The liquidator of FTX, a major cryptocurrency exchange, is trying to recover almost $4 billion for creditors from another bankrupt cryptocurrency firm, Genesis Global Capital (GGC). But GGC has only $5 billion in assets, meaning that if FTX is allowed to pursue GGC, it would result in a legal battle with low recoveries for Genesis creditors. The court in the Southern District of New York will decide on June 15 whether to allow FTX to go ahead with its claims over payments made shortly before the exchange’s collapse, amid allegations of fraud.
Zero-Sum Legal Battles Sparked By Crypto Bankruptcies
US bankruptcy laws state that everyone owed money by a failed business should receive a fair share, and liquidators have the right to recall any payments made by a stricken company in the 90 days before its bankruptcy. FTX’s case is that GGC is instrumental to its fraudulent business model and should therefore have its payments reversed. GGC lent money to Alameda Research, FTX’s sister company, but was caught in the blowback from FTX’s collapse.
At the time of the bankruptcy, GGC had $175 million locked up on the FTX platform, which led to a surge in redemptions. Unable to meet the influx, GGC was forced to suspend withdrawals as it sought an emergency cash injection, and ultimately, to file for bankruptcy itself. Hence, FTX claims that each transaction GGC made with FTX should be reversed.
Legal Experts Skeptical About FTX’s Chances in Clawback Claim
Legal experts are concerned that all other creditors in GGC’s bankruptcy could be affected if FTX’s $4 billion clawback claim is successful, especially as Gemini, the cryptocurrency exchange run by Cameron and Tyler Winklevoss, is the largest GGC creditor after FTX. Gemini’s yield farming service, Gemini Earn, fed into GGC’s loan book, with $900 million of its customers’ assets locked inside when GGC filed for bankruptcy. However, even if the New York judge allows FTX’s claim to continue, the case may never get to court, with clawback cases almost always resulting in a settlement.
