Chinese Creditor Victory: FTX Bankruptcy Case 'Forum Selection' Motion Withdrawn

Original Article Title: "Victory for Chinese Creditors: FTX Bankruptcy Case 'Limited Jurisdiction' Motion Withdrawn"

The U.S. Bankruptcy Court for the District of Delaware, on October 23, 2025, after a re-hearing on the motion by the FTX Recovery Trust to exclude creditors from 49 jurisdictions, including mainland China, from the main distribution list, and under pressure from all sides, the FTX Recovery Trust formally withdrew the motion.

For Chinese creditors, this was not only a struggle concerning their property but also a difficult battle to defend equality and justice.

To rebut the motion by the FTX Recovery Trust, Darren Tian, a lawyer at Beijing DeHeng Law Offices, accepted the commission of the Chinese creditors' representatives and issued a detailed legal opinion refuting the so-called 'justification' of the FTX Recovery Trust. This legal opinion was submitted to the U.S. Bankruptcy Court on July 15, 2025. The core points of this legal opinion are as follows:

1. China's current cryptocurrency regulatory documents do not have legal binding force and do not constitute enforceable laws against foreign entities.

Currently, China has not formulated any unified cryptocurrency-specific legislative documents, with only four normative documents regulating cryptocurrencies. The FTX Recovery Trust believes that China's cryptocurrency regulatory policy may hold FTX and related parties legally liable, primarily based on the "Notice on Further Preventing and Disposing of Risks Associated with Virtual Currency Trading Speculation" jointly issued by multiple departments including the People's Bank of China (PBOC) (referred to as the 'Notice'). The Notice clearly states that virtual currency-related business activities are categorized as illegal financial activities. However, the 'Notice' is an 'administrative normative document' and not a 'legislative document' (laws, administrative regulations, local regulations, departmental rules). It serves as a policy statement aimed at guiding the behavior of domestic financial institutions to prevent domestic financial speculation risks, lacking the legally binding force of laws.

Therefore, using the 'Notice' as a legal basis that could lead to foreign entities bearing criminal responsibility is a serious misunderstanding and exaggeration.

2. FTX's Recovery Trust Misinterpreted the Purpose of the 'Notice'

The purpose of the 'Notice' is to 'prevent and dispose of speculation risks in virtual currency trading, maintain national security and social stability, curb disruption of the economic and financial order, and prevent the breeding of illegal criminal activities such as gambling, illegal fundraising, fraud, pyramid schemes, and money laundering.' The Notice prohibits fraudulent, speculative, and unlicensed operating behaviors, with no intent to deprive investors of their legitimate property rights or to prevent investors from receiving bankruptcy distributions through legal proceedings. Citing the Notice to prove the justification of depriving Chinese creditors of their repayment rights is contradictory to the fundamental purpose of protecting people's property.

3. Chinese Investors Holding and Trading Cryptocurrency on Overseas Exchanges Does Not Violate Chinese Regulations or Regulatory Policies.

The motion by FTX implies that all cryptocurrency activities by Chinese citizens are illegal, suggesting that enabling Chinese citizens to acquire cryptocurrency would incur legal liability. However, an analysis of two relevant clauses in the "notice" reveals that Chinese citizens holding or trading foreign cryptocurrency is not prohibited:

"(2) Virtual currency-related business activities are considered illegal financial activities. Activities related to virtual currency, such as conducting currency exchange between legal tender and virtual currency, exchange between virtual currencies, acting as a central counterparty for the buying and selling of virtual currency, providing information intermediation and pricing services for virtual currency transactions, token issuance financing, and virtual currency derivative trading, are suspected of engaging in illegal financial activities such as the illegal issuance of token vouchers, unauthorized public issuance of securities, illegal operation of futures business, and illegal fundraising, all of which are strictly prohibited, and resolutely banned according to law. For those engaging in related illegal financial activities that constitute a crime, criminal responsibility will be pursued according to law."

The core of this clause is to ban all domestic operations related to virtual currency in China, such as exchanges, ICOs, OTC, and banking financial support. Therefore, after the issuance of the "notice," a large number of exchanges and practitioners in China underwent liquidation, cancellation, or transferred operations overseas. However, this does not involve restrictions on individual Chinese investors investing in overseas cryptocurrency exchanges.

"(4) Participation in virtual currency investment and trading activities carries legal risks. Any legal person, unincorporated organization, or natural person investing in virtual currency and related derivatives, if it violates public order and good customs, the relevant civil legal acts will be invalid, and any resulting losses will be borne by the individual; if there are suspicions of disrupting financial order and jeopardizing financial security, the relevant departments will investigate and deal with it according to law."

This clause stipulates that investing in virtual currency and related derivatives within China, if it violates public order and good customs, will render the relevant civil legal acts invalid. However, "violation of public order and good customs" is a vague legal standard, and Chinese courts are particularly cautious when applying this standard, and not all civil actions involving cryptocurrency investments will automatically be invalidated.

The scope of the "notice" is limited to commercial activities conducted within China, only applicable to transaction relationships between Chinese investors and domestic cryptocurrency service providers, and does not apply to transactions on overseas cryptocurrency exchanges. Therefore, the notice does not have practical jurisdictional authority over investments made overseas and cannot effectively regulate or invalidate the validity of overseas investment activities.

3. Chinese law does not possess extraterritorial jurisdiction over foreign entities—there is no actual risk of bankruptcy distribution from overseas cryptocurrency exchanges.

The "notice" mentions that "overseas virtual currency exchanges providing services to Chinese residents through the internet also constitute illegal financial activities," and that the "responsibility of relevant individuals within China" will be pursued. This clause is likely the most concerning issue for FTX in terms of recovering the trust fund and its payment service provider (DSP). Although we do not argue that foreign cryptocurrency exchanges are completely free from potential constraints under Chinese law, it must be made clear that, based on the actual enforcement of Chinese law, there is no civil or criminal liability risk when FTX recovers the trust fund and distributes assets to Chinese creditors:

First, the judicial and administrative authorities in China lack extraterritorial jurisdiction over foreign entities that do not actually operate within China's borders. While this provision implies a theoretical risk exposure, its primary function is declaratory—as a form of policy deterrence rather than a legally binding norm.

Second, the focus of this provision is not on foreign exchanges but on Chinese entities assisting in their operation. Individuals working in China for foreign exchanges and entities providing marketing, payment, or technical services within China are the ones potentially subject to criminal liability. The provision does not include any specific criteria, penalties, or enforcement mechanisms targeting foreign exchanges themselves.

To date, there is no public record of any foreign cryptocurrency exchanges being sanctioned by Chinese courts or regulators solely for allowing Chinese residents to use their services, nor have any such entities faced civil, administrative, or criminal penalties in China for accepting Chinese users or transactions.

4. FTX Recovery Trust cannot be held liable under Chinese law for paying USD or stablecoins to Chinese creditors (via Payment Services Provider DSP).

The FTX Recovery Trust is concerned that it may be held liable under Chinese law for paying USD or stablecoins to Chinese creditors, facilitated through Payment Services Provider DSP. However, this concern is unfounded:

(1) Does the act of Chinese investors holding USD or stablecoins through overseas cryptocurrency exchanges violate Chinese law?

Chinese investors may have violated China's foreign exchange control regulations when initially converting Renminbi to foreign currency or cryptocurrency and depositing it into the FTX platform. The individuals responsible for this violation are the Chinese investors themselves, who may face administrative penalties from China's foreign exchange regulator as a result. However, this liability does not extend to FTX or the FTX Recovery Trust. The act of compensation by the FTX Recovery Trust essentially settles a confirmed debt within the framework of U.S. law, with its operations entirely conducted outside of China, thus not constituting a currency exchange service provided within China, and therefore not subject to China's foreign exchange control regulations. There is no precedent in Chinese law for holding foreign entities liable for such actions.

(2) The FTX Recovery Trust's payment of USD or USD-pegged stablecoins via DSP does not violate Chinese foreign exchange controls.

Article 4 of the Regulations of the People's Republic of China on Foreign Exchange Administration states: These Regulations apply to the foreign exchange receipts and payments and foreign exchange business activities of domestic units and individuals, as well as the foreign exchange receipts and payments and foreign exchange business activities conducted by overseas units and individuals within the territory of the People's Republic of China.

It is evident that this regulation does not apply to foreign institutions operating entirely outside of China, including those engaged in cross-border settlements with Chinese citizens. Therefore, the FTX Recovery Trust's payment of USD or stablecoins to Chinese creditors via DSP is not unlawful.

5. What Would Be the Result If This Case Really Falls Under Chinese Law?

If the FTX bankruptcy event were to be handled in accordance with Chinese law, Chinese judicial authorities might: prosecute FTX's operator for illegal fundraising or illegal business operations; impose criminal penalties, including imprisonment and fines; confiscate and sell off assets, returning the proceeds to the victims of financial crimes.

The primary focus of Chinese judicial authorities has always been to maximize investor protection and recover losses. There has never been a precedent where investors participating in a restricted investment activity were deprived of their rights to compensation as victims during the restitution process. From this perspective, FTX Recovery Trust's refusal to compensate Chinese creditors is actually contrary to the original legal intent of Chinese judicial authorities to "protect people's property."

This article is contributed content and does not represent the views of BlockBeats.