In the latest legal twist in the FTX bankruptcy, the trustee's have filed a lawsuit against Binance and its former CEO, Changpeng Zhao (known as “CZ”), seeking damages over the USD$1.8 billion sale of Binance’s stake in the exchange and alleged involvement in its subsequent collapse. The suit alleges that FTX’s funds were fraudulently transferred to Binance in a 2021 share buyback deal, orchestrated by former FTX executives, including Sam Bankman-Fried. The complaint also makes various allegations of misrepresentation, fraud and injurious falsehood over Binance and CZ’s conduct in the final days before its collapse.
Background
The lawsuit relates to Binance’s 2019 investment in FTX, which it later agreed to sell back to the company in 2021. According to FTX’s lawsuit, its affiliated trading arm, Alameda Research, funded the deal using customer deposits, tokens, and overvalued digital assets. At the time, FTX was allegedly insolvent, and its bankruptcy administrators now argue that it could not have legitimately afforded the transaction.
They claim that this buyback weakened FTX’s financial stability, ultimately deepening its financial woes and setting it on a path toward collapse in late 2022.
FTX’s bankruptcy administrators argue that recovering these funds is critical for compensating its creditors, and they are also seeking punitive damages from Binance. Binance denies the allegations, stating they are “meritless” and promising a rigorous defense. Given there have been prior statements that all customer creditors will be paid 118% of their claims full from assets presently held in the estate, it's unclear what the proceeds of any lawsuit will be put towards, but perhaps they can help defray the ongoing legal costs.
A competitive history
The lawsuit highlights the fierce rivalry between Binance and FTX, two of the largest cryptocurrency exchanges at the time, competing in a rapidly expanding but volatile market. In November 2022, as rumors began circulating about FTX’s liquidity, CZ publicly announced that Binance would liquidate its holdings of FTX’s native token, FTT. The announcement triggered a cascade of customer withdrawals from FTX, contributing to the exchange’s liquidity crisis. Binance then made a conditional offer to buy FTX subject to due diligence but determined not to proceed. Within days, FTX filed for bankruptcy.
FTX’s lawsuit claims that Zhao’s announcement was part of a coordinated effort to destabilise the exchange (and going as far as to say CZ conducted a campaign to "destroy" FTX), citing massive customer withdrawals and FTT’s plummeting value. They argue that Zhao’s statements and actions undercut any chance FTX might have had to secure emergency funding or stay afloat.
Intent and the Challenge of Proving It
FTX’s legal team face an arguably herculean task in proving that Binance (and by extension, CZ) intentionally aimed to harm its rival, especially in a competitive industry known for sharp moves between firms. The case will likely turn on any evidence of intent, including internal documents and testimonies, that might demonstrate whether Binance (and CZ) deliberately sought to harm FTX for their own gain.
Beyond the immediate legal battle, this case emphasises the need for more robust governance and transparency in the sector. FTX’s use of customer deposits, its opaque financial practices, and the lack of internal oversight all played a part in its downfall, and critics argue that stronger regulatory frameworks might have prevented its collapse.
Conclusion
As the lawsuit unfolds, it will not only shed light on the events leading to FTX’s bankruptcy, but may also underscore the risks inherent in an under-regulated crypto market where competitive pressures and financial misconduct can spell disaster.
Written by Steven Pettigrove and Luke Higgins with Michael Bacina
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