Now-defunct cryptocurrency exchange FTX is currently embroiled in a complex and time-consuming legal battle as creditors attempt to recover over $8 billion in assets. Unlike other crypto bankruptcies, the case against FTX involves multiple parties fighting over remaining funds, making the legal process more challenging.
Extended Litigation Expected
Alan R. Rosenberg, a partner at Markowitz Ringel Trusty & Hartog, predicts that the FTX case will be prolonged due to the litigation of various clawback claims. Clawback claims aim to recover funds that were paid out by FTX leading up to its insolvency. With the involvement of large organizations capable of defending themselves, negotiating settlements outside of court can be time-consuming.
Complications Arise from Unresolved Issues
In addition to fighting against clawback claims, FTX is also facing a significant $24 billion claim from the Internal Revenue Service (IRS) for unpaid taxes. This further complicates the bankruptcy proceedings. The cryptocurrency exchange has settled mutual adversary complaints with Genesis, another crypto firm going through bankruptcy proceedings. However, there are still unresolved complaints against FTX and Alameda Research, an FTX-affiliated trading firm.
- A $1 billion lawsuit against crypto exchange ByBit
- An attempt to recover $71 million from FTX’s philanthropic arm
- Seeking reimbursements from multiple celebrities for promotional activities
Additionally, potentially fraudulent transactions have been identified by the bankruptcy estate, resulting in FTX suing its former CEO, Sam Bankman-Fried, and other former executives, including Bankman-Fried’s parents. More lawsuits related to FTX’s investments and political donations may arise in the future.
Challenges in Valuing Cryptocurrencies and Paying Creditors
Valuing cryptocurrencies over time is a key issue in this type of litigation, as there is a lack of definitive case law on the matter. This is also true for deciding how creditors should be paid, whether in cryptocurrencies or fiat money. Currently, there are no official rules governing these complexities.
Legal experts, including Rosenberg, are hopeful that as the number of crypto bankruptcies increases and cryptocurrencies become more mainstream, new rules will be established to address these challenges.
Although US prosecutors have dropped certain charges against Sam Bankman-Fried, including allegations of foreign bribery and bank fraud, the dropped charge of unlawful political donations has raised concerns within the crypto community. Bankman-Fried’s substantial political contributions to politicians from both major parties have been well-documented. Prosecutors alleged that he used customer funds of $100 million for political donations. Coinbase’s Chief Legal Officer, Paul Grewal, has expressed dissatisfaction, denouncing the decision as a “miscarriage of justice.”
