Bankrupt Crypto Companies Are Fighting Over a Dwindling Pot of Money
The liquidator of bankrupt crypto exchange FTX is trying to retrieve nearly $4 billion for creditors—from another bankrupt crypto firm. After a hearing on June 15, a court in the Southern District of New York will decide whether to let FTX pursue Genesis Global Capital (GGC), a crypto lender, over payments said to have been made shortly before the exchange’s collapse amid allegations of fraud.
GGC, which filed for bankruptcy in January after being caught in the blowback from FTX’s implosion, only has about $5 billion in assets. If the court allows FTX to go ahead, a zero-sum legal battle will ensue. “If all the FTX claims are legitimate,” explains Ram Ahluwalia, CEO of wealth management firm Lumida Wealth, “the recoveries for Genesis creditors will be very low.”
The impending legal battle underscores how tightly connected major crypto players had become before trouble started brewing in the markets a year ago. First, the collapse of FTX helped pull down other crypto companies, leaving many people out of pocket. Now creditors have to wait through the slow and painful unraveling of the various businesses’ intertwined estates.
FTX, now under the management of Enron liquidator John Ray III, did not respond to a request for comment, nor did GGC or its parent company, Digital Currency Group.
The basis of FTX’s claim against GGC are provisions in US bankruptcy laws designed to ensure that everyone owed money by a failed business receives a fair share. The law gives liquidators a right to recall any payments made by a stricken company in the 90 days prior to the bankruptcy, to avoid a scenario where creditors who pull their money out quickest get the biggest share of the pot.
GGC and FTX’s business relationship was substantial. The former provided Alameda Research, FTX’s sister company, with large loans—at one point amounting to nearly $8 billion—to fund its capital-intensive crypto bets, while GGC used FTX for its own crypto trading activity. The court motion filed by FTX’s liquidator describes GGC as “one of the main feeder funds” to FTX and therefore “instrumental to its fraudulent business model.”
To fund its loans, GGC borrowed from individuals and institutions that owned large quantities of crypto, who received a cut of the profits in return. But this arrangement, combined with its close ties to FTX, made GGC triply vulnerable to trouble at the exchange.
Not only did GGC have $175 million locked up on the FTX platform at the time of the bankruptcy, but the ensuing panic led to a surge in attempts by customers to redeem crypto from GGC. 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. (Genesis Global Trading, the brokerage arm, remains active and solvent.)
Now, GGC has to fend off FTX’s clawback claim too. The suit alleges that Alameda paid GGC $1.8 billion in loan repayments and $270 million in collateral pledges, and that the lender—and non-bankrupt affiliate GGC International Limited—withdrew $1.8 billion from FTX’s trading platform, all in the 90 days before the exchange filed for bankruptcy. FTX claims each of these transactions should be reversed.
Source: WIRED
