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 collection of occasions in movement that ultimately uncovered 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 alternate’s books. To make issues worse, Bankman-Fried coated up his fraudulent actions for months, leaving buyers, clients, and even his personal staff in the dead of night proper up till FTX declared chapter on November 10. 

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

Enterprise Capital

Throughout its heyday, FTX attracted big investments from among the most distinguished and well-funded enterprise capital companies on the earth. 

In July 2021, the alternate raised $900 million at an $18 billion valuation from over 60 buyers, together with crypto heavyweights akin to Coinbase Ventures, Sequoia Capital, and 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 companies by way of participation from high-ranking non-crypto enterprise companies. 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 the corporate is bankrupt and owes billions to collectors, FTX shares are nearly actually nugatory. 

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

Moreover, many enterprise companies that invested in FTX additionally used its providers to carry money and crypto property. Nonetheless, solely a handful of those companies have publicly disclosed their further 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 said that his agency was within the technique of withdrawing $47.5 million of that quantity. Nonetheless, In mild of the corruption uncovered throughout the alternate’s remaining days, it appears unlikely FTX honored this withdrawal. 

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

As many enterprise companies don’t have any obligation to reveal the precise quantities of their investments and losses publicly, it’s laborious to understand how a lot they collectively misplaced from the FTX meltdown. Nonetheless, with the proof at hand, VC losses 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 drastically 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 undertaking was Serum, a Solana-based central restrict order e book alternate, during which Bankman-Fried was a co-founder and Alameda Analysis invested. 

Whereas Serum initially soared in worth, its predatory tokenomics, which gave big quantities of its native SRM token to early buyers like Alameda, prompted its worth to bleed. Regardless of dumping big quantities of SRM onto the market all through the 2021 bull run, Alameda nonetheless held thousands and thousands of tokens as collateral in opposition to 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 bought on the open market, driving costs additional down. 

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 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’s little hope that both asset will return to peg. 

One remaining manner FTX has broken Solana is thru Alameda Analysis’s investments in ecosystem tasks. A number of corroborating experiences point out that beneath the phrases of funding, protocols have been required or closely incentivized to custody their treasuries on FTX. This follow not solely left many tasks excessive and dry after FTX’s chapter but additionally fed into the broader fraud happening on the alternate. By requiring tasks to maintain their funds on FTX, Alameda may partially make investments right into a undertaking however obtain again the whole sum of that undertaking’s elevate. As was revealed when FTX went bankrupt, buyer funds deposited onto the alternate have been being utilized in investments by Alameda. 

The Clients

Whereas enterprise capital companies and FTX-backed tasks have suffered from Sam Bankman-Fried’s years-long rip-off, finally, the common buyer is the largest loser in the entire debacle. Many FTX customers misplaced their life financial savings believing that the alternate 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 alternate. 

It’s laborious to estimate how a lot clients holding funds on FTX misplaced as reports vary, however the quantity is more likely to be within the billions. The determine will doubtless 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 alternate have been absolutely backed at 1:1, dissuading customers from withdrawing funds. In hindsight, these tweets turned out to be bald-faced lies. 

However it wasn’t simply Bankman-Fried and his “internal circle” of FTX staff who betrayed Clients—U.S. regulators who labored intently with the alternate and gave it lenience are additionally culpable. U.S. Securities and Alternate Fee Chair Gary Gensler devoted his group’s assets to go after extra minor, much less vital DeFi protocols for enforcement motion whereas the largest fraud in recent times operated proper beneath his nostril. Seemingly, Bankman-Fried’s standing as a significant political donor and his lively engagement with 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 honest, complete laws early, this entire state of affairs may have been prevented or no less than lowered in its severity. 

Just like the Mt. Gox hack earlier than it, the FTX fraud will doubtless tarnish the trade’s popularity with the present cohort of crypto-curious buyers. Many who’ve been burned won’t return. However it’s additionally vital 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 could appear bleak now, in the long term, crypto might be stronger for having crooks like Bankman-Fried rooted out early, even when the price 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.