Key TakeawaysThe collapse and subsequent fraud of FTX is already being referred to as the worst crypto-related fraud in history.
Sam Bankman-Fried’s meticulously-crafted empire was destroyed along with his reputation over the course of a single week.
Although it is not possible to know how many people have been affected by the scam, we do know who the largest victims have been so far.
Share this articleFTX was exposed along with its affiliated trading firm Alameda Research. Alameda’s financial problems were revealed in a CoinDesk article on November 2. This set off a series that ultimately exposed FTX. Sam Bankman-Fried, former CEO of FTX, secretly used customer funds for FTX’s sister firm Alameda Research. This resulted in an estimated $10 billion hole on the exchange’s books. Bankman-Fried hid his fraud activities for months, leaving customers, investors, and even his employees in the dark until FTX declared bankruptcy November 10. Crypto Briefing examines the consequences of Sam Bankman-Fried’s deceitful scheme. Venture Capital FTX attracted large investments from some the most well-funded and prominent venture capital firms around the world during its heyday. The exchange raised $900million at a $18 billion valuation in July 2021 from more than 60 investors, including crypto heavyweights like Sequoia Capital, Coinbase Ventures, Paradigm, and Sequoia Capital. Many of these investors doubled down on FTX in its January 2022 funding round, which valued it at an incredible $32 billion. FTX’s raises were more impressive than those of other crypto companies due to participation from non-crypto venture firms. FTX equity was purchased by VanEck, Softbank, and Temasek during one of its many funding rounds. Crunchbase data shows that FTX sold equity in excess of $1.8 billion during its three-year existence. FTX shares are almost certain to be worthless now that the company has gone bankrupt and owes billions of dollars to creditors. The three largest FTX shareholders at the time of the collapse were Sequoia Capital, Temasek, and Paradigm with 1%. These three venture firms collectively invested $620 million in FTX. Many venture firms that invested in FTX also used its services for holding cash and crypto assets. Only a few of these firms have made public disclosures about their additional exposure to FTX. CNBC reported that Galaxy Digital CEO Mike Novogratz stated that his company had $76.8million in cash and digital assets deposited onto FTX at time of collapse. However, he also said that his company was about to withdraw $47.5 million. However, given the extent of corruption exposed during the final days of the exchange, it seems unlikely that FTX will honor this withdrawal. Multicoin Capital, another prominent FTX equity investors, reported that 10% of its total assets were still under management on FTX prior to the exchange’s bankruptcy. Crunchbase data indicates that Multicoin raised $605 million through three funds, implying that it had lost at least $60 millions from its exposure to FTX. It’s difficult to estimate how much they collectively lost due to the FTX meltdown because venture firms are not required to publicly disclose the amounts of their investments or losses. However, the evidence suggests that VC losses are well into the billions. The Solana Ecosystem Sam Bankman Fried’s FTX empire was heavily intertwined with Solana ecosystem. This is causing the high-throughput blockchain to suffer greatly. The native SOL token of Solana, along with many other tokens from the Solana ecosystem, experienced a boom in August 2021 due to the alternative Layer 1 narrative. Serum, a Solana-based central order book exchange, was one such project. Bankman-Fried co-founded it and Alameda Research was an investor. Serum’s initial value was high, but its predatory tokenomics which gave large amounts of its native SRM tokens to early investors like Alameda caused it to plummet. Alameda had millions of tokens to secure loans against its bankruptcy, despite dumping large amounts of SRM onto market during the 2021 bull rush. Alameda as well as FTX held large SOL positions that will be liquidated. These tokens will likely be sold on the open markets, as Alameda and FTX are bankrupt. This will drive prices down further. FTX’s involvement in Solana was more than just investing in its protocols and promoting blockchain. To help DeFi adoption bootstrap, FTX created wrapped Bitcoin and Ethereum tokens backed with its reserves. Both wrapped tokens were widely utilized in the Solana DeFi ecosystem. As FTX faced a liquidity crisis, FTX-backed wrapped Bitcoins and Ethereum began to depeg. These tokens fell after FTX declared voluntary bankruptcy November 11. It was clear that FTX had no real Bitcoin or Ethereum in reserve. Solana wrapped Bitcoin 93% to $1.363 and Ethereum 83% to $257 over the past week. There is little chance that either asset will ever return to its original peg. Alameda Research’s investments into ecosystem projects is another way FTX has hurt Solana. Numerous reports confirm that protocols were required or heavily incentivised to store FTX’s treasuries under the terms and conditions of investment. This practice led to fraud on the exchange and left many projects in the dust. Alameda could invest in a project, but not receive the entire amount of the project’s raise by requiring that projects keep their funds on FTX. Alameda was using customer funds deposited on FTX to fund investments, as it was revealed after the bankruptcies of FTX. The Customers. Venture capital firms and FTX-backed initiatives have both suffered from Sam Bankman Fried’s decades-long scam. However, the average customer is ultimately the biggest loser in this whole mess. Many FTX users believed that the exchange was safe and they lost their entire lives savings. Trust in the exchange was also cultivated by Jim Cramer and Kevin O’Leary of Shark Tank. They compared Bankman-Fried to J.P Morgan. Although it’s difficult to estimate the loss to customers who have funds on FTX, there are many reports. However, it is likely that it will be in the millions. This figure will likely be exacerbated by Bankman-Fried’s now-deleted tweets during the FTX bankruptcy. The former CEO of FTX assured users that assets on the exchange were fully backed by 1:1, which discouraged users from withdrawing funds. These tweets were bald-faced lies in hindsight. Customers–U.S. were not the only ones who were betrayed by Bankman-Fried and his inner circle of FTX employees. Regulators who worked closely with the exchange, and gave it lenience, are also guilty. Gary Gensler, the Chair of the U.S. Securities and Exchange Commission, devoted his organization’s resources in order to pursue smaller, less important DeFi protocols for enforcement action. However, the largest fraud in recent years was right under his nose. Bankman-Fried’s status of a major political donor and active involvement in drafting crypto regulation likely helped him to pull the wool over the eyes of the SEC. U.S. crypto users were also pushed to unregulated overseas exchanges such as FTX.com by the lack of regulatory clarity from regulators such as the SEC. This whole situation could have been avoided if the SEC had consulted with stakeholders from the crypto industry in the U.S. to develop fair and comprehensive legislation early. Similar to the Mt. Like the Mt. Many who have been beaten will not return. It’s important to find a silver lining even in the darkest times. It is better to expose the rot in crypto now than wait for more. Although it may seem grim now, crypto will be stronger if Bankman-Fried is caught early. Disclosure: The author of this article owned ETH, BTC, and other crypto assets at the time of writing. However, Decentral Media, Inc. does not warrant the timeliness, completeness, accuracy, or currency of any information accessed through this site. Decentral Media, Inc. does not provide investment advice. We do not provide personalized investment advice or any other financial advice. This website’s information is subject to change at any time. The information on this website could become obsolete or incorrect. 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