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FTX's Complex Legal Battle and Cryptocurrency's Murky Path

FTX is now the central player in a high-stakes drama, a battle set over several years, now with a staggering $8 billion
By Josefina Dipaolo
January 4, 2024

In a legal saga that could stretch across years, the now-defunct cryptocurrency exchange, FTX, finds itself entangled in a high-stakes battle as creditors strive to recover a staggering $8 billion. This gripping legal drama, initiated in November, takes a unique twist, setting it apart from other crypto bankruptcies, as multiple parties grapple for the remaining assets. Renowned legal expert Alan R. Rosenberg foresees a prolonged skirmish, attributing the complexity to the litigation of clawback claims seeking to recoup funds disbursed in the lead-up to FTX's insolvency.

The FTX case, laden with clawback claims, unveils a multifaceted challenge, with significant sums involved and heavyweight organizations defending their interests. Rosenberg suggests that the magnitude of these claims, coupled with the formidable adversaries, might elongate the legal proceedings. While settlements typically resolve such disputes, the involvement of large entities could extend negotiations, adding an extra layer to the legal tussle.

In a legal quagmire, FTX not only confronts clawback claims but also grapples with an imposing $24 billion demand from the Internal Revenue Service (IRS) for unpaid taxes, intensifying the intricacies of its bankruptcy proceedings. Despite settling mutual adversary complaints with Genesis, a fellow crypto firm navigating bankruptcy, FTX faces unresolved issues, including a $1 billion lawsuit linked to crypto exchange ByBit.

At the heart of the legal conundrum lies the challenge of determining the value of cryptocurrencies over time, a critical factor in the ongoing litigation. The lack of definitive case law on valuing cryptocurrencies in avoidance action litigation poses a hurdle, with the 2014 bankruptcy case of HashFast offering a potential precedent. Another complexity arises in deciding how creditors should be compensated—whether in cryptocurrencies or fiat money—with no official rules currently governing this matter.

Legal experts, including Rosenberg, express hope that the surge in crypto bankruptcies and the mainstream adoption of cryptocurrencies will prompt the establishment of new rules to address these intricate challenges.

As the FTX legal battle unfolds, the labyrinthine nature of the cryptocurrency landscape comes to the forefront. With unresolved claims, potential fraudulent transactions, and lawsuits involving former executives, including CEO Sam Bankman-Fried, the path ahead remains convoluted. The crypto community watches closely, aware that this legal quagmire could not only reshape FTX's fate but also set crucial precedents for the evolving world of cryptocurrency litigation. The decision not to pursue specific charges against Bankman-Fried adds a layer of controversy, leaving industry leaders, such as Coinbase's Chief Legal Officer, Paul Grewal, to voice concerns about what they perceive as a "miscarriage of justice" on social media. As the legal tapestry weaves its intricate pattern, the implications for FTX and the broader crypto sphere remain shrouded in uncertainty.

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