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 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 change’s books. To make issues worse, Bankman-Fried coated up his fraudulent actions for months, leaving traders, prospects, and even his personal workers in the dead of night 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 companies on the planet. 

In July 2021, the change raised $900 million at an $18 billion valuation from over 60 traders, together with crypto heavyweights reminiscent of 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 companies via 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 line with Crunchbase knowledge, 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 complete, 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 belongings. Nevertheless, solely a handful of those companies have publicly disclosed their extra FTX publicity. On November 9, Galaxy Digital CEO Mike Novogratz advised 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 strategy of withdrawing $47.5 million of that quantity. Nevertheless, In mild of the corruption uncovered through the change’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 change declared chapter. Crunchbase knowledge exhibits Multicoin had raised $605 million via three separate funds, implying that it misplaced no less than $60 million via its publicity to FTX. 

As many enterprise companies haven’t any obligation to reveal the precise quantities of their investments and losses publicly, it’s exhausting to understand how a lot they collectively misplaced from the FTX meltdown. Nevertheless, with the proof at hand, VC losses throughout the board seem like properly 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 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 undertaking was Serum, a Solana-based central restrict order guide change, 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, 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 will 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 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 ultimate manner FTX has broken Solana is thru Alameda Analysis’s investments in ecosystem initiatives. A number of corroborating stories point out that below the phrases of funding, protocols have been required or closely incentivized to custody their treasuries on FTX. This observe not solely left many initiatives excessive and dry after FTX’s chapter but additionally fed into the broader fraud happening on the change. By requiring initiatives to maintain their funds on FTX, Alameda may partially make investments right into a undertaking however obtain again the entire sum of that undertaking’s elevate. As was revealed when FTX went bankrupt, these buyer funds deposited onto the change have been being utilized in investments by Alameda. 

The Prospects

Whereas enterprise capital companies and FTX-backed initiatives have suffered from Sam Bankman-Fried’s years-long rip-off, finally, the unusual buyer is the most important loser in the entire debacle. Many FTX customers misplaced their life financial savings, believing that the change 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 change as a reputable and dependable entity. 

It’s exhausting to estimate how a lot prospects holding funds on FTX misplaced, as stories fluctuate, however the quantity is more likely 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 belongings held on the change have been totally 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 “interior circle” of FTX workers who betrayed Prospects—U.S. regulators who labored intently with the change and confirmed it lenience are additionally culpable. U.S. Securities and Alternate Fee Chair Gary Gensler devoted his group’s sources going after extra minor, much less vital DeFi protocols for enforcement motion whereas the most important fraud in current crypto historical past operated proper below his nostril. Very most likely, 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 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 business stakeholders within the U.S. to draft honest, complete laws early, this complete scenario may have been averted or no less than diminished in its severity. 

Just like the Mt. Gox hack earlier than it, the FTX fraud will seemingly tarnish the business’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 essential to search for a silver lining in instances of darkness. It’s higher that the rot within the crypto business be uncovered now reasonably than sooner or later when extra is on the road. Whereas it could 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 expensive.  

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