Analysis

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

Key Takeaways

  • The collapse of FTX is already taking place as one of the crucial extreme crypto-related frauds in historical past.
  • Over the course of every week, Sam Bankman-Fried’s carefully-curated empire was shattered alongside together with his status.
  • Whereas it isn’t know what number of have been damage by the rip-off, we do know who a number of the greatest victims are thus far.

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 lined up his fraudulent actions for months, leaving buyers, clients, and even his personal workers at midnight 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 buyers, together with crypto heavyweights corresponding to Coinbase Ventures, Sequoia Capital, Paradigm, and others. Many of those buyers 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 way of 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 keeping with Crunchbase knowledge, FTX offered fairness totaling roughly $1.8 billion over its three years in operation. Now that the corporate is bankrupt, FTX shares are nearly 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. Nonetheless, solely a handful of those corporations have publicly disclosed their further FTX publicity. On November 9, Galaxy Digital CEO Mike Novogratz instructed 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 technique of withdrawing $47.5 million of that quantity. Nonetheless, In gentle of the corruption uncovered in the course of the trade’s last 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 way of three separate funds, implying that it misplaced at the very least $60 million by way of its publicity to FTX. 

As many enterprise corporations don’t have any obligation to reveal the precise quantities of their investments and losses publicly, it’s arduous to know the way a lot they collectively misplaced from the FTX meltdown. Nonetheless, 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 because of this. 

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 challenge was Serum, a Solana-based central restrict order e-book trade, during 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 buyers like Alameda, brought about 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 nearly actually be offered 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 extensively used throughout the Solana DeFi ecosystem. Nonetheless, because it turned obvious that FTX was going through 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 last means FTX has broken Solana is thru Alameda Analysis’s investments in ecosystem initiatives. A number of corroborating experiences point out that below the phrases of funding, protocols have been required or closely incentivized to custody their treasuries on FTX. This follow 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 challenge however obtain again the entire sum of that challenge’s increase. 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 unusual 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 legit and dependable entity. 

It’s arduous to estimate how a lot clients holding funds on FTX misplaced, as experiences differ, however the quantity is prone to be within the billions. The determine will nearly 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. 

Nevertheless it wasn’t simply Bankman-Fried and his “interior 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 Trade Fee Chair Gary Gensler devoted his group’s assets going after extra minor, much less important DeFi protocols for enforcement motion whereas the largest fraud in latest crypto historical past operated proper below his nostril. Very in all probability, Bankman-Fried’s standing as a significant political donor and his lively involvement in drafting crypto regulation aided him in pulling the wool over the SEC’s eyes. 

The shortage 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 honest, complete laws early, this complete scenario might have been prevented or at the very least decreased in its severity. 

Just like the Mt. Gox hack earlier than it, the FTX fraud will seemingly tarnish the trade’s status with the present cohort of crypto-curious buyers. Many who’ve been burned won’t return. Nevertheless it’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 reasonably than sooner or later when extra is on the road. Whereas it might appear bleak for the time being, in the long term, crypto shall be stronger for having crooks like Bankman-Fried rooted out early, even when the associated fee is pricey.  

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

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