Lawyer interprets the founder of Three Arrows Capital's new venture: the "new FTX" for trading FTX claims?

Written by: @wassielawyer

Compiled by: GaryMa, Wu Blockchain

The founders of Three Arrows Capital, Zhu Su and Kyle Davis, along with the two founders of CoinFlex, have launched a new project called GTX, which is raising $25 million in seed funding to trade claims from creditors of companies like FTX. Su Zhu confirmed this news to Wu Blockchain: "Yes, but no comment, busy building it."

Deck pointed out that the exchange project will unlock a $20 billion claims market; fill the market gap left by FTX; enter the $2 trillion stock securities lending market; launch in 2-3 months; and the executive team includes CTO Kent Deng, who has worked at Alibaba, Tencent, and Huawei; CMO Leslie Lamb, former head of institutional sales at Amber.

Full Deck:

CoinFlex responded to this matter in a blog post: Mark and Sudhu will both remain, with Mark continuing as CEO; the new trading platform co-founded with 3AC will not be named GTX, as GTX is just a placeholder name; CoinFLEX creditors/B-round financing will be the largest shareholder category, and we are also discussing other benefits, with any funds raised being used to increase the company's and its shareholders' (including creditors) equity value.

Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute, stated that he will not invest in the proposed new crypto exchange by Three Arrows Capital and CoinFlex. He tweeted: "If you are investing in coinflex/3ac exchange, you might find it a bit difficult to collaborate with wintermute in the future (in terms of building relationships). We will also not participate in these upcoming venture capital deals that enter the cap table, so founders should be careful."

Crypto lawyer @wassielawyer commented on the launch of the new project GTX by Zhu Su and others, summarized as follows:

1. People call it a "claims trading platform," but it's not limited to that; it is essentially a default listing of a new junk coin from FTX, and this new junk coin is your FTX claim; imagine you receive your FTX claim and then showcase it as a new token on this exchange, like USDG; you can now trade USDG/USDC at a price of 1/0.15 and cash out your FTX claim, or you can hold your USDG and wait for it to appreciate. Or, as GTX hopes, you can trade with your USDG, which is quite an impressive concept of "reopening the casino," and it seems they are incentivizing you to bring your USDG back to the casino by offering you proportional equity.

2. At GTX, it is essentially a conversion of debt into new debt + equity, with the condition for the equity part being that you have to come back to the casino to play. GTX can also meet the needs of other bankrupt exchanges, where you exchange your claims against the bankrupt platform for a "tokenized" claim. Therefore, you will have VUSD/USDC, CUSD/USDC, etc., representing Voyager and Celsius, allowing you to easily trade these claims, but more importantly, continue to gamble with these claims at the casino.

3. I do wonder how the equity incentive part works for these people, but it seems tricky to implement. Are they planning to bid on FTX assets (thus defaulting to all customers), or is it on a selective basis? Presumably, it must be a bidding process for FTX assets because selective inclusion would be very chaotic. And the 3AC people are not good at chaotic structures, as can be gleaned from how they built DeFiance and Starry Night in their own fund. If this is a selective inclusion process, you might find a way to sell them a fake claim and rug.

4. In any case, this idea reinforces the point that restarting the FTX platform is feasible. GTX is clearly trying to capture the victim user base of FTX and keep the degens in the casino, as the casino itself is valuable.

5. Supporters of this idea gain equity benefits from all this (they might be drooling over becoming the new FTX-Alameda), but the problem is, they don't have to do this! Current FTX claimants can also enjoy equity benefits through a similar, albeit not identical, plan.

6. Suppose you let FTX out of Chapter 11 bankruptcy protection and immediately restart the platform, creditors would recover 25 cents on every dollar. Similarly, you would have an FUSD representing dollar claims in FTX, which you could cash out from the company's liquid assets. If you cash out, your claim against FTX is extinguished. If not, you can keep your claim on the platform without touching it, or you can trade on the platform. If people continue to use the platform, the fees generated will go into the treasury, hopefully increasing its amount.

7. Each FUSD holder can recover funds. For example, if there are initially $10 billion in claims and $2.5 billion in liquid assets, any creditor can redeem FUSD for 25 cents. If $2 billion worth of creditors exit, there would ultimately be $8 billion in claims and $2 billion in liquid assets. Now, with the exchange operating, let's assume it earns $100 million in the first year. Now, you have $8 billion in claims and $2.1 billion in liquid assets, which would purely from an organic perspective increase the amount recovered to 26.25 cents.

8. But for some, this may be too slow. That's right, this means you need to reduce the denominator while organically increasing the numerator through the operation of the exchange. This is part of what I like about the "GTX" proposal. If you incentivize people to trade with their claims, the house always wins, so when people trade with the house, they ultimately get fewer claims, allowing you to reduce the $8 billion claim figure as well. Suppose a year later the debt is $7.5 billion, now your dollar value is 28 cents. Of course, some people may still be dissatisfied! Yes, because we only accounted for liquid assets. The price you pay for immediate liquidity is that you give up the value you could obtain from illiquid assets (i.e., venture portfolios, etc.). Therefore, cashing out your FUSD is actually not in anyone's interest.

9. Because you only need to trade FUSD/USDC, which will be priced based on your current treasury share + your potential illiquid share. Thus, you can obtain immediate liquidity from people outside the exchange who want to speculate on illiquid asset portfolios! Of course, you can also complicate things by securing some loan with illiquid assets, but we can keep things extremely simple: hand over your claim to liquid assets now, sell it to others (who will also price it with illiquid assets), or hold it.

10. If the heaviest traders acquire equity in the company, you will ultimately have an FTX owned by degens. In summary, this concept (if developed) is not scary, but FTX creditors should not let "vultures" (a jab at 3AC) run this casino. Some proposals have already been made.

11. FTX creditors should realize that they can and should restart the FTX platform through a rational and wise recovery plan, allowing users to choose how to recover their claims. I could say more; I believe a "tiered" recovery system could work for FTX users, but space is limited and that is not something you can hear for free.

Summary: It is understandable that GTX is mocked because of its founding team, but the concept behind it should not be so easily overlooked. I would encourage FTX creditors (especially the official committee and special committee) to look at this plan and others, and realize that restarting the exchange and setting specific thresholds or mechanisms may be more beneficial for recovery than endlessly leaking fees to professionals over the years. At the very least, it gives customers control and choice. Please note that I do not support the "GTX" proposal (or the 3AC team), but some ideas are good.