FTX Challenges 3ACs 1.5 Billion Claim Over Digital Assets

FTX Recovery Trust, the entity overseeing the liquidation of the bankrupt cryptocurrency exchange FTX, has submitted a comprehensive 94-page objection in the US Delaware bankruptcy court. The filing aims to completely dismiss the over $1.5 billion claim made by the failed hedge fund Three Arrows Capital (3AC).

The objection argues that 3AC’s claim is “unrealistic, unsupportable, and based on an erroneous assumption regarding the account balance.” FTX contends that 3AC has overstated the value of its digital assets. The claim by 3AC is rooted in the allegation that FTX held approximately $1.6 billion worth of digital assets on the platform at the time of its bankruptcy in November 2022. However, FTX’s records indicate that as of June 2022, the account was valued at only $284 million, which included a margin debt exceeding $733 million.

FTX asserts that 3AC disregarded the debt burden and attempted to present its highly leveraged positions as having “clean value.” According to the filing, a significant portion of the $284 million in assets vanished within just two days. The crypto market crash erased $222 million, while 3AC itself withdrew $60 million. FTX claims that it only liquidated one $82 million position after 3AC exceeded limits by failing to respond to margin calls, an action FTX maintains was in accordance with the contract and “prevented a negative account balance.”

The petition emphasizes that “FTX creditors should not be insured against 3AC’s failed trades. The hedge fund took risky positions and messed it up. FTX took action as those positions collapsed.” If the court rules in favor of FTX, 3AC’s claim could be entirely dismissed or significantly reduced to ordinary creditor status, meaning the fund would receive only a small fraction of the amount it is seeking.

The next hearing in this matter is scheduled for August 12. This development underscores the complex legal and financial challenges faced by FTX as it navigates its bankruptcy proceedings. The outcome of this objection could have significant implications for the distribution of assets among FTX’s creditors and the broader cryptocurrency industry.