BitGo sues Galaxy Digital

BitGo sues Galaxy Digital for $100m

BitGo sues Galaxy Digital for $100m, as the collapse of the crypto market gives way to lawsuits.

Galaxy Digital made an attempt to acquire BitGo in a $1.2 billion deal that has since fallen through, and BitGo has claimed that for terminating the acquisition Galaxy must honour a clause in the contract which stipulates that BitGo should be paid $100m in the event of a termination.

The acquisition was expected to be a huge success for BitGo, which is one of the most trusted custodians in the space. Several of the largest companies use BitGo to custody their assets, including Michael Saylor and Microstrategy.

As well as solutions for custody, BitGo offers a range of solutions for institutional clients with regard to trading and portfolio management, particularly in the DeFi world. For example, they have recently incorporated SOL into their product offering and users can now stake SOL with BitGo.

They are also hugely important in the world of tax and regulatory compliance, which is something that Galaxy deals with a lot too.  The acquisition seemed to be a match made in heaven.

What does Galaxy Digital do?

According to their website, Galaxy Digital has five core lines of business, all of which interact with one another to a greater or lesser extent.  They are: trading, asset management, investment banking, mining, and ventures.

Over the last few years, Galaxy Digital has made some incredible investments into DeFi giants such as 1inch, FireBlocks, Avalanche, and…LUNA.

Their main focus, however, is offering institutional services to clients and assisting them with managing crypto, whether it be earning yield, custody solution, OTC trading, portfolio management, etc.

Was Galaxy Digital acting in bad faith?

Mike Novogratz, the CEO of Galaxy Digital, has claimed that the company does not have to pay the termination fee because the the company was not acting in bad faith.

In fact, he claims that they would have been happy to go along with the deal, but unfortunately it was not possible.  A spokesperson for Galaxy said that  “BitGo did not provide certain BitGo financial statements needed by Galaxy for its SEC filing.”

This, he claims was the reason that “Galaxy’s Board of Directors then made the decision to exercise its contractual right to terminate.”

The reasoning seems flismy at best: in an acquisition worth $1.2 billion, a few papers being ought of order isn’t a strong reason to call the entire thing off.

Novogratz is not having a good year

Galaxy Digital has not had the best start to 2022.

Despite the company’s incredible performance in previous years, and impressive series of acquisitions and investments, recent events have been extremely damaging for both the company’s financials as well as their reputation.

Galaxy was an extremely large investor in Terra, and was caught completely by surprise when the project collapsed overnight. This was a terrible thing for a lot of people in the space; suicide rates in Korea spiked after the LUNA collapse because so many people had lost money.

For Novogratz, the humiliation was more than just financial, since only a few weeks earlier he had commissioned a tattoo of a wolf with the caption “LUNA” to be inked onto his arm.

He has since reflected that this was a lesson in overexuberance.

Brian Timmons, who is the legal representative of Galaxy Digital in this matter, has said that Novogratz’s claims are “absurd”, and that the real reason that Galaxy is not honouring the terms of the acquisition is because they have “lost hundreds of millions of dollars”.

He went on to say: “Either Galaxy owes BitGo a $100 million termination fee as promised or it has been acting in bad faith and faces damages of that much or more.”

It seems things aren’t going to get much easier for Novogratz in the short term.

The domino effect of contagion

In the world of DeFi it easier than ever for people to take on leverage, and this was one of the main reasons that the market collapsed so much.

The crypto contagion affected companies all across the industry. Three Arrows Capital was a particularly extreme example of this: lots of large companies and funds had lent them funds in an undercollateralised manner, and when 3AC fell, so too did many other projects.

When UST depegged from $1, the market was extremely panicked. As more people decided to short, the faster the price was depressed. In many ways, Celsius’ problems began at this stage.  Even though they very narrowly managed to save themselves from losing $500m, Celsius’ dumping of UST further weakened the peg and was identified by Nanse as one of seven whale wallets that caused the crash.

$40bn of value was stored in UST by funds and retail investors alike, who believed that it wasn’t a risky way to earn high yield on stablecoins.

Galaxy Digital being at the centre of this crash has been extremely problematic for them, and will have sown discontent amongst many of their clients and partners, especially after vocal Bitcoin evangelists Max Keiser and Stacy Herbert have spoken out about the complete lack of due diligence that Galaxy exercised.

For now, it seems that Novogratz may be right: “This is frustrating as heck … because at times the whole industry looks like a bunch of idiots.”

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