The most recent summary statement provided details on the status of the FTX bankruptcy proceedings, which are running in parallel with the Inlock claims settlement. According to the latest information released, the payment of FTX claimants will start at the end of 2024, after which the Inlock platform is expected to be compensated through our OTC partner.

If the FTX payment is the basis of settlement in the legal proceedings between the OTC partner and the Inlock platform, it is expected to be only partially sufficient to settle the outstanding claim, as FTX will consider the exchange rates at the time of the bankruptcy as the subject of the claim. The majority of the damage caused by our OTC partner was in stablecoin, but due to exchange rate movements, BTC and ETH, which originally accounted for a smaller proportion, have now appreciated significantly. The amount of the settlement owed to the Inlock platform will be determined as a result of the ongoing legal proceedings, but we are already certain that it will not be less than the amount paid by FTX.

Based on the information currently available, FTX expects to pay 118% of the value outstanding at the start of the bankruptcy proceedings (11 November 2022) to its former clients. Inlock’s compensation is expected to reach a higher percentage than this, as during the Inlock claims settlement process, customers were able to choose a number of options to opt out of the settlement, thereby increasing the level of coverage for outstanding customer claims.

The purpose of this Communication is to describe the partial compensation process that will be used to settle claims for customers of the Inlock platform. In total, three customer groups will be affected by the final settlement:

  1. Customers opting for a scheduled release programme remaining on the Inlock platform
  2. Customers with pending migrations on the Vigiler platform who do not wish to complete the migration by the time the claim is settled.
  3. Customers with a completed migration on the Vigiler platform who still have a compensation balance.

The three customer groups have different levels of coverage as a result of different customer groups having different access to different services:

We currently manage three separate sets of assets, each with different coverage levels. These are:

  1. Active customers remaining on the Inlock platform: scheduled releases are already taking place, with the coverage level continuously decreasing as customers receive loss-free payments every month. So far, 15 scheduled release rounds have taken place, with 39% of the assets of clients remaining on Inlock being released without loss relief. This brings the coverage level of the Inlock platform to 64% at present. This means that the platform has this much of the remaining unpaid assets on top of those already paid out.
  2. Vigiler/ pending migrations: the hedge level of these assets can change continuously given the ability of clients to swap, deposit, borrow and the fact that the hedge level is maintained on a dollar-weighted average value of the assets. For this reason, changes in the dollar value of assets also constantly affect the specific aggregate hedge level, but it currently stands at 78.9%.
  3. Vigiler/ completed migration: Here we take it as evidence that the hedging level should always be above 100%, as all client assets have the hedge behind them. The reason why the coverage level can rise towards 100% is that platform revenues are constantly generated from service fees. These revenues are either re-distributed as platform fee reimbursements or transferred to the reserve fund, from which they are released and compensation is reduced on a quarterly basis for the benefit of customers.

The final compensation payment will be distributed to the customers in the amount that Inlock receives as compensation. These distributions will be made to customers on a pro rata basis, bearing in mind the following section of Inlock’s Recovery and Restructuring Plan:

In the development of the Recovery and Restructuring Plan, in addition to the technical content, a framework was developed with the involvement of our legal staff that is uniformly advantageous and fair for all our clients

This means that we intend to settle all claims on a pro-rata basis, with clients being compensated on the basis of the average coverage levels already described above. In all payouts and settlements to date, we have used the asset-weighted average dollar value as the basis for all payouts and settlements. This is how we have done it in the Inlock early payout, in the exit payouts, and it is also how we have used it to record coverage for segregated asset pools. Of course, this will also be the case when the Inlock claims settlement arrives and is distributed. In practice, this means that during a damage settlement, assets are isolated for a short period of time, during which time the different assets are balanced against each other to produce the final collateral value. The collateral value represents the proportion of client assets Inlock holds before the settlement!

The Inlock Recovery and Restructuring Plan, issued on 31 December 2022, was designed to enable the operating entity to respond as quickly as possible and a number of alternative damage management options were developed. If we did not bring the damage on a unified basis, we could not have made either an early payment, a migration or a scheduled release, as this could not be done with one client having 100% coverage of its assets and the other only 44%. The alternative we offered was a risk-sharing settlement, where we diversified only in such a way that the client would take a larger proportion of the damage in exchange for some benefit. A good example of this is the completed migration, which allowed us to rationalise the USDC asset that suffered the most damage very quickly by converting the shortfall in coverage into long-term compensation. If we had not addressed the shortfall in collateral in a coherent way, we would have been unable to do any of these things and, in the absence of a rational solution, would have had to declare bankruptcy of the entity operating the Inlock platform.

Based on the above, the following three pieces of information form the basis for the settlement of claims with customers:

  • Collateral level: how much collateral we will have for client assets. Up to the coverage level, all clients will receive their assets “as is” without conversion.
  • Value of assets at default: the calculated dollar value of these assets has already been sent to clients participating in the Inlock Scheduled Release programme by email. This uniform value helps us to manage different customer needs in a uniform way. The calculation of the “value of assets at the time of loss” is described in our previous blog post.
  • Loss settlement rate in relation to the value of assets at the time of the claim: This is a percentage value that determines the extent to which losses above the level of cover are settled.

Below is a concrete example of what Inlock customers can expect if the claims settlement can be completed in the first half of 2025. For ease of reference, a case will be presented where the customer had 2 Bitcoin and 10,000 USDC on the platform at the time of the damage event and service suspension. The example assumes the following constants:

  • Uniform coverage level of customers: 80%
  • Loss settlement rate in relation to the value of assets at the time of the loss: 150%
  • Example client’s assets value at default: $43810.12

The claims settlement process:

  1. The example client is entitled to 80% of his assets on a “as-is” basis. If we assume that 24 scheduled payout rounds have already taken place before the moment of settlement, 62.4% of his assets have already been paid out, so the remaining part will be released without further conversions. So, customer balance will have 0.352 BTC and 1760 USDC available for freely withdraw.
  2. The additional 20% of the balance (both BTC and USDC) that is not covered will be burned and will be subject to a damage settlement. The calculation scheme for this is: settlement value = amount of assets burned * value of assets at default * loss settlement rate
  3. 0.4 BTC (uncovered), the settlement value is 10143.036 USDC (0.4 * 16905.06 * 1.5)
  4. 2000 USDC (uncovered), the settlement value is USDC 3000 (2000 * 1 * 1.5)
  5. So, in addition to the amounts indicated in point 1, the example client will receive a total of 13143.036 USDC in final settlement, which can also be immediately transferred from the Inlock platform.

❗️️️️️️️DISCLAIMER: The “Collateral level” and “Loss settlement rate” in the example above are only indicative preliminary estimates, which will be finalised once the pre-settlement isolation has been completed.

At the end of the claims settlement process, the assets will no longer be locked on the Inlock platform and our customers will be free to withdraw them.