Rebooting a tarnished name is difficult and some firms are so utterly compromised by their failures that there is no real hope of rehabilitation.
Lawyers handling the FTX bankruptcy case are considering offers that could eventually lead to a relaunch of the troubled exchange.
At an Oct. 24 hearing of the United States Bankruptcy Court in the District of Delaware, Kevin Cofsky of Perella Weinberg Partners revealed he is negotiating with several parties interested in purchasing the company.
Cofsky, an attorney specializing in restructuring and liability management, told Judge John Dorsey that an initial 70 inquiries have been reduced to just three final buyers. But the exact structure of the sale and what kind of exchange might emerge thereafter is unclear.
Any potential relaunch of the company would have to contend with the severe reputational damage done to it. For that reason, industry experts are skeptical that a simple reboot of FTX is even possible.
Debra Nita, senior crypto public relations strategist at YAP Global — an international PR agency specializing in crypto, Web3 and decentralized finance — believes the FTX brand is too far gone to recover.
“The reputation and viability of FTX as a business is likely irreparable at this stage,” Nita told Cointelegraph. “The ability for a brand to recover comes down to several factors, primarily due to the nature and extent of the scandal. Secondary factors include the stability and strength of business operations when it failed, and the kind of response delivered after the initial downfall.”
With millions of customers out of pocket and former CEO Sam Bankman-Fried recently found guilty of seven counts of fraud, the damage to FTX is considerable. Past examples of financial misconduct or carelessness illustrate how difficult it is for exchanges to regain investor trust.
Damaged beyond repair
In January 2019, New Zealand exchange Cryptopia suffered a series of hacks to the tune of $30 million.
Cryptopia was down for two months as its founders formulated a rescue plan. Even as they sifted through the ashes, executives assured customers the damage was minimal. According to Cryptopia, the lost money amounted to a “worst case” of only 9.4% of its total funds.
Through March and April of that year, the exchange carried on, bringing various services back online in a staggered relaunch. By May, it was all over. The damage to Cryptopia’s systems, as well as its reputation, was simply too much to overcome.
Cryptopia is far from an isolated case. Enron, MF Global and Mt. Gox are further examples of companies so utterly compromised by their respective failures that there was never any real hope of rehabilitation.
“Due to the extent of the damage caused, the companies never could recover, regardless of how positively they may have responded after the scandal,” noted Nita.
Miraculous recoveries
On the other hand, there are examples of firms that managed to recover from significant setbacks.
Wells Fargo, an American multinational bank, is one such case. In 2016, the company was embroiled in a significant cross-selling credit card scandal. The bank issued credit cards and other lines of credit to its existing customers without seeking approval.
Executives initially tried to blame middle managers and entry-level workers, but it later transpired that the catalyst for the malpractice was unreasonable expectations of senior management, which created extreme top-down pressure.
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“Following the scandal, they reimbursed affected customers and introduced internal ethics procedures, and their stock price and reputation recovered,” said Nita. “The strength of their business and their responsible responses were then able to see [Wells Fargo] recover in reputation.”
The Consumer Financial Protection Bureau fined Wells Fargo $185 million, and CEO John Stumpf resigned. The company also settled a class-action lawsuit for $575 million.
In the same year as the Wells Fargo scandal, a major crypto exchange suffered a security breach. In August 2016, Bitfinex lost 119,756 Bitcoin (BTC) in a hack worth $72 million at the time. Bitfinex ceased all trading, and the severity of the hack wreaked havoc in the markets, with the price of Bitcoin falling by 20%.
To deal with the matter, Bitfinex decided that all customers would take a 36% haircut. This was applied to all accounts, even those unaffected by the hack. The exchange also issued the Rights Recovery Token, intending to make customers whole.
Bitfinex’s recovery was by no means guaranteed following the hack, but swift (even if unpopular) action on the part of its management helped the exchange weather the storm.
Possible options for an FTX “relaunch”
Cofsky’s testimony highlighted several potential forms a future FTX might take depending on the conditions of the sale.
“We have been engaging in an outreach process with a number of interested parties to either acquire the legacy exchange assets and/or to partner with the debtors in connection with the launch of the exchange. We’ve been evaluating that process relative to the potential to reorganize the assets on a standalone basis.”
“I am optimistic that we will have either a plan for a reorganized exchange, or a partnership agreement, or a stalking horse for a sale on or prior to the December 16th milestone,” said Cofsky.
Not all prospective buyers would want to use the FTX brand despite relaunch discussions. Cofsky clarified that one of the most valuable FTX assets is its list of 9 million customers. One option is to simply sell the list to another exchange and dump the FTX brand entirely.
To make that sale possible, the prospective buyer must know how many FTX customers are unique for any counterparty. Cofsky said that in this instance, the database of FTX information would need to be compared with the counterparty’s database of customers without revealing the identities of anyone on either database.
Cofsky did not make clear how that process would be achieved, but the challenge sounds like a potential use case for zero-knowledge proofs.
A fly in the ointment
Cofsky has stressed the importance of preserving the anonymity of FTX customers, but the position is still being argued in the courts.
Katie Townsend, an attorney representing the Reporters Committee for Freedom of the Press, has argued that the public has a “compelling and legitimate interest” in knowing the names of those affected by the fall of FTX.
Cofsky’s argument has so far persuaded Judge Dorsey that releasing this information would jeopardize the sale, rendering its value close to zero. At each point, Cofsky has been able to extend the length of the anonymity ruling, but the matter is by no means closed.
“The value that would be provided to the estate would be conditioned on the extent to which customers transact on the future exchange or are accessible to others and therefore are not available to that counterparty,” Cofsky testified.
“I would think that the value of the customers to the exchange would remain even after the conclusion of the case,” he added.
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In cross-examination, Townsend questioned how Cofsky could be sure that customers would even wish to trade on any future version of FTX.
“I don’t know how we would do that without contacting those customers,” replied Cofsky.
The admission highlights just how complex any sale of FTX really is.
Cautious buyers may even want to split the FTX purchase into a number of payment tranches, with the final value of the spend dependent on their ability to convert the customer database — which will have been inactive for more than a year at the time of any sale — back into active customers.
Given the lessons of history, achieving that goal will be no easy feat.
