A Brisbane-based cryptocurrency exchange will continue to operate after creditors agreed to a long-term plan from administrators keep the business going in an attempt to recover from the global collapse of FTX.
Digital Surge went into administration in December last year as a result of the company having transferred $33m worth of its assets to global platform FTX just two weeks before that company’s spectacular collapse in November.
In a report released last week by administrators KordaMentha – which is also handling the Australian administration of FTX – it was revealed Digital Surge had 22,545 customers with more than $0.01 cent in their account at the time the company went into administration.
Some of the self-managed superfunds listed as creditors for the business had between $140,000 and $233,000 invested on the platform.
At the second meeting of creditors, which ran over four hours in Brisbane on Tuesday, creditors ultimately agreed to a plan to keep Digital Surge operating, and pay back most customers what they are owed over the next five years.
The proposal, from Digico and Digital Surge directors Daniel Ritter and Joshua Lehman, will see Digico loan $1.25m to Digital Surge to keep the company running.
Customers with under $250 in their digital wallets will be repaid in full, while the remainder will receive 55% of their balance in the next few months. Customers will be paid in cryptocurrency or regular currency depending on how much they had of each. The rest will be paid back over the next five years in regular currency out of any quarterly profits Digital Surge makes.
Any funds obtained from FTX’s administration process will also be distributed to Digital Surge creditors from the administrators.
All employees will retain employment with entitlements perserved. The administrators had recommended this option as it allowed the company to keep operating, and will result in a better return of funds for the creditors.
The administration report reveals that between FTX going into bankruptcy on 11 November 2022, and Digital Surge’s platform being suspended, $6.5m was withdrawn from Digital Surge’s platform, including more than $31,000 by five employees.
While the administrators found that the directors had not breached any of their duties, questions were raised about the actions of one employee. The administrators found that an employee or someone acting on their behalf for their self-managed super fund, withdrew $1.6m-worth in Australian dollars and bitcoin.
The administrators said the unnamed employee confirmed he was aware that Digital Surge had exposure to FTX. They argued that the employee received a direct benefit over other creditors through the withdrawal based on that information, and it had a “significant impact” on the company’s ability to repay customers in full.
A lawyer for the employee told administrators that he was acting in good faith, and knowing that Digital Surge had exposure to FTX was not enough to infer that the employee had reason to suspect Digital Surge would become insolvent. The administrators disagreed.
On why Digital Surge signed up with FTX just weeks before the company’s collapse, the creditors report reveals the directors held the view FTX was reputable due to their personal experience with using the platform, the venture capital firms behind FTX, the company’s marketing, and because FTX held an Australian Financial Services Licence (AFSL).
Guardian Australia revealed last year that the regulator, the Australian Securities and Investment Commission, did not assess FTX’s suitability to hold the licence at the time it acquired the licence when taking over another company.
The company’s reasoning for transferring such a large amount to FTX at the time was due to the lower transaction fees it would offer for customers.
FTX’s disgraced chief executive, Sam Bankman-Fried, has pleaded not guilty to criminal charges that he defrauded investors and is currently at his parents’ home in California on $250m bail.
