The Collapse of the Encryption Empire and Dark Trading

On June 23, 2023, an epic legal battle unfolded in the Delaware bankruptcy court. The bankruptcy liquidation team of a large cryptocurrency exchange submitted a significant document to the court, fully rejecting a claim of up to $1.53 billion from a well-known cryptocurrency hedge fund and requesting the judge to completely "zero out" the claim. This action instantly pushed this long-standing "battle of the souls" to a new climax. The two already collapsed cryptocurrency empires had their "ghosts" fiercely clashing in court once again, while also opening a new chapter in the darkest and most chaotic page of cryptocurrency history.

To fully understand this complex legal dispute, we first need to recognize three key figures and the legendary story behind them that is comparable to a Hollywood blockbuster.

First, there is the founder of a major cryptocurrency exchange platform, a young entrepreneur once hailed as the savior of the crypto world. Before the catastrophic collapse in 2022, he was seen as a "white knight" in the eyes of countless followers. The media compared him to financial giants, and politicians favored him. With his signature messy hair and casual attire, he crafted an image of an unconventional genius, claiming to change the world with cryptocurrency. However, when his business empire came crashing down, people realized that beneath the armor of this "knight" was nothing but emptiness; he was merely a "century fraud" sentenced to 25 years in prison.

Secondly, there are the two founders of a well-known encryption hedge fund. They are famous in the encryption circle as the "gambling kings," known for their arrogance, aggressiveness, and massive leverage. Their proposed "supercycle theory" was once regarded as a standard, and every move they made could trigger significant market fluctuations. However, when the market conditions reversed, their so-called "myth" was proven to be just a huge bubble. After the company went bankrupt, the two staged a global escape drama, with one being arrested and imprisoned in Singapore, while the other lived a "noble exile" life in Dubai.

The third is the bankruptcy liquidation head of a large cryptocurrency exchange platform, an experienced financial restructuring expert. He has dealt with one of the largest corporate fraud cases in U.S. history. When he took over this mess, even this battle-hardened "King of Liquidation" was shocked. He admitted that in his more than forty years of professional career, he had never seen such a complete lack of corporate management control and such a total absence of credible financial information.

The main storyline revolves around these three parties. In 2022, an unprecedented financial tsunami swept through the entire encryption world, triggered by the collapse of a certain algorithmic stablecoin. A well-known encryption hedge fund, a luxury cruise ship supported by leverage and debt, was the first to be hit and quickly sank. A few months later, a seemingly indestructible large encryption currency trading platform suddenly imploded, exposing a shocking scam amounting to tens of billions of dollars.

Now, in the bankruptcy court of Delaware, these two giants that have already "buried" themselves are entangled over a "hellish ledger" worth up to $1.53 billion. The liquidator of a well-known encryption hedge fund claims that at the last moment before their company went bankrupt, a large encryption cryptocurrency exchange platform acted like a bloodthirsty shark, conducting a despicable "black eating black" and illegally swallowing their last assets. However, the liquidator of the large encryption cryptocurrency exchange platform retorted: you gamblers screwed up yourselves and still want to take a cut from us, the similarly drained victims? No way!

Is this ultimately a shameless extortion or a delayed pursuit of justice? To unravel this complex puzzle, we must return to that bloody summer of 2022 and delve into the truths that have been deliberately buried.

One Contract, Two Interpretations

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

A statement from a large cryptocurrency exchange platform tells a story about "order and rules."

In their narrative, the platform plays the role of a diligent and impartial "gatekeeper". Their logic is simple: a well-known encryption hedge fund is a major client on the platform, but also a reckless gambler. When the market plummets, the fund's account suffers severe losses, and its margin level falls below the safety line stipulated in the contract, constituting a clear default.

The platform claimed that they contacted the fund multiple times to request additional margin, but the other party ignored them. Worse still, the fund not only failed to supplement its funds but also withdrew a large amount of encryption from its already precarious account. In the face of this behavior, the platform stated that its actions were completely in accordance with procedures and were impartial risk management. They forcibly liquidated some of the fund's assets according to the agreement to prevent its account from going negative, thereby protecting the interests of the platform and other clients.

Under the guidance of the bankruptcy liquidator, the platform's legal team maintained a firm stance. They emphasized to the court that the platform's creditors should not, and cannot, become the "white knights" of a failed trade by a well-known encryption hedge fund. Their narrative portrayed the platform as a "responsible guardian" protecting everyone in the storm.

A certain well-known encryption hedge fund claimed to tell a story of "conspiracy and pursuit."

This version started from a ruin. When the fund's liquidators took over the company, they found almost no useful records in the office. The founders were extremely uncooperative, making the liquidation process very difficult.

In the case of serious information deficiency, the liquidator could initially only submit a preliminary claim of $120 million to a large encryption cryptocurrency trading platform based on sporadic clues. However, after they went through legal procedures and faced numerous obstacles, they finally obtained a large amount of original transaction data from the platform, and an astonishing fact emerged. They discovered that within just two days of the platform claiming that a well-known encryption hedge fund had defaulted and was liquidated, assets worth up to $1.53 billion in that fund's account were almost completely wiped out.

This discovery completely changed the direction of the story. The fund's liquidator immediately applied to the court to significantly raise the claim amount from 120 million to 1.53 billion. The platform strongly opposed this, believing it to be unreasonable. However, the presiding judge made a crucial ruling: he believed that the fund's delay in amending the claim was largely due to the platform's own actions, as the platform had repeatedly delayed in providing key data.

This judicial ruling provides strong official support for the fund's "conspiracy theory." If the platform's liquidation operations are truly as transparent and procedurally just as they claim, why do they need to obstruct and delay the provision of trading data? Unless, behind this ledger, there are deeper, darker secrets hidden.

The Core of the Scam: Internal Distress Signals

To unravel this mystery, we must unveil the "white knight" mask of the founder of a major encryption cryptocurrency exchange and see what kind of fatal implosion was occurring at the core of his own empire in June 2022, when he took on the role of a savior and directed the course of events.

The key witness is the ex-girlfriend of the platform's founder and the head of another company he secretly controls.

In the later criminal trial, as a witness with a stain, she revealed a shocking secret to the world. She confirmed that in the same week when a major cryptocurrency exchange sternly claimed "insufficient margin" and "liquidated" a well-known crypto hedge fund, the company she was responsible for also suffered disastrous losses due to the market crash, resulting in a huge gap of billions of dollars on the balance sheet. Major creditors called one after another to demand loan repayment.

Her company is about to collapse. What should she do? She trembled in court as she revealed the answer: it was the platform founder who instructed her to commit these crimes. He made her open a "secret channel" to "borrow" billions of dollars from the platform's client fund pool to repay the company's loans.

This testimony was like a flash of lightning, instantly illuminating the dark core of the entire incident. It turns out that while a certain large encryption currency trading platform played the role of a "cold gatekeeper," its "prodigal son" company was secretly and illegally receiving an "infinite transfusion" of funds from the platform's clients due to a similar but much larger funding gap.

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

A report from a blockchain analysis company shows that during the collapse of a well-known encryption hedge fund in mid-June 2022, a company controlled by the platform's founder sent approximately $4 billion worth of platform tokens to the platform's wallet address. This token is issued by the platform itself, and its value is entirely supported by the platform. This operation is akin to using "game coins" printed in one’s own backyard, which have almost no real liquidity, as collateral to exchange for the real money deposited by clients in the platform's treasury.

Now, looking back at the platform founder's public performance at that time, it was simply Oscar-level. While he was frantically misappropriating client funds behind the scenes, he was accepting media interviews in front, downplaying the situation by claiming that we are willing to make some less-than-ideal trades if that is the necessary cost to stabilize the situation and protect our clients.

This generous rhetoric, when heard today, is filled with great irony. He is not a stable participant reaching out to help, but a bankrupt swindler with a false front. His so-called "rescue" is merely to prevent the dominoes from continuing to fall, thus exposing that he himself is the biggest hole.

When we piece together these fragments, the words of a famous encryption hedge fund founder saying "we were hunted" no longer seem baseless. For a large encryption trading platform that was already in desperate struggle in June 2022, liquidating a large high-leverage trading counterparty like a well-known encryption hedge fund had a clear motivation: first, it was to "kill for goods," to immediately obtain the urgently needed liquidity to plug their own gaps; second, it was to "kill the chicken to scare the monkey," to stabilize the market by eliminating a huge source of risk, thus covering up the truth that they themselves were already "internally injured."

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

Echoes of History

Putting this dispute in a broader historical context, we find that its pattern is not novel. Stripping away the technical veneer of encryption that is filled with terminology and codes, its core is merely a rehash of the 2008 financial crisis, a "cycle" of the collapse of a major investment bank.

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

This is the most untouchable red line in the financial world. Whether it is traditional banks from a century ago or today's digital currency exchanges, the client's money is the client's money, and the platform has no right to use it. However, after the bankruptcy of a large investment bank, it was discovered that there were "shocking failures" and "staggering violations" in its customer fund segregation. Furthermore, the entire fraud system of a large encryption currency trading platform is directly based on the mixing of customer assets with the proprietary trading funds of its affiliated companies. This is a catastrophic risk transfer that turns clients from asset owners into unsecured creditors of the platform.

The outcome of the two crises is the same: a protracted and chaotic situation.