Digital Surge creditors approve five-year bailout plan

Despite having more than $30m tied up in failed crypto giant FTX, this local exchange is confident it can pay back its investors.

Digital Surge creditors voted to approve a five-year bailout plan for the cryptocurrency group, allowing it to narrowly avoid collapse despite being owed more than $30m by FTX.

The Brisbane-based group went into administration in December and froze the accounts of its some 30,000 customers after it was caught up in the dizzying collapse of crypto exchange FTX, which has been likened to that of failed energy giant Enron.

Digital Surge, which had described itself as “the best place to buy, sell and trade crypto in Australia”, had $33m worth of assets tied up in FTX, according to an investigation by administrators.

KordaMentha administrators Scott Langdon, John Mouawad and David Johnstone had recommended a rescue plan for Digital Surge in which creditors would recoup all of their investments, a plan that was ultimately approved on Tuesday at a meeting in Brisbane. “It is not in creditors’ interests to wind up the company or to bring the administration to an end,” the administrators said in their report.

Some creditors had more than $100,000 of self-managed super invested in Digital Surge.

Under the plan, proposed by major creditor Digico and the company’s directors Daniel Ritter and Joshua Lehman, creditors with an account balance below $250 will be paid out in full, while creditors with balances of $250 and above will be repaid over five years dependent on Digital Surge making a net profit on a quarterly basis.

Mr Ritter and Mr Lehman will contribute $1m of their own money into the repayment plan, also known as a deed of company arrangement, and they said they are confident creditors will be repaid in full. The administrators said they received several binding offers to buy the business, including from rival local crypto exchange Coinjar, but ultimately recommended Digico’s proposal and said it would likely provide for a greater return to creditors.

Digital Surge’s financial woes were largely due to the $33m worth of assets tied up with FTX, as opposed to any breach of duties by the company’s directors, the administrators found.

One employee also withdrew $1.6m from the Digital Surge platform in November, a move that drew a rebuke from administrators who said it “may warrant further investigation.”

Customer accounts were frozen by Digital Surge on November 16 when chief executive Daniel Rutter revealed that a portion of its assets were held by FTX in Australian dollars and digital assets. FTX had collapsed days earlier, on November 11.

Lawyers handling the bankruptcy of FTX, co-founded by Sam Bankman-Fried, have recovered around $US5bn in assets. Picture: Ed Jones/AFP

“Digital Surge operates as a broker and is committed to facilitating the best trade for our users at any time,” Mr Rutter said at the time. “To do this, a portion of assets are held with trading partners to facilitate trades. FTX was one of those partners.

“Until a permanent solution has been implemented, it is a legal requirement for Digital Surge to suspend all deposits and withdrawals. This is for the benefit of all users as a whole.”

FTX was the second-largest crypto exchange globally, behind Binance before its collapse.

“(FTX) advertised the ability to get lower fees and deliver better rates to customers by using FTX rather than other exchanges as liquidity providers,” Digital Surge’s administrators said in their report.

“FTX held a financial services licence in Australia and also had financial support from some of the largest known venture capital funds in the world, such as NEA Venture Capital, and large investors such as Ontario Teachers’ Pension Plan, Sequoia Capital, SoftBank, and Temasek.

“Through a separate company, the directors had experienced buying and selling crypto on the FTX exchange for more than 12 months and never experienced any issues with the FTX platform. It was because of these reasons the directors held the view that FTX was reputable and a suitable liquidity provider for the company.”

KordaMentha are also administrators of FTX Australia, the local arm of the crypto exchange that filed for bankruptcy in November after a surge of customer withdrawals. FTX founder Sam Bankman-Fried is facing numerous fraud charges related to allegations he paid debts incurred by his crypto hedge fund, Alameda Research.

FTX Australia’s administrators have warned some Australian customers have lost “very significant” sums of money and that many are unlikely to see the return of their investment, as investigations into its collapse continue. Mr Langdon said 29,234 separate Australian customers have been identified as having lost significant property, and “recoverability and current value are yet to be determined.”

“The major constituent stakeholders are a broad range of customers who have spent funds (in many cases very significant sums) purchasing cryptocurrencies,” he wrote in an affidavit late last year. “I am informed by the directors and believe that the companies have little else in the way of assets other than the funds in the bank accounts.

The administrators are continuing to conduct investigations into the affairs of the companies.