Author: Alexandra Andhov, Forbes; Translated by: Baishui, Golden Finance
As FTX’s bankruptcy estate seeks to recover funds for creditors, it has filed 23 new lawsuits against entities including Binance, Anthony Scaramucci, SkyBridge Capital, Crypto.com, and even Mark Zuckerberg-backed lobbying group Fwd.us.
The lawsuits add to a growing list of legal actions aimed at recovering billions of dollars in losses from the dramatic collapse of cryptocurrency exchanges. Perhaps the most significant lawsuit is the $1.76 billion lawsuit against Binance and its former CEO Changpeng Zhao.
The focus turns to the question on many people’s minds: What does this mean for FTX’s defrauded investors? In 2022, FTX went from a respected and trusted cryptocurrency exchange to a bankrupt disgrace, losing more than $8 billion in investor funds. As such, this new lawsuit may offer a glimmer of hope for the thousands of people who lost funds in the FTX debacle — but the path to recovery is far from certain.
Allegations
The lawsuit alleges that the funds transferred to these organizations were part of a larger “influence buying campaign” orchestrated by FTX founder Sam Bankman-Fried. According to the filing, Bankman-Fried poured money into sponsorships, investments, and donations to boost his reputation in politics and traditional finance while masking FTX’s growing financial instability. For example:
SkyBridge Capital and Scaramucci: FTX acquired a 30% stake in SkyBridge in September 2022, just months before the company collapsed. In addition, FTX spent $12 million to sponsor Scaramucci's SALT conference and invested $10 million in SkyBridge's Coin Fund. In return, Scaramucci allegedly helped Bankman-Fried market to potential investors and even loaned him a suit and tie to attend conferences to enhance his professional image.
Fwd.us and Alameda Research: Payments to lobbying group Fwd.us have been described as part of a coordinated effort to siphon funds away from FTX creditors and boost the personal reputations of FTX insiders.
The lawsuit alleges that these expenditures provided “little to no benefit” to FTX or its creditors and were primarily intended to maintain the illusion of financial stability as the company grappled with a severe hole in its balance sheet. However, the courts may examine whether the responsibility for assessing the cost-benefit ratio of these decisions lies with the service providers or with the company’s management — Mr. Bankman-Fried and his board of directors?
What does this mean for defrauded investors?
For the thousands of retail investors and customers who lost money, these lawsuits are an important part of the bankruptcy agency’s strategy to recover assets. So far, the bankruptcy agency has launched 23 lawsuits (with more likely to come) aimed at recovering billions of dollars from numerous entities. If successful, even partially, these recovered funds could significantly increase the pool of assets available for distribution to investors.
However, this process is fraught with challenges:
Proving intent and misuse: The key to many of these cases is proving that funds were intentionally misused or diverted without legitimate business reason. This can be difficult, especially when the transactions involve high-profile partnerships and investments.
Scope of Recovery: Even if these lawsuits are successful, they will likely recoup only a fraction of the estimated $8 billion in investor losses. The amount recovered will also be impacted by administrative costs, bankruptcy expenses, and competing creditor claims.
Investor’s view: Confidence in cryptocurrencies
The collapse of FTX and the ongoing litigation highlight deeper problems in the cryptocurrency industry. For many defrauded investors, the issue is not just about recovering their funds, but rebuilding trust. The collapse of FTX revealed systemic governance failures, misuse of investor and customer deposits, and insufficient regulatory oversight. These issues have shaken confidence in the entire cryptocurrency market.
As such, the lawsuits are not just about holding FTX accountable for its collapse, but also about setting a precedent for investor protection. If the case is successful, it could herald a shift toward greater transparency and regulation, providing some comfort to cryptocurrency investors.
It not only benefits investors, but also the entire industry
If FTX’s assets can prove its claims, it could potentially recoup a significant portion of the funds lost in the stock buyback. However, the complexity of bankruptcy proceedings, legal challenges in proving intent, and a multitude of competing claims mean any recovery is likely to be slow. For defrauded investors, the lawsuit is a critical chapter in the saga of FTX’s collapse. While it may not result in full restitution, it represents an important step toward accountability in an industry often criticized for its lack of safeguards. Whether the case will ultimately lead to meaningful results for those who lost their savings remains to be seen.
FTX, led by founder Sam Bankman-Fried, was seen as a game-changer in the cryptocurrency industry before it collapsed in late 2022. Bankman-Fried was later sentenced to 25 years in prison for defrauding clients of $8 billion, although he has appealed the verdict. Meanwhile, Zhao Changpeng was sentenced to four months in prison earlier this year for violating U.S. anti-money laundering laws, and like many other cryptocurrency companies, Binance's reputation has come under increasing questioning.
While FTX’s legal team seeks compensation, the question remains: Will defrauded investors be able to recoup the billions they lost? The bigger question, however, is whether the industry will learn from these cases.
The cryptocurrency industry and blue sky laws
The whole story could be a turning point for the cryptocurrency industry, propelling it toward the kind of regulation that transformed U.S. stock exchanges a century ago.
Like the era before blue sky laws, when unregulated securities markets led to rampant fraud and mismanagement — effectively selling parts of the blue sky — the cryptocurrency industry has largely operated in the shadow of regulation.
The introduction of blue sky laws in the early 2000s actually marked some legitimacy for an industry that was plagued by fraud. And this is something that many cryptocurrency companies fail to realize or appreciate - yes, we can be excited about innovation and oppose any regulation, but it is regulation that opens the door to the market.
Blue sky laws require transparency and accountability, ultimately restoring investor trust and stabilizing financial markets. Likewise, the scrutiny brought about by the FTX debacle could catalyze the creation of a clearer regulatory framework for cryptocurrencies, fostering a safer, more reliable market for investors.
The question is not only whether defrauded creditors can recoup the billions they lost, but whether this moment can pave the way for a more sustainable, trustworthy crypto industry. As the legal battles drag on, the possibility of systemic change hangs in the balance, offering hope not only for investors but for the future of cryptocurrencies themselves.