FTX Fraud: Who Are Sam Bankman-Fried’s Biggest Victims?

FTX and its affiliated buying and selling agency Alameda Analysis have been uncovered. A November 2 CoinDesk article revealing Alameda’s troubled funds put a sequence of occasions in movement that finally revealed FTX as bancrupt.

Former FTX CEO Sam Bankman-Fried secretly used buyer funds to bail out FTX’s sister firm Alameda Analysis, leading to an estimated $10 billion gap within the trade’s books. To make issues worse, Bankman-Fried coated up his fraudulent actions for months, leaving traders, clients, and even his personal workers at nighttime proper up till FTX declared chapter on November 10. 

Within the aftermath of arguably probably the most earth-shattering deception in crypto historical past, Crypto Briefing takes a have a look at who has misplaced probably the most from Sam Bankman-Fried’s monumental grift. 

Enterprise Capital

Throughout its heyday, FTX attracted large investments from a number of the most outstanding and well-funded enterprise capital corporations on the earth. 

In July 2021, the trade raised $900 million at an $18 billion valuation from over 60 traders, together with crypto heavyweights comparable to Coinbase Ventures, Sequoia Capital, Paradigm, and others. Many of those traders additionally doubled down on FTX throughout its final funding spherical in January 2022, which valued the corporate at an eye-watering $32 billion. 

FTX’s raises stood out from these of different crypto corporations by participation from high-ranking non-crypto enterprise corporations. Softbank, VanEck, and Temasek all purchased FTX fairness throughout one of many firm’s many funding rounds. In response to Crunchbase data, FTX bought fairness totaling roughly $1.8 billion over its three years in operation. Now that the corporate is bankrupt, FTX shares are virtually actually nugatory. 

On the time of its collapse, the three greatest FTX stakeholders have been Sequoia Capital at 1.1% and Temasek and Paradigm, every with 1%. In whole, these three enterprise corporations invested a mixed $620 million into FTX. 

Moreover, many enterprise corporations that invested in FTX additionally used its providers to carry money and crypto property. Nevertheless, solely a handful of those corporations have publicly disclosed their extra FTX publicity. On November 9, Galaxy Digital CEO Mike Novogratz told CNBC that his agency had $76.8 million of money and digital property deposited on FTX on the time of its collapse, though he acknowledged that his agency was within the means of withdrawing $47.5 million of that quantity. Nevertheless, In mild of the corruption uncovered throughout the trade’s remaining days, it appears unlikely FTX will honor this withdrawal. 

Multicoin Capital, one other outstanding FTX fairness investor, reported that it had 10% of its whole property below administration trapped on FTX earlier than the trade declared chapter. Crunchbase knowledge exhibits Multicoin had raised $605 million by three separate funds, implying that it misplaced no less than $60 million by its publicity to FTX. 

As many enterprise corporations haven’t any obligation to reveal the precise quantities of their investments and losses publicly, it’s arduous to understand how a lot they collectively misplaced from the FTX meltdown. Nevertheless, with the proof at hand, VC losses throughout the board look like nicely into the billions. 

The Solana Ecosystem 

Sam Bankman-Fried’s FTX empire was closely entwined with the Solana ecosystem, and the high-throughput blockchain is struggling vastly consequently. 

When Solana skilled a growth on the again of the choice Layer 1 narrative in August 2021, its native SOL token, together with many Solana ecosystem tokens soared in worth. One such venture was Serum, a Solana-based central restrict order ebook trade, through which Bankman-Fried was a co-founder and Alameda Analysis an investor. 

Whereas Serum initially soared in worth, its predatory tokenomics, which gave large quantities of its native SRM token to early traders like Alameda, precipitated its worth to bleed over time. Regardless of dumping large quantities of SRM onto the market all through the 2021 bull run, Alameda nonetheless held over two billion tokens as collateral towards loans on the time of its chapter. Moreover, Alameda and FTX each held massive SOL positions, which may even face liquidation. Now FTX and Alameda are bankrupt, these tokens will virtually actually be bought on the open market, driving costs down additional. 

FTX’s involvement with Solana went past selling the blockchain and investing in its protocols. To assist bootstrap DeFi adoption, FTX additionally created Solana-based wrapped Bitcoin and Ethereum tokens backed by its reserves. 

Each wrapped tokens have been broadly used throughout the Solana DeFi ecosystem. Nevertheless, because it grew to become obvious that FTX was dealing with a liquidity crunch, FTX-backed wrapped Bitcoin and Ethereum started to de-peg. After FTX declared voluntary chapter on November 11, these tokens plummeted because it was clear FTX now not held any actual Bitcoin and Ethereum in reserve. Over the previous week, Solana wrapped Bitcoin has fallen 93% to $1,363 and wrapped Ethereum 83% to $257. Presently, there appears to be little hope that both asset will return to peg. 

One remaining approach FTX has broken Solana is thru Alameda Analysis’s investments in ecosystem initiatives. A number of corroborating studies point out that below the phrases of funding, protocols have been required or closely incentivized to custody their treasuries on FTX. This apply not solely left many initiatives excessive and dry after FTX’s chapter but additionally fed into the broader fraud going down on the trade. By requiring initiatives to maintain their funds on FTX, Alameda might partially make investments right into a venture however obtain again the overall sum of that venture’s elevate. As was revealed when FTX went bankrupt, these buyer funds deposited onto the trade have been being utilized in investments by Alameda. 

The Clients

Whereas enterprise capital corporations and FTX-backed initiatives have suffered from Sam Bankman-Fried’s years-long rip-off, in the end, the atypical buyer is the largest loser in the entire debacle. Many FTX customers misplaced their life financial savings, believing that the trade was protected. Endorsements from Shark Tank’s Kevin O’Leary and Jim Cramer evaluating Bankman-Fried to J.P. Morgan additionally helped engender belief within the trade as a reputable and dependable entity. 

It’s arduous to estimate how a lot clients holding funds on FTX misplaced, as reports vary, however the quantity is prone to be within the billions. The determine will virtually actually have been made worse by Bankman-Fried’s since-deleted tweets within the lead-up to FTX’s chapter. The previous FTX CEO assured customers that property held on the trade have been absolutely backed at 1:1, dissuading customers from withdrawing funds. In hindsight, these tweets turned out to be bald-faced lies. 

But it surely wasn’t simply Bankman-Fried and his “internal circle” of FTX workers who betrayed Clients—U.S. regulators who labored carefully with the trade and confirmed it lenience are additionally culpable. U.S. Securities and Change Fee Chair Gary Gensler devoted his group’s assets going after extra minor, much less vital DeFi protocols for enforcement motion whereas the largest fraud in latest crypto historical past operated proper below his nostril. Very most likely, Bankman-Fried’s standing as a serious political donor and his lively involvement in drafting crypto regulation aided him in pulling the wool over the SEC’s eyes. 

The dearth of regulatory readability from regulators just like the SEC additionally helped push U.S. crypto customers onto unregulated abroad exchanges like FTX.com. If the SEC had as a substitute labored with crypto trade stakeholders within the U.S. to draft truthful, complete laws early, this complete state of affairs might have been prevented or no less than decreased in its severity. 

Just like the Mt. Gox hack earlier than it, the FTX fraud will seemingly tarnish the trade’s popularity with the present cohort of crypto-curious traders. Many who’ve been burned is not going to return. But it surely’s additionally necessary to search for a silver lining in occasions of darkness. It’s higher that the rot within the crypto trade be uncovered now relatively than sooner or later when extra is on the road. Whereas it might appear bleak in the mean time, in the long term, crypto might be stronger for having crooks like Bankman-Fried rooted out early, even when the price is expensive.  

Disclosure: On the time of writing, the creator of this piece owned ETH, BTC, SOL, and a number of other different crypto property.