Lawsuits Pile Up at End of Digital Asset Markets’ Rough 2022

2022 was generally a rough year for digital asset markets. In May, the Terra stablecoin depegged, causing the Terraform Labs ecosystem to disintegrate (and Do Kwon is still on the run as of 12/28/2022). This caused a domino effect leading to the bankruptcy of some large organizations and left others scrambling for bailouts. For a while, it seemed like FTX was merely one of a few sharks circling in the crypto water, hoping to snap up assets at favorable terms.

Then FTX had a rapid meltdown after Changpeng Zhao’s tweet that Binance was going to sell off its FTT holdings. Zhao denies that he caused the problem. His tweet was probably just the final staw. FTX is more likely to have been a victim of mismanagement and fraudulent activity on the part of its senior staff members than a direct casualty of a competing crypto exchange’s CEO’s tweet or Terra’s meltdown.

FTX bankruptcy came with its backing out of acquisition and bailout deals and freezing of customer assets. Voyager Digital had to scramble to find another buyer – which coincidentally (or not) turned out to be Binance.US. BlockFi declared bankruptcy and is currently engaged in a legal tug-of-war with FTX and Sam Bankman-Fried over some Robinhood shares. Genesis Trading had to freeze withdrawals for its brokerage division, which led to Gemini having to pause withdrawals for its Gemini Earn product.

So … yeah. It’s been a bad year for crypto. Even Tether gave us a scary moment on November 10, though that could have been Alameda Research shorting USDT as one final flex of Sam Bankman-Fried’s former crypto empire. However, there are professional investors like Kevin O’Leary who think crypto can recover, as seen in the below video.

Send in the attorneys!

Predictably, the FTX meltdown and its fallout led to another round of lawsuits being filed. Most recently, FTX users filed paperwork asking the U.S. Bankruptcy Court for the District of Delaware to prioritize repayment of the value of their holdings on FTX, plus damages. The plaintiffs alleged that FTX’s senior staff misappropriated their assets to execute risky trading strategies at Alameda Research and fund their lifestyles, including buying expensive luxury properties in the Bahamas. They also asked that the court grant their lawsuit class-action status. The U.S. Bankruptcy Court for the District of Delaware is currently presiding over the FTX case.

“FTX executive defendants failed to institute any corporate controls and were therefore able to cause, direct or allow the misappropriation of billions of dollars in customer funds and digital assets deposited or held worldwide at FTX,” the plaintiffs wrote in their court filing.

Besides sometimes losing access to their funds when FTX froze withdrawals, some celebrities who promoted FTX are facing lawsuits from investors. Defendants in the lawsuits include Tom Brady and “Shark Tank” investor Kevin O’Leary.

Investors who had money on Gemini Earn when it froze withdrawals recently filed a separate lawsuit alleging that Gemini failed to properly register the deposits as securities with the SEC. Genesis Trading had functioned as Gemini Earn’s main borrower but had to pause redemptions after $175 million in its assets were frozen on FTX. A company that went bankrupt during the Terra fallout, Three Arrows Capital, also owed Genesis Trading $1.2 billion – a loss that Genesis’ parent company, Digital Currency Group, tried to absorb. Genesis Trading is likely to face a bankruptcy of its own.

Gemini Earn got hit hard by Genesis Trading’s financial problems. The plaintiffs in the Gemini Earn case allege that they lost money when Genesis failed to return the money it owed.

According to the paperwork, the plaintiffs allege that Gemini Earn “refused to honor any further investor redemptions, effectively wiping out all investors who still had holdings in the program, including plaintiffs.”

Naturally, processing a bankruptcy can take several months or even years and the creditors may not get all their money back, if they get any at all. Just ask the investors who lost their bitcoin when the Mt. Gox exchange stopped operations and filed for bankruptcy in 2014. (Yes, there was at least one lawsuit.) At the time, Mt. Gox CEO Mark Karpeles expressed confidence that bitcoin would recover from the exchange’s collapse – and it did in spades.

“The bitcoin industry is healthy and it is growing. It will continue, and reducing the impact is the most important point,” he said at the time.

Despite the rough year that the digital asset industry had in 2022, longtime supporters expressed confidence that it could recover because it is bigger than a few exchanges and lending platforms, even big ones like FTX or Gemini. The bankruptcies and lawsuits just need work their way through the courts.