FTX’s bankruptcy estate filed a lawsuit against Binance and its former CEO, Changpeng Zhao, on November 10, 2024, seeking to recover $1.76 billion. The lawsuit alleges that these funds were fraudulently transferred to Binance as part of a stock repurchase agreement in 2021.

The lawsuit highlights serious allegations of financial misconduct, business rivalry and actions that may have contributed to FTX’s collapse and subsequent bankruptcy.

The core allegations

At the heart of the lawsuit is a July 2021 deal in which FTX bought back Binance’s equity stake in the company. The complaint alleges that FTX, led by Sam Bankman-Fried, who currently has 25 years of service, used overvalued cryptocurrencies and customer deposits to fund this transaction despite being insolvent. Binance walked away with $1.76 billion in assets, while FTX’s repurchased shares were essentially worthless.

The lawsuit also alleges that this transaction was orchestrated to conceal FTX’s financial instability, sending a false signal of strength to the market. Internal testimony from Caroline Ellison, a top FTX executive, reveals that Bankman-Fried ignored warnings about the lack of funds and instead relied on deposits from FTX customers to complete the deal.

The role of Changpeng Zhao and Binance

The lawsuit accuses Binance CEO Zhao of orchestrating FTX’s demise by taking advantage of Binance’s market dominance. In November 2022, Zhao tweeted that Binance planned to liquidate $529 million worth of FTX’s FTT tokens. This caused a wave of panic, which caused an avalanche of withdrawals that affected FTX’s liquidity and saw its token value plummet from $24 to $2.30 in a matter of days.

FTX claims that Zhao’s tweets were part of a deliberate campaign to destroy its competitor and strengthen Binance’s market share. By the time FTX sought emergency financing, Zhao’s actions had already undermined confidence in the company, sealing its fate.

The evidence presented

• Transactions and recordsDocuments show the repurchase deal involved Alameda Research, a subsidiary of FTX, which used customer deposits to fund the payments.
• Testimonials: Ellison’s testimony revealed that Alameda was insolvent at the time and did not have sufficient resources to complete the transaction.
• Market impact: Following Zhao’s tweets, FTX suffered unprecedented customer withdrawals, with $6 billion exiting the exchange in just two days.
• Public statements: Bankman-Fried misled the public, claiming the deal was funded entirely by Alameda’s profits, while Zhao’s tweets hid an alleged intent to destabilize FTX.

Prove a purpose

FTX’s bankruptcy administrators are seeking to recover the aforementioned $1.76 billion for the benefit of creditors, along with damages. However, Binance has dismissed the claims as baseless and vowed to defend itself in court. It won’t be easy to show the CEO’s intentions; However, if Binance was somehow taking advantage of FTX’s customers and there was a brief email or communication showing that it was indeed designed this way, intent could be proven.

Proving intent in these types of cases is a significant legal challenge. Intent often depends on demonstrating that actions are deliberately calculated to achieve a specific outcome, such as favoring one party at the expense of another. For FTX administrators, establishing intent may require uncovering communications (such as emails, messages, or internal documents) that explicitly show an awareness of the fraudulent nature of the transactions or a coordinated effort to harm FTX while benefiting Binance.

The lawsuit presents a detailed account of actions and statements that FTX alleges were part of a deliberate strategy to destabilize its operations. The following points summarize the key evidence aimed at establishing intent:

Coordinated public statements and market impact

FTX accuses Zhao of using his public platform to cause market panic. On November 6, 2022, Zhao announced Binance’s plan to liquidate its FTT holdings, ostensibly for ‘risk management’. However, FTX claims this was part of a calculated attempt to harm its competitor. The resulting market panic caused an unprecedented spike in customer withdrawals, from $18 million per hour to $150 million per hour. This overwhelmed FTX’s liquidity and ultimately caused its collapse.

False and misleading claims

The lawsuit highlights Zhao’s alleged false statements, including claims that Binance’s actions were routine and unrelated to competition. Furthermore, Zhao later suggested that Binance’s due diligence revealed new issues with FTX’s finances, further eroding confidence in the exchange. FTX claims that these statements were deliberately misleading, intended to prevent the company from securing alternative financing and hastening its demise.

Leaked financial information

FTX claims that Binance leaked confidential financial data from its trading arm, Alameda Research, to the media. This leak resulted in a damaging article that raised questions about FTX’s solvency, exacerbating market anxiety. FTX claims that this leak was part of Binance’s campaign to undermine its stability.

Influence campaigns

Binance has been accused of funding influencers and using social media to increase distrust in FTX. These efforts were reportedly aimed at criticizing FTX’s pro-regulation stance, positioning Binance as a platform of choice in the eyes of the crypto community.

Restrictive Exclusivity Agreement

During discussions about a possible acquisition, Binance signed a letter of intent with an exclusivity clause that prevented FTX from seeking other financing. The lawsuit alleges that this agreement and Zhao’s public statements limited FTX’s ability to recover and misled the market about Binance’s true intentions.

Conspiracy versus bad governance: the underlying issue

Even if the accusations against Binance and Changpeng Zhao are true – that they deliberately leaked information and stoked market panic – it raises the question of whether such actions alone would have been enough to take down FTX.

Every market thrives on competition, crypto even more so, and companies often seek dominance through strategic maneuvers. While Binance’s alleged actions may have exacerbated FTX’s collapse, they took place in a highly competitive, but largely unregulated industry.

Although this lawsuit might bring more clarity to what happened and why. The real problem remains: the FTX’s glaring lack of internal governance and necessary regulatory oversight due to the limited regulation as such.

The evidence presented in the lawsuit shows that FTX and its trading arm, Alameda Research, were insolvent long before the alleged sabotage. Mismanagement, including the misuse of customer deposits to finance risky ventures, created a fragile foundation that could not withstand external pressure. This mismanagement, compounded by opaque practices and the absence of robust oversight, ultimately left the FTX vulnerable to collapse.

Although this case is set in the world of cryptocurrency, it is fundamentally not about the technology or the crypto industry itself. It is a stark reminder of the consequences of poor governance and regulatory gaps. Had FTX adhered to stronger internal controls, transparency and sound financial practices, external pressure – however calculated – might not have led to its demise. The broader lesson here is not just about competition, but about the urgent need for better governance frameworks and regulatory standards in both traditional and emerging financial markets.