FTX and Three Arrows Capital tear into each other, 1.5 billion dollars in bad debt, who is darker than whom?

The FTX bankruptcy liquidation team rejected the $1.53 billion claim from Three Arrows Capital, sparking a courtroom battle between the two collapsed encryption giants.

Written by: Oliver, Mars Finance

The flames of war reignite! On June 23, the FTX bankruptcy liquidation team officially dropped a heavy bombshell in court. They completely rejected the massive claim of $1.53 billion from Three Arrows Capital (3AC), demanding the judge to wipe it out entirely. This resounding slap in the face instantly escalated the "battle of the dead souls" that has been ongoing for several years. Two already buried encryption empires, their "ghosts" are once again biting at each other in court, and this latest legal conflict also unveils the darkest and most chaotic "Luo Ming" event in the entire history of encryption, marking a new chapter.

To understand this grand drama, we must first get to know the three key players at the table, as well as the bloody storm behind them that could be made into a Hollywood blockbuster.

The first is the explosive-haired SBF (Sam Bankman-Fried), the creator of the FTX empire. Before the great avalanche in 2022, he was a god in the crypto world, a "white knight" in the eyes of countless believers. The media compared him to J.P. Morgan, and politicians regarded him as an honored guest. Sporting a messy head of hair, wearing shorts and a T-shirt, he portrayed himself as a disheveled genius, claiming he would save the world with cryptocurrency. However, when the empire collapsed, people discovered that beneath this "knight"'s armor lay nothing; he was merely a "century fraud" sentenced to 25 years in prison.

The second is the two founders of Three Arrows Capital, Su Zhu and Kyle Davies. They are the "gamblers" of the crypto world, known for their arrogance, aggressiveness, and billions of dollars in leverage. Their investment philosophy, the "supercycle theory," was once revered as a benchmark, and their every word and action could stir the market. However, when the market reversed, their so-called "myth" was proven to be just a massive bubble. After the company's bankruptcy, the two staged a global escape, one was arrested in Singapore, while the other continued to play the role of the "exiled aristocrat" under the sun in Dubai.

The third is John J. Ray III, a truly tough character. The most prominent highlight on his resume is that he personally handled one of the largest fraud cases in American history—the bankruptcy liquidation of Enron. When he was called in to clean up the mess at FTX, this "king of liquidation," who is used to big scenes, was shocked. He candidly told the court: In my more than forty years of professional career, I have never seen such a complete failure of corporate control and such a total lack of credible financial information.

The story takes place among these three parties. In 2022, an epic tsunami triggered by the collapse of the algorithmic stablecoin Terra/LUNA swept through the entire encryption world. The luxury cruise ship Three Arrows Capital, built on leverage and debt, was the first to hit the iceberg and quickly sank. Then, a few months later, the seemingly indestructible FTX aircraft carrier also imploded without warning, exposing a shocking $10 billion scam.

Today, in the bankruptcy court of Delaware, these two giants that have "entered the grave" are entangled in a relentless battle over a "hellish ledger" worth up to $1.53 billion. The liquidator of Three Arrows claims that at the last moment before their sinking, FTX, like a bloodthirsty shark, conducted a despicable "black eat black" scheme, illegally swallowing their last possessions. In response, the liquidator of FTX retorted: You gamblers messed up on your own, and now you want to tear a piece of flesh from us, the equally drained victims? No way!

Is this a shameless extortion or a delayed pursuit of justice? To unravel this "Rashomon," we must return to the bloody summer of 2022, dive into the depths, and salvage those truths that have been deliberately buried.

One Contract, Two Narratives

In court, the lawyers for both sides presented completely opposing versions of the story, like two ledgers recording the same event but containing vastly different content.

The ledger of FTX tells a story about "order and rules."

In this account, FTX is a dutiful and ruthless "platform warden." The core logic of the story is simple: Three Arrows Capital is a major client on the platform, but also a reckless gambler. When the Terra/LUNA collapse triggered a market tsunami, Three Arrows' account suffered severe losses, and its margin level fell below the safety line stipulated in the contract, constituting a clear default.

FTX claimed that they contacted Three Arrows multiple times to request additional margin, but the other party ignored them. What was even more outrageous was that Three Arrows not only did not add funds but also withdrew $18 million worth of Ethereum from an already precarious account. In FTX's view, this is akin to stealing from a burning house. In the face of such malicious behavior, FTX stated that their actions were completely procedural and free of any biased risk management. They enforced the liquidation of part of Three Arrows' assets according to the agreement to prevent its account from going negative, thus protecting the interests of the platform and other innocent clients.

Under the leadership of John Ray III, the "King of Liquidation," the legal team of FTX appears quite confident. They emphasized to the court that FTX's creditors should not and cannot become the "saviors" of the failed trades of Three Arrows Capital. Their narrative portrays FTX as a "responsible gatekeeper" protecting everyone in the storm.

The ledger of Three Arrows Capital tells a story about "conspiracy and pursuit".

This account began from a pile of ruins. When the liquidators of Three Arrows were ordered to take over the company, they found that the hard drives had been dismantled, computers were missing, and there was almost no useful record to be found. The founders, Su Zhu and Kyle, were extremely uncooperative, making the liquidation process as difficult as climbing to the sky.

In a state of information vacuum, the liquidators initially could only submit a "placeholder" claim of $120 million to FTX based on scattered clues. However, after going through legal procedures and overcoming numerous obstacles, they finally obtained a massive amount of original trading data from FTX, revealing an astonishing picture. They discovered that during the brief two days when FTX claimed that Three Arrows Capital defaulted and liquidated, assets worth up to $1.53 billion in the Three Arrows account were almost "plundered clean."

This discovery completely changed the direction of the story. The liquidator of Three Arrows immediately applied to the court to increase the claimed amount from 120 million to 1.53 billion. Of course, FTX strongly opposed this, arguing that it was unreasonable harassment. However, the presiding judge made a key ruling: he believed that the reason Three Arrows modified the claim so late was largely due to FTX's own actions, as FTX repeatedly delayed in providing crucial data.

This judicial determination provides a strong official endorsement for the "conspiracy theory" surrounding Three Arrows. If FTX's liquidation actions are indeed as transparent and procedurally just as they claim, why do they need to obstruct and delay the provision of trading data? Unless there are deeper, darker secrets hidden behind this ledger.

The heart of the scam: Alameda's distress signal

To unravel this mystery, we must tear off SBF's mask of the "white knight" and see what kind of fatal implosion was happening in the heart of his own empire in June 2022, when he was pointing the way as a savior.

The key witness is SBF's ex-girlfriend, the secret "shadow empire" leader of Alameda Research — Caroline Ellison.

In the later criminal trial of SBF, Caroline, as a key witness, revealed a shocking secret to the world. She confirmed that just in the same week that FTX sternly "called out" Three Arrows Capital for being "under-margined," her company Alameda also suffered catastrophic losses due to the Terra collapse, with a huge hole appearing on its balance sheet amounting to billions of dollars. Major lenders, like sharks sensing blood, frantically called to demand loan repayments.

Alameda is about to collapse. What should we do? Caroline trembled in court as she revealed the answer: It was SBF who instructed me to commit these crimes. He had her open a "secret backdoor" to "borrow" billions of dollars from FTX's customer fund vault to repay Alameda's loans.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire event. It turned out that while FTX played the role of the "cold-hearted warden", its "favorite son" Alameda was secretly and illegally receiving an "infinite blood transfusion" from FTX customer funds due to a much larger funding gap of the same nature.

The data on the blockchain provides cold, hard evidence for this lie.

A report from blockchain analytics company Nansen shows that during the collapse of Three Arrows in mid-June 2022, Alameda sent approximately $4 billion worth of FTT tokens to FTX's wallet address. FTT is the platform token issued by FTX itself, and its value is entirely supported by FTX. This operation is akin to using "happy beans" printed from its own backyard, which have almost no real liquidity, as collateral to exchange for the real gold and silver deposited by clients in FTX's treasury.

Now, looking back at SBF's public performance at that time, it was simply Oscar-worthy. While he was frantically misappropriating customer funds behind the scenes, he was on stage accepting interviews from media outlets like Forbes, casually claiming that we are willing to make a somewhat bad deal if that is the necessary cost to stabilize the situation and protect customers.

This generous rhetoric now sounds full of great irony. He is not a stable participant reaching out to help, but rather a bankrupt, hollow fraud. His so-called "rescue" is merely to prevent the dominoes from falling further, thus exposing that he himself is the biggest hole.

When we piece together these fragments, the narrative from the founders of Three Arrows Capital that "SBF hunted us down" no longer seems unfounded. For FTX/Alameda, which was already in desperate struggle in June 2022, the motivation to liquidate large high-leverage counterparts like Three Arrows was crystal clear: first, it was "killing for profit," to immediately obtain the much-needed liquidity to fill their own holes; second, it was "killing the chicken to scare the monkey," to stabilize the market by eliminating a huge source of risk and to cover up the truth that they were also already "internally injured."

They are not enforcing the rules; they are like a drowning person, desperately pulling another person nearby just to catch a breath for themselves.

The Ghost of Lehman Brothers

Placing this dispute in a larger historical context, we find that its pattern is not novel. Stripping away the technical garb of encryption that is filled with terminology and codes, its core is merely a rehash of the 2008 financial crisis, a "reincarnation" of the collapse of Lehman Brothers.

The original sin of both crises is the same: failure to segregate client assets.

This is the most untouchable red line in the financial world. Whether it was traditional banks a hundred years ago or today's digital currency exchanges, customers' money is their own, and the platform has no right to use it. However, after the bankruptcy of Lehman Brothers, it was discovered that there were "staggering failures" and "massive violations" in their client fund segregation. The entire fraud system of FTX was directly built on the mixing of client assets with Alameda's proprietary trading funds. This is a catastrophic transfer of risk that turns customers from owners of assets into unsecured creditors of the platform.

The outcome of the two crises is the same: a prolonged and chaotic reckoning.

The bankruptcy of Lehman Brothers involved over a trillion dollars in debt and subsidiaries spread across the globe, and the unwinding process took years. Today, FTX's liquidator, John Ray III, is facing a similarly thorny situation. The opaque corporate structure, missing financial records, and hard-to-value digital assets... all of these make the liquidation process extremely challenging.

History does not simply repeat itself, but it does rhyme with similar endings. The saga of FTX and Three Arrows is not a unique "encryption" issue, but rather a classic tale about financial arrogance, regulatory failure, and human greed, just dressed in a trendy new outfit called "Web3."

The End Without Heroes

So, what is the truth behind this $1.5 billion "Hell Ledger" dispute?

The truth is that this is not a contract lawsuit about "who defaulted," but rather a naked "black eats black" survival game. Three Arrows Capital, undoubtedly a greedy, reckless, and ultimately self-destructive "super gambler," brought about its own downfall. However, FTX is by no means an innocent platform that follows the rules. It is a "fraudster" that has already undergone a malignant transformation, yet disguises its own unhealthy state by "sacrificing" another competitor.

A dying gambler encounters a disguised conman. In that lawless place, a jungle of rules, the encryption slaughterhouse, they staged the final bloody struggle.

The final ruling of the Delaware court may set some rules for future encryption bankruptcy cases. However, for this young industry that aspires to disrupt traditional finance, history has already written its verdict: when a system lacks strong regulation and transparent records, and when the slogan of "trustlessness" ultimately devolves into blind worship of a few "big shots," there are no heroes here, only predators of different faces.

Human greed and fear have never changed. The "battle of the dead" between FTX and Three Arrows is merely a "crypto" version of countless greed stories from Wall Street over the past century.