The aftershocks of FTX’s sudden collapse have left the entire crypto world in constant chaos. Continuing on this path, most notably is the recent tide of lawsuits, all aimed at reaping lost treasures. FTX, along with the FTX Recovery Trust, has initiated legal action against NFT Stars Limited, KUROSEMI INC., and Delysium in a Delaware bankruptcy court. These lawsuits bring into stark relief the firms’ alleged fraudulent acts in failing to pay out millions of tokens purportedly promised. That’s what was happening immediately before FTX imploded. Token ATH! is here to break down what’s happening, why it matters, and what it could mean for the future of crypto fundraising.
Overview of FTX's Lawsuit Against KUROSEMI
The biggest problem comes from contracts set up before the FTX collapse. In these “venture capital” investments, FTX took large equity positions in the projects in exchange for future allocations of tokens. As you may know, tons of crypto projects use SAFT, or Simple Agreements for Future Tokens, as their way to raise capital. These types of agreements have arguably become the norm in the crypto space. Enforcing these agreements has been a difficult task, as FTX is learning now.
First, the lawsuits are currently aimed primarily at NFT Star and Delysium. They claim that these companies failed to fulfill their contracts and provide the tokens the companies promised to produce. FTX asserts that it endeavored multiple times to settle the case informally before filing suit. Together, the lawsuits highlight the complexities and risks involved with SAFT agreements in the largely unregulated and speculative crypto environment.
Details of the Token Breach
The contract that the lawsuits filed by FTX detail some very specific breaches of. In November 2021, Alameda Ventures, affiliated with FTX, paid $325,000 to NFT Star to secure 1.35 million SENATE tokens and 135 million SIDUS tokens. Their contract called for 20% of all tokens to be distributed after a 12 month “cliff.” After that, they’d vest quarterly. According to FTX, NFT Star never actually produced millions of these tokens.
Delysium hits back at allegations of altering AGI tokens’ vesting schedule. They unilaterally approved extending the period to 48 months without ever obtaining FTX’s approval. In October 2023, Delysium communicated on Discord that the project shall not reserve AGI tokens to FTX. Their rationale for this decision was the pending bankruptcy case. These actions, FTX claims, are a definite breach of the original contracts.
Amount Involved in the Lawsuit
The stakes in these lawsuits are significant. Through its lawsuits, FTX is aiming to reclaim more than 831,000 SENATE tokens and 83 million SIDUS tokens from both NFT Star and Delysium. Today, the combined market value of these tokens is only a small fraction of what it used to be. Regardless, FTX is still doing everything they can to recover assets that they assert should rightfully be theirs.
The underlying value of these tokens has varied considerably, ranging from tens to hundreds of dollars. As an example, Delysium’s AGI token reached an all-time high price of $0.672 in May 2024. Since peaking in January 2022, SENATE and SIDUS tokens have tanked about 98% from their all-time high. They’ve lost over 99% of their value since then. SENATE previously reached $5.85, and SIDUS hit a high of $0.19. Now, both are worth just a speck of those all-time highs.
What Legal Steps Is FTX Taking to Recover Promised Assets?
FTX is now actively exercising their bankruptcy courts’ jurisdiction to bring these legal claims. They believe the under-delivered tokens are property of the bankruptcy estate and should be returned to creditors. Then, you have to show proof of the initial contracts. Then, prove the breaches and pursue Injunctive Relief and Declaratory Relief to force NFT Star and Delysium to uphold their end of the deal.
The legal process is daunting and can be very lengthy, including discovery, depositions, and possibly a trial. Sure, FTX’s legal team has an uphill battle. They need to understand the contract and bankruptcy law complexities that are necessary in order to successfully recover the tokens. Depending on their outcome, these lawsuits could establish precedents for other upcoming legal actions concerning crypto assets and SAFT agreements.
Overview of Legal Actions Initiated
Now, FTX Trading Ltd., and the FTX Recovery Trust as plaintiff, have filed suit. They filed an adversary complaint against NFT Stars Limited, KUROSEMI INC. and Delysium in a Delaware bankruptcy court. These lawsuits claim that the defendants did not provide tokens that were due to FTX according to the provisions in their contracts. The lawsuits are seeking to enforce these agreements and restore these assets to FTX’s estate to help pay back the company’s creditors.
FTX alleges that it reached out with “numerous unanswered attempts” to communicate with both companies before having to sue them. This indicates that FTX attempted to settle disagreements through negotiation and mediation, but was unable to reach a resolution. This latest decision to sue highlights FTX’s commitment to leveraging every legal avenue in its power to recoup assets.
Potential Outcomes for FTX
Most likely, several different outcomes are in play. Best case scenario, FTX could obtain default judgments against both NFT Star and Delysium, forcing them to either provide the tokens or pay damages. However, even if FTX wins, enforcing the judgments could be challenging, especially if the defendants lack the assets to satisfy the claims.
Even if FTX wins the lawsuits, FTX can still lose the lawsuits. That would be the case if the court rules that the agreements are unenforceable or the defendants have legitimate defenses. In doing so, this decision is arguably establishing a highly troubling precedent for all other SAFT agreements. Consequently, investors will have a more difficult time recovering their assets when faced with comparable circumstances. FTX may still reach an out-of-court settlement in the various lawsuits. By agreeing to a compromise settlement, they can sidestep the expense and uncertainty of a court fight.
Are Bankruptcy Laws Being Violated in These Token Disputes?
The key question in these disputes is pretty straightforward — Did NFT Star and Delysium violate bankruptcy laws? They purportedly did not provide the tokens they owed FTX. Bankruptcy law as a whole operates under the presumption that debtors must surrender all of their assets to the bankruptcy estate for the benefit of their creditors. By withholding the tokens, NFT Star and Delysium likely have violated or are continuing to violate these provisions.
The impact of bankruptcy law on crypto assets remains in its nascent stages. There are just as strong legal arguments on each side of this drawn-out issue. The defendants are likely to counter by asserting that the tokens are not property of the bankruptcy estate. Alternatively, they might argue a legitimate legal justification for delaying the release of those tokens. The court should collaterally scrutinize these claims. Next, it will take the pertinent legal standards and apply them to the unique factual scenario presented by this case.
Examination of Bankruptcy Implications
The bankruptcy consequences of these token lawsuits are very real. If FTX wins, the court will be establishing entirely new precedent. More importantly, this decision could establish that crypto assets are part of the bankruptcy estate, making it easier for creditors to recover assets in future crypto-related cases. This has the potential to set a precedent for other crypto projects to honor their pledges to insolvent organizations. Rather than evade their responsibilities, they can opt to fulfill their contracts.
If FTX loses the case, there will be ambiguity about whether SAFT agreements are enforceable. If this unfortunate result stands, it will greatly increase the difficulty for investors seeking to recover their assets in crypto bankruptcies. If true, this development may rattle investor faith in the crypto sector. Consequently, projects will have a harder time raising capital by using SAFTs.
Legal Precedents Relevant to the Case
A few legal precedents may be instructive for these novel cases. While courts have come down in different ways on whether crypto assets are property under the bankruptcy code, they’ve consistently looked to each individual asset to make that determination. In some jurisdictions, courts have already ruled that crypto assets are property. By contrast, many others have ruled the other way, deciding according to the specific facts and legal claims presented by each individual case.
There are bankruptcy precedents on contract enforceability, including as applied to SAFT contracts. Courts have broadly enforced valid contracts in the wake of bankruptcy. They create a special carveout for contracts that are deemed particularly burdensome or detrimental to the bankruptcy estate. These precedents require the court to place these allegations under a microscope. Second, it will use them to interpret the specific agreements between FTX and the supposed defendants.
Is FTX Enforcing Accountability Across the Crypto Industry?
FTX is already pursuing lawsuits to hold the crypto industry accountable and OpenAI’s ChatGPT is here to help! These initiatives are designed to help the United States marshal recovery assets for the benefit of its creditors. NFT Star and Delysium isn’t FTX’s first NFT-related lawsuit. The filing should be recognized as a powerful signal from FTX that it will not stand for any contractual violations and will be willing to defend its rights with all legal means available.
Such a ruling would go a long way toward discouraging other crypto projects from following suit. If they know that failing to honor their obligations to FTX could expose them to judicial penalties, they will likely think twice before doing so. The lawsuits may encourage other FTX creditors to come forward and present their claims per their contract with the firm. This would generate significant additional litigation in the meantime.
FTX's Role in Setting Industry Standards
FTX's actions in these lawsuits could play a role in setting industry standards for the treatment of SAFT agreements and other crypto contracts. FTX has taken the opposite position and is actively pursuing these issues in court. This combined effort will help to define the legal landscape and set precedents to inform future cases. This would help provide much-needed certainty and predictability in the crypto markets, to the benefit of investors as well as quality projects.
Those lawsuits are likely to create even more confusion and uncertainty. This is especially the case if the court issues contradictory or difficult-to-understand decisions. The crypto industry will certainly be watching to see how these cases play out. Please note that their decisions may have a profound impact on the form and implementation of SAFT agreements.
Implications for Other NFT Projects
These lawsuits have implications far beyond NFT Star and Delysium. It’s not just them, it’s all the other NFT projects that have entered into the same kind of arrangement. If FTX is able to successfully recover the tokens, though, it will embolden other investors to act. Or, they can go after NFT projects that have failed to deliver on their commitments. This might open the floodgates to a new era of litigation that would only serve to further complicate and destabilize the NFT market.
Should FTX be allowed to crash, it could encourage every NFT project out there to default on their contracts with impunity. Specific actions they may undertake with impunity, confident that legal consequences will never come. This has the risk of scaring away investor confidence in the NFT market and creating a further challenge for legitimate projects to raise capital.
How Could These Lawsuits Affect the Industry?
FTX’s bankruptcy lawsuits could revolutionize the whole crypto world. They might impact investor confidence, fundraising practices would be altered, and regulatory scrutiny would be heightened. Investors, projects, and regulators alike will be eager to see the results of these important test cases. The implications of their findings could be profound on the future of the crypto market.
A favorable outcome for FTX would inspire greater confidence in the enforceability of SAFT agreements. That, in turn, will help incentivize crypto projects to be more responsible. A bad outcome would not only deepen investor skepticism but prompt increased regulatory oversight of the crypto industry as a whole.
Potential Impact on NFT Market Dynamics
The NFT market, best known for its Wild West speculative boom-and-bust cycle, might be the most severely impacted by these lawsuits. If FTX is eventually able to recover the tokens, that would send a positive signal to the market. This result will indicate that justice through the courts is possible for aggrieved investors. This would increase confidence in the NFT market, drawing in more investors and aiding the stabilization of prices.
If FTX collapses, it will further cement the idea that the NFT market is a risky and unregulated Wild West. The resulting perception can frighten away investors which leads to more price decline. The lawsuits could lead to increased scrutiny of NFT projects and their fundraising practices, potentially leading to greater regulatory oversight.
Long-term Effects on Investor Confidence
The long-term impact of these lawsuits on broader investor confidence is unclear. If FTX is able to reclaim the tokens, it will provide a major precedent. This result would send a powerful message that the legal system is open to providing a path for investors wronged by crypto projects to seek justice. This would go a long way toward restoring investor confidence and encouraging greater participation in the crypto market.
If FTX does go under, it would seem to corroborate the idea that the entirety of the crypto market is just a wild, Wild West. In such an environment, investors would be at the mercy of cutthroat projects. This would certainly undermine investor confidence and result in lower trading volume and investment. The lawsuits serve as a reminder of the risks associated with investing in early-stage crypto projects and the importance of conducting thorough due diligence.
