FTX vs. LayerZero: $85 Million Crypto Clash Unveiled in New Lawsuit

Just when you thought the FTX saga couldn’t get any more dramatic, another chapter unfolds. The FTX estate, still picking up the pieces after the colossal exchange collapse, has launched a lawsuit against LayerZero Labs, a prominent name in blockchain infrastructure. At the heart of this legal battle? A contentious $85 million, tied to transactions made in the shadow of FTX’s downfall.

Why is FTX Suing LayerZero? The $85 Million Question

The core of the lawsuit revolves around two key financial movements:

• The $45 Million Deal: A transaction involving Alameda Research’s ownership stake in LayerZero, orchestrated just days before FTX’s bankruptcy filing.
• The $40 Million Withdrawals: Substantial withdrawals from FTX accounts by LayerZero and its former COO, Ari Litan, in the 90 days leading up to the bankruptcy.

Let’s break down each of these points to understand what’s fueling this crypto courtroom drama.

The $45 Million Transaction: A Lifeline or a Red Flag?

Imagine this: it’s November 2022, and the crypto world is starting to feel tremors of what’s to come with FTX. Just four days before the exchange officially filed for bankruptcy, Caroline Ellison, then CEO of Alameda Research (FTX’s sister trading firm), greenlit a significant transaction. Alameda decided to sell its 5% ownership stake in LayerZero. Now, LayerZero wasn’t just any company; it was valued at a staggering $150 million at the time. The deal? LayerZero would forgive a $45 million loan they had previously extended to Alameda in exchange for this equity.

The FTX estate, led by the current CEO John Ray III, is now arguing that this transaction is invalid. Why? Because they claim FTX was already insolvent when this deal went down. Under bankruptcy law, transactions made when a company is insolvent can be deemed illegal and reversed to protect creditors. The lawsuit aims to nullify this transaction, essentially clawing back that $45 million for the benefit of those owed money by FTX.

But wait, there’s more to this deal…

The Stargate Token Twist: $25 Million Purchase Turns into $10 Million Sale

Alongside the equity swap, another transaction raises eyebrows. Alameda had also agreed to sell 100 million Stargate (STG) tokens to LayerZero for $10 million. Here’s the kicker: Alameda had bought these very same tokens earlier in the year for a whopping $25 million. That’s a significant loss on paper!

Things got even more complicated when LayerZero tried to regain control of these tokens by reissuing them to a wallet they controlled. However, the FTX estate stepped in, threatening legal action, and successfully blocked this move. This detail highlights the tangled web of transactions and assets the FTX estate is currently trying to untangle.

$40 Million in Withdrawals: A Pre-Bankruptcy Dash for the Exit?

Beyond the $45 million transaction, the lawsuit also targets a substantial $40 million in withdrawals made by LayerZero and Ari Litan from FTX platforms in the 90 days leading up to the bankruptcy. This period is crucial under bankruptcy law as it’s considered the ‘preference period’. Any payments made to creditors during this time, when the company is presumed to be nearing insolvency, can be clawed back if they are deemed ‘preferential transfers’.

Let’s break down these withdrawals:

• LayerZero’s FTX.com Withdrawals: A significant $21 million was withdrawn from LayerZero’s FTX.com account. Interestingly, a large chunk of this, around $16 million, was taken out before the major FTX liquidity crisis became public knowledge. The remaining $5 million was withdrawn on November 7th, coinciding with LayerZero’s call for the Alameda loan repayment.
• Ari Litan’s FTX.US Withdrawals: Ari Litan, LayerZero’s former COO, is also named in the lawsuit. He allegedly withdrew $19.6 million from FTX.US accounts in the days leading up to the bankruptcy, both personally and through his LLC, Skip & Goose.

The FTX estate argues these withdrawals are ‘preferential transfers’ under Section 547 of the Bankruptcy Code and are therefore subject to being reversed. Essentially, they want this money back too.

A Close Relationship Gone Sour?

Adding another layer to this complex situation is the previously close relationship between FTX and LayerZero. The lawsuit itself points out that the FTX Group had hosted LayerZero staff and even invested in LayerZero back in January 2022. This detail paints a picture of a once-strong partnership now turned adversarial in the aftermath of the FTX collapse.

As of now, LayerZero Labs has remained silent, not responding to requests for comment. Their side of the story is yet to be heard, leaving many questions unanswered.

What Does This Mean for the Crypto World?

This lawsuit is more than just a dispute between two companies. It’s a significant development in the ongoing FTX bankruptcy saga and has broader implications for the cryptocurrency industry:

• Creditor Recovery: For FTX creditors, every dollar recovered by the estate is crucial. This lawsuit is part of a larger effort to maximize the funds available to compensate those who lost money in the FTX collapse.
• Bankruptcy Law in Crypto: The case will further test the application of traditional bankruptcy laws to the novel and often complex world of cryptocurrency transactions. How insolvency is defined and proven in crypto, and how ‘preferential transfers’ are interpreted in this context, will be closely watched.
• Transparency and Scrutiny: The lawsuit highlights the intense scrutiny and legal battles that can arise from the collapse of major crypto entities. It serves as a reminder of the risks involved in the industry and the potential for prolonged legal fallout.

The Road Ahead: What’s Next?

The lawsuit is still in its early stages. LayerZero is expected to respond, and the legal proceedings could be lengthy and complex. Key questions remain:

• Will LayerZero defend the transactions and withdrawals?
• What evidence will the FTX estate present to prove insolvency at the time of the transactions?
• How will the court interpret bankruptcy law in the context of these crypto-specific transactions?

The outcome of this case could set precedents for future crypto bankruptcy proceedings and further illuminate the intricate financial dealings that occurred in the lead-up to the FTX downfall.

In Conclusion: The FTX Ripple Effect Continues

The FTX saga continues to ripple through the crypto world, and the lawsuit against LayerZero Labs is just the latest wave. This $85 million legal battle underscores the far-reaching consequences of FTX’s collapse and the relentless efforts to recover funds for creditors. As the case unfolds, it will undoubtedly provide more insights into the inner workings of FTX and the legal complexities of navigating crypto bankruptcies. One thing is clear: the FTX story is far from over.