In a bombshell development, bankrupt cryptocurrency exchange FTX has filed a lawsuit against rival Binance and its former CEO Changpeng “CZ” Zhao over an allegedly fraudulent buyback of shares by disgraced FTX founder Sam Bankman-Fried. The legal action, seeking a staggering $1.8 billion in damages, is poised to send tremors through the already turbulent crypto landscape.
The Controversial Buyback Deal
The crux of the lawsuit revolves around a July 2021 agreement in which Bankman-Fried negotiated to purchase Binance and Zhao’s stake in FTX, using a combination of FTX’s native FTT token and Binance-issued BSB and BUSD coins. At the time, the deal was valued at approximately $1.76 billion.
However, the transaction was funded by Bankman-Fried’s trading firm, Alameda Research, which FTX now alleges was insolvent at the time. According to a court filing, Alameda’s second-in-command, Caroline Ellison, had warned that they didn’t actually have the funds for the buyback and would need to borrow from FTX to complete it.
Allegations of Fraud and Worthless Tokens
FTX contends that it was already insolvent at the time of the transaction and that the FTT tokens used were essentially worthless. As such, the exchange argues that the transfer should be classified as fraudulent.
“The purchase was funded by Bankman-Fried’s trading firm, Alameda Research. However, Alameda was insolvent at the time, and second-in-command Caroline Ellison had warned that ‘we don’t actually have the money for this, we’ll have to borrow from FTX to do it,'” the court filing states.
The Spectacular Fall of FTX
The lawsuit comes in the wake of FTX’s spectacular collapse in November 2022, which was precipitated by revelations about the misallocation of funds between the exchange and Alameda Research, as first reported by CoinDesk. The implosion was accelerated by Binance and Zhao selling off their sizable FTT holdings, contributing to a plunge in the token’s value and exacerbating FTX’s liquidity crisis.
Bankman-Fried, once hailed as a crypto wunderkind, has since been sentenced to 25 years in prison on multiple fraud charges related to the exchange’s collapse.
Accusations Against Zhao and Binance
In addition to the allegations surrounding the share buyback, FTX accuses Zhao of deliberately attempting to harm his competitor by disseminating a series of tweets about the company that were “false, misleading, and fraudulent.” According to the filing, these actions destroyed value that FTX shareholders could have otherwise realized.
Binance has not yet responded to requests for comment on the lawsuit.
The Wider Implications
The high-stakes legal battle between two of the crypto industry’s most prominent players is likely to have far-reaching consequences. It threatens to shed further light on the opaque business practices and financial entanglements that have plagued the largely unregulated cryptocurrency sector.
As the case unfolds, it may also provide insights into the events leading up to FTX’s downfall and the role that its competitors may have played in the exchange’s demise. The outcome could have significant implications for the future of crypto regulation and the way in which exchanges interact with one another.
For now, the crypto community and wider financial world will be watching closely as two of the industry’s titans face off in what promises to be a riveting and consequential legal showdown. The repercussions of this lawsuit are likely to be felt far beyond the confines of the courtroom, as the crypto space grapples with the fallout of one of its biggest scandals to date.
