The bankruptcy estate of FTX 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 2021 share buyback agreement.

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

The basic charges

At the heart of the process is a business from July 2021, when FTX bought back Binance shares share in the company. The complaint alleges that FTX, led by Sam Bankman-Fried, who is now over 25 years old, used overvalued cryptocurrencies and customer deposits to finance this transaction despite being insolvent. Binance walked away with $1.76 billion in assets, while FTX’s redeemed shares were essentially worthless.

The lawsuit also alleges that this transaction was orchestrated to hide 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 of a lack of funds and instead relied on deposits from FTX customers to complete the transaction.

The role of Changpeng Zhao and Binance

The lawsuit accuses Binance CEO Zhao of orchestrating the downfall of FTX by capitalizing on Binance’s market dominance. In November 2022, Zhao tweeted that Binance was planning to liquidate $529 million worth of FTX’s FTT tokens. This triggered a wave of panic, causing an avalanche of withdrawals that drained FTX of liquidity and caused the token’s value to drop from $24 to $2.30 within days.

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

The evidence presented

• Transactions and Records: The documents show that the buyout transaction involved Alameda Research, an FTX subsidiary, which used customer deposits to fund the payments.
• TESTIMONIES: Ellison’s testimony revealed that Alameda was insolvent at the time and did not have sufficient funds to complete the transaction.
• Market impact: Following Zhao’s tweets, FTX experienced unprecedented customer withdrawals, with $6 billion leaving the exchange in just two days.
• Public statements: Bankman-Fried misled the public by claiming the deal was funded entirely from Alameda profits, while Zhao’s tweets concealed an alleged intent to destabilize FTX.

Demonstrating an intent

FTX’s bankruptcy trustees are seeking to recover the aforementioned $1.76 billion for the benefit of creditors, along with punitive damages. Binance, however, dismissed the claims as without merit and vowed to defend itself in court. Showing the CEO’s intent won’t be easy; however, if Binance somehow benefited FTX customers and there was a brief email or communication showing that it was indeed intended to be so, intent could be proven.

Proving intent in such cases is a significant legal challenge. Intent often depends on showing that the actions were deliberately calculated to achieve a particular result, such as the advantage of one party at the expense of another. For FTX administrators, establishing intent may require discovery of communications—such as e-mails, 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 provides a detailed description 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 its public platform to panic the market. On November 6, 2022, Zhao announced Binance’s plan to liquidate its FTT holdings, apparently for “risk management.” However, FTX claims this was part of a calculated effort to harm its competitor. The resulting market panic triggered an unprecedented surge in customer withdrawals, rising from $18 million an hour to $150 million an hour. This overwhelmed the liquidity of FTX and ultimately caused the crash.

False and misleading statements

The lawsuit highlights Zhao’s allegedly false claims, including claims that Binance’s actions were routine and unrelated to competition. In addition, Zhao later suggested that Binance’s due diligence revealed new issues with FTX’s finances, further eroding confidence in the exchange. FTX alleges that these statements were deliberately misleading, designed to prevent it from securing alternative financing and hasten its downfall.

Leaks of financial information

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

Influence campaigns

Binance is accused of funding influencers and using social media to amplify distrust of FTX. These efforts have apparently focused on criticizing FTX’s pro-regulation stance, positioning Binance as the platform of choice in the eyes of the crypto community.

Restrictive Exclusivity Agreement

During discussions about a potential 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 vs. bad governance: the core problem

Even if the allegations against Binance and Changpeng Zhao are true – that they deliberately leaked information and fueled market panic – the question arises whether such actions alone would have been enough to destroy FTX.

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

Although, this suit could shed more light on what happened and why. The real problem remains – FTX’s glaring lack of internal governance and regulatory oversight required due to limited regulation as such.

Evidence presented in the trial shows that FTX and its commercial 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 pressures. This mismanagement, compounded by opaque practices and the absence of robust oversight, ultimately made FTX vulnerable to collapse.

Although this case is set in the world of cryptocurrency, it is basically not about the technology or the crypto industry itself. It is a stark reminder of the consequences of bad governance and regulatory loopholes. Had FTX adhered to stronger internal controls, transparency and sound financial practices, external pressures – no matter how calculated – might not have led to its downfall. 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.