FTX Rejects $1.53 Billion Three Arrows Capital Claim Amidst Bankruptcy Proceedings

The intricate insolvency proceedings of the defunct cryptocurrency exchange FTX continue to progress, with a pivotal development arising as FTX’s debtors formally rejected a significant $1.53 billion recovery claim from Three Arrows Capital (3AC). FTX’s legal representatives assert that 3AC’s claimed losses do not stem from FTX’s actions but rather from the hedge fund’s inherently high-risk, leveraged trading strategies. They argue that the financial burden of these speculative failures should not be transferred to other creditors. This ongoing dispute highlights the complex web of liabilities and counterclaims characteristic of major cryptocurrency bankruptcies.

The Contested Claim and FTX’s Rebuttal

Three Arrows Capital, itself a prominent casualty of the 2022 crypto market downturn, initially filed a $120 million claim in FTX’s bankruptcy proceedings in June 2023. This claim was subsequently escalated to $1.53 billion by November 2024. 3AC’s liquidators alleged various grievances, including breach of contract, breach of fiduciary duty, and unjust enrichment, asserting that FTX had held and improperly liquidated assets belonging to 3AC, thereby contributing to its downfall. Chief Judge John Dorsey had previously ruled in favor of 3AC in March on a related motion.

However, FTX’s legal team filed a strong objection in the U.S. Bankruptcy Court for the District of Delaware, characterizing 3AC’s assertions as “illogical and baseless.” They contended that 3AC’s predicament was a direct consequence of its aggressive investment posture, specifically an aggressive “bet big” strategy on appreciating crypto prices that ultimately backfired amidst a market downturn. FTX’s lawyers stated, “The Joint Liquidators are effectively petitioning this Court to compel other Exchange customers and creditors to absorb the costs of 3AC’s failed strategy through the assertion of illogical and baseless claims totaling $1.53 billion.”

Disputed Account Balances and Liquidation Validity

FTX further contested the veracity of 3AC’s claimed $1.53 billion, asserting it derived from erroneous account balances recorded on June 12, 2022. According to FTX, 3AC’s actual crypto balance on that date was $1.02 billion, not the $1.59 billion claimed, and its negative U.S. dollar balance was $733 million, not $1.3 billion. FTX maintains that 3AC had an available balance of only $284 million, which was further depleted by market price declines and 3AC’s own withdrawals totaling $60 million.

Addressing specific transactions, FTX acknowledged an $82 million crypto liquidation event involving 3AC’s assets. However, FTX argued this liquidation was permissible under pre-existing credit and margin agreements, which were designed to enforce 3AC’s adherence to account balance stipulations. Furthermore, FTX contended that this liquidation did not diminish 3AC’s overall account balance; rather, it preserved value by converting and transferring assets to 3AC’s U.S. dollar fiat account, thereby benefiting the hedge fund. FTX maintains that 3AC’s “theory of lost assets,” which underpins the core of its claim, is devoid of both legal and factual foundation.

Upcoming Proceedings and Broader Implications

The legal proceedings are poised for further significant developments. Three Arrows Capital has been granted a deadline of July 11 to submit a formal reply to FTX’s objection. A non-evidentiary hearing is subsequently scheduled for August 12, to be presided over by Chief Judge Karen Owens at the U.S. Bankruptcy Court for the District of Delaware.

This dispute is not an isolated incident for 3AC, as the hedge fund’s liquidators are concurrently pursuing substantial claims against other defunct cryptocurrency entities. In August of the previous year, 3AC lodged a $1.3 billion claim against Terraform Labs within its bankruptcy proceedings. In that particular instance, 3AC’s liquidators, Russell Crumpler and Christopher Farmer of Teneo Holding, alleged that Terraform Labs misrepresented the stability of tokens within the Terra ecosystem, specifically TerraUSD (UST) and Luna (LUNA). They contended that these misrepresentations induced significant investment just months prior to UST’s de-pegging, which precipitated the catastrophic collapse of the entire Terra ecosystem. This recurring pattern of claims vividly underscores the systemic risk and cascading failures that broadly characterized the 2022 cryptocurrency market contraction.