt) or may use stablecoins for online compensation (although this plan may also bring compliance risks). Overall, the only thing users from mainland China can do right now is wait. After all, even if a special clearing channel is established, it will require cooperation and breakthroughs from various countries and international financial regulatory frameworks.

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