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 ultimately 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, prospects, and even his personal workers at the hours of darkness 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 take 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 among the most outstanding and well-funded enterprise capital corporations on the planet. 

In July 2021, the trade raised $900 million at an $18 billion valuation from over 60 buyers, together with crypto heavyweights reminiscent of 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 means 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. Based on Crunchbase data, FTX offered fairness totaling roughly $1.8 billion over its three years in operation. Now that the corporate is bankrupt, FTX shares are nearly definitely nugatory. 

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

Moreover, many enterprise corporations that invested in FTX additionally used its companies to carry money and crypto belongings. Nonetheless, 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 belongings deposited on FTX on the time of its collapse, though he said that his agency was within the technique of withdrawing $47.5 million of that quantity. Nonetheless, In gentle of the corruption uncovered through the trade’s ultimate days, it appears unlikely FTX will honor this withdrawal. 

Multicoin Capital, one other outstanding FTX fairness investor, reported that it had 10% of its complete belongings below administration trapped on FTX earlier than the trade declared chapter. Crunchbase information exhibits Multicoin had raised $605 million by means of three separate funds, implying that it misplaced at the least $60 million by means 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 onerous to understand how a lot they collectively misplaced from the FTX meltdown. Nonetheless, with the proof at hand, VC losses throughout the board seem like effectively 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 enormously in consequence. 

When Solana skilled a increase 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 guide trade, wherein 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 on 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 giant SOL positions, which will even face liquidation. Now FTX and Alameda are bankrupt, these tokens will nearly definitely 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 had 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 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 ultimate manner FTX has broken Solana is thru Alameda Analysis’s investments in ecosystem tasks. A number of corroborating experiences point out that below the phrases of funding, protocols had been required or closely incentivized to custody their treasuries on FTX. This apply not solely left many tasks excessive and dry after FTX’s chapter but additionally fed into the broader fraud happening on the trade. By requiring tasks to maintain their funds on FTX, Alameda may partially make investments right into a venture however obtain again the full sum of that venture’s elevate. As was revealed when FTX went bankrupt, these buyer funds deposited onto the trade had been being utilized in investments by Alameda. 

The Prospects

Whereas enterprise capital corporations and FTX-backed tasks have suffered from Sam Bankman-Fried’s years-long rip-off, finally, the atypical buyer is the largest loser in the entire debacle. Many FTX customers misplaced their life financial savings, believing that the trade was secure. 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 reliable and dependable entity. 

It’s onerous to estimate how a lot prospects holding funds on FTX misplaced, as reports vary, however the quantity is more likely to be within the billions. The determine will nearly definitely 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 belongings held on the trade had been totally 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 “internal circle” of FTX workers who betrayed Prospects—U.S. regulators who labored intently 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 current crypto historical past operated proper below his nostril. Very in all probability, Bankman-Fried’s standing as a serious political donor and his energetic 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 entire scenario may have been prevented or at the least decreased in its severity. 

Just like the Mt. Gox hack earlier than it, the FTX fraud will probably tarnish the trade’s status with the present cohort of crypto-curious buyers. Many who’ve been burned is not going to return. Nevertheless it’s additionally necessary to search for a silver lining in instances 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 intervening time, in the long term, crypto will likely 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 several other different crypto belongings.