Rashomon Reappears: The $1.5 Billion Dispute Between FTX and Three Arrows Capital

The cryptocurrency world is once again stirred. On June 23, the FTX bankruptcy liquidation team submitted a significant document to the court, thoroughly denying the claim of up to $1.53 billion from Three Arrows Capital (3AC) and requesting the judge to dismiss it entirely. This move escalates the "battle of the undead" that has lasted for years, as two defunct crypto empires engage in a new round of confrontation in court, opening a new chapter in the most controversial event in crypto history.

To understand this complex dispute, we first need to recognize three key figures and the stories behind them.

First is Sam Bankman-Fried (SBF), the founder of the FTX empire. Before its collapse in 2022, he was seen as the savior of the crypto world, sought after by the media and politicians. However, when his empire came crashing down, people realized that this "white knight" was nothing more than a fraudster sentenced to 25 years in prison.

Next are the founders of Three Arrows Capital, Su Zhu and Kyle Davies. They are known for their aggressive investment strategies and massive leverage, having been hailed as the "gamblers" of the crypto world. However, when the market turned, their myth was shattered, and after the company's bankruptcy, the two staged a global escape.

Finally, there is John Ray III, an experienced bankruptcy liquidation expert. He has dealt with one of the largest fraud cases in American history—the bankruptcy liquidation of Enron. When he took over the mess of FTX, even this well-versed "King of Liquidation" was shocked.

In 2022, the tsunami in the crypto market triggered by the collapse of Terra/LUNA swept in. Three Arrows Capital was the first to be hit and quickly sank. A few months later, the seemingly unbreakable FTX also suddenly imploded, exposing a huge scam.

Now, in the bankruptcy court of Delaware, these two collapsed giants are engaged in a fierce debate over a $1.53 billion debt. Three Arrows claims that FTX conducted an improper liquidation on them as they were on the verge of collapse. FTX counters that Three Arrows went bankrupt due to its own excessive risk-taking and should not seek compensation from other victims.

Is this a shameless extortion or a belated pursuit of justice? To unravel this mystery, we need to return to the tumultuous summer of 2022 and uncover the truths that have been deliberately concealed.

One contract, two interpretations

In court, the lawyers for both sides presented completely different versions.

FTX's narrative is a story about "order and rules." They claim to be a dutiful "platform warden." In their account, Three Arrows Capital is an unruly high-stakes gambler. When the market became turbulent, Three Arrows' accounts suffered significant losses, violating contractual agreements. FTX repeatedly requested additional margin, but Three Arrows ignored them and even withdrew substantial funds from accounts on the brink of danger. In response to this situation, FTX stated that their actions were entirely procedural and aimed at protecting the platform and other customers' interests.

The FTX legal team emphasized that the creditors of FTX should not bear the cost of Three Arrows' failed trades. They are trying to portray FTX as a "responsible gatekeeper" that protects everyone in the storm.

The version from Three Arrows Capital tells a story of "conspiracy and pursuit." When the liquidators took over the company, they found the office in disarray, with hardly any useful records to be found. In the absence of information, they could initially only submit a preliminary claim of $120 million to FTX.

However, when they finally obtained the original trading data from FTX, an astonishing fact came to light: within just two days of FTX claiming to liquidate positions, assets worth up to $1.53 billion in the Three Arrows account were almost completely depleted. This discovery prompted Three Arrows to significantly increase the amount of their claims.

A key ruling by the judge supports Three Arrows' claims. He believes that the reason Three Arrows delayed amending the claims for so long was largely due to FTX's repeated delays in providing crucial data. This judicial finding adds credibility to Three Arrows' "conspiracy theory."

The Core of the Scam: Alameda's Crisis

To understand this complex situation, we need to peel back the layer of SBF's "white knight" disguise and see what was actually happening inside his empire in June 2022, when he was ostensibly saving the market.

The key witness is SBF's ex-girlfriend, Caroline Ellison, who is the head of Alameda Research. During SBF's criminal trial, she revealed a shocking secret as a whistleblower. She confirmed that in the same week FTX liquidated Three Arrows Capital for "insufficient margin," Alameda also suffered huge losses due to the market crash, with a gap of billions of dollars appearing on its balance sheet.

Faced with pressure from creditors, Caroline admitted that it was SBF who instructed her to "borrow" billions of dollars from FTX clients' funds to repay Alameda's debts. This testimony reveals the core of the entire incident: while FTX played the role of a "ruthless enforcer" to the outside world, its affiliated company Alameda was illegally misappropriating FTX clients' funds to cover its own losses.

Blockchain data supports this claim. Analysis shows that during the Three Arrows Capital collapse in mid-June 2022, Alameda sent a large amount of FTT tokens to the FTX wallet address. This amounted to exchanging tokens issued by FTX itself, which lacked real liquidity, for real assets deposited by customers.

Looking back at SBF's public statements at the time, they are now full of irony. While he was secretly misappropriating client funds, he publicly claimed he was willing to make sacrifices to stabilize the market and protect clients. In reality, he was not reaching out a helping hand, but rather covering up his own financial crisis.

Putting this information together, the statement made by the founders of Three Arrows about being "hunted by FTX" does not seem to be groundless. For FTX/Alameda, which was already in trouble at the time, there were two obvious motives for liquidating a large high-leverage counterparty like Three Arrows: first, to immediately obtain much-needed liquidity; second, to stabilize the situation by eliminating a significant source of risk in the market and covering up its own problems.

Their behavior is not about following the rules, but rather a drowning person desperately trying to survive.

Echoes of History

This dispute is reminiscent of the 2008 financial crisis, bringing to mind the collapse of Lehman Brothers. The root cause of both crises lies in the failure to properly segregate client assets, which is the most fundamental principle in finance. After its bankruptcy, Lehman Brothers was found to have serious issues with client fund management, while FTX commingled client assets with proprietary trading funds, turning clients from asset owners into unsecured creditors of the platform.

The consequences of the two crises are also similar: both led to prolonged and complex liquidation processes. The bankruptcy of Lehman Brothers involved trillions of dollars in debts and subsidiaries around the world, and its liquidation lasted for years. Today, FTX's liquidator, John Ray III, is facing the same tricky situation, with issues such as an opaque company structure, missing financial records, and difficulties in valuing digital assets making the liquidation process exceptionally challenging.

The story of FTX and Three Arrows is not just a cryptocurrency issue, but a classic case of financial arrogance, regulatory failure, and human greed, merely dressed in a new "Web3" guise.

Conclusion

The truth behind this $1.5 billion dispute is that it is not merely a simple contract dispute, but a naked survival game. Three Arrows Capital is undoubtedly a reckless gambler, and its downfall can be said to be self-inflicted. However, FTX is by no means innocent; it is a fraudster that covers its own problems by "sacrificing" its opponents.

In that lawless and jungle-rule crypto market, a dying gambler encounters a disguised con artist, staging the final bloody struggle.

The final ruling of the Delaware court could set some precedents for future cryptocurrency bankruptcy cases. However, history has already provided a verdict for this young industry: when a system lacks effective regulation and transparency, and when the idea of "decentralization" turns into blind trust in a few "big shots," there are no heroes here, only different forms of predators.

Human greed and fear have never changed. The "battle of the dead" between FTX and Three Arrows is merely a reenactment of countless stories of greed on Wall Street over the past century in the cryptocurrency sector.