Who are Sam Bankman-Fried’s biggest victims?

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FTX and its affiliated trading firm Alameda Research are exposed. A November 2 Coin Bureau article The revelation of Alameda’s troubled finances set in motion a chain of events that eventually revealed FTX to be insolvent.

Former FTX CEO Sam Bankman-Fried secretly used client money to bail out FTX’s sister company Alameda Research, resulting in an estimated $10 billion hole in the exchange’s books. To make matters worse, Bankman-Fried hid his fraudulent activities for months, keeping investors, customers and even his own employees in the dark until FTX declared bankruptcy on November 10.

In the wake of perhaps the most earth-shattering deception in crypto history, Crypto briefing looks at who lost the most from Sam Bankman-Fried’s monumental revenge.

Venture capital

During his During its heyday, FTX attracted massive investments from some of the most prominent and well-funded venture capital firms in the world.

In July 2021, the exchange raised $900 million at a valuation of $18 billion from over 60 investors, including crypto heavyweights such as Coinbase Ventures, Sequoia Capital, Paradigm and others. Many of these investors also doubled down on FTX during its last funding round in January 2022, valuing the company at an eye-watering $32 billion.

FTX’s raises stood out from those of other crypto companies due to the participation of high-ranking non-crypto companies. Softbank, VanEck and Temasek all bought FTX shares during one of the company’s many funding rounds. According to Crunchbase factsFTX sold shares totaling approximately $1.8 billion during its three years of operation. Now that the company is bankrupt, FTX stock is almost certainly worthless.

At the time of the collapse, the three largest FTX stakeholders were Sequoia Capital with 1.1% and Temasek and Paradigm, each with 1%. In total, these three venture capital firms jointly invested $620 million in FTX.

Moreover, many venture capital firms that invested in FTX also used its services to hold cash and crypto assets. However, only a handful of these companies have disclosed their additional FTX exposure. On November 9, Galaxy Digital CEO Mike Novogratz said told CNBC that his company had deposited $76.8 million in cash and digital assets into FTX at the time of the collapse, although he stated that his company was in the process of withdrawing $47.5 million of that amount. However, in light of the corruption exposed in the final days of trading, it seems unlikely that FTX will honor this withdrawal.

Multicoin Capital, another prominent FTX stock investor, reported that it had 10% of its total assets under management on FTX before the exchange declared bankruptcy. Crunchbase data shows that Multicoin had raised $605 million through three separate funds, implying that it lost at least $60 million from its exposure to FTX.

Because many venture capital firms are not required to publicly disclose the exact amounts of their investments and losses, it is difficult to know how much they collectively lost from the FTX meltdown. However, with the available evidence, VC losses across the board appear to be well into the billions.

The Solana Ecosystem

Sam Bankman-Fried’s FTX empire was deeply intertwined with the Solana ecosystem, and the high-throughput blockchain suffers greatly as a result.

When Solana experienced a boom in August 2021 due to the alternative Layer 1 story, the original SOL token, along with many Solana ecosystem tokens, rose in value. One such project was Serum, a Solana-based central limit order book exchange, in which Bankman-Fried was a co-founder and Alameda Research an investor.

While Serum initially rose in value, predatory tokenomics, which gave large amounts of its native SRM token to early investors like Alameda, caused its value to bleed over time. Despite dumping massive amounts of SRM onto the market during the 2021 bull run, Alameda still held over two billion tokens as collateral for loans at the time of its bankruptcy. Additionally, Alameda and FTX both had large SOL positions, which will also face liquidation. With FTX and Alameda bankrupt, these tokens will almost certainly be sold on the open market, causing prices to drop further.

FTX’s involvement with Solana went beyond promoting the blockchain and investing in its protocols. To promote DeFi adoption, FTX has also created Solana-based wrapped Bitcoin and Ethereum tokens backed by its reserves.

Both wrapped tokens were widely used in the Solana DeFi ecosystem. However, as it became clear that FTX was facing a liquidity crisis, FTX-backed Bitcoin and Ethereum began to disconnect. After FTX voluntarily declared bankruptcy on November 11, these tokens plummeted as it was clear that FTX no longer had real Bitcoin and Ethereum in reserve. Over the past week, Solana Bitcoin has fallen 93% to $1,363 and Ethereum has fallen 83% to $257. Currently, there appears to be little hope that either asset will get back on track.

A final way FTX has damaged Solana is through Alameda Research’s investments in ecosystem projects. Several supporting reports indicate that the terms of the investments required or strongly encouraged protocols to hold their government bonds on FTX. This practice not only abandoned many projects after FTX’s bankruptcy, but also contributed to the broader fraud taking place on the exchange. By requiring projects to keep their money in FTX, Alameda can partially invest in a project but get back the total sum of that project’s proceeds. As was revealed when FTX went bankrupt, customer funds deposited on the exchange were used by Alameda for investments.

The customers

While venture capital firms and FTX-backed projects have suffered from Sam Bankman-Fried’s years-long scam, the average customer is ultimately the biggest loser in the whole debacle. Many FTX users lost their savings, thinking the exchange was safe. Recommendations from From Shark Tanks Kevin O’Leary and Jim Cramer comparing Bankman-Fried to JP Morgan also helped increase confidence in the exchange as a legitimate and trustworthy entity.

It is difficult to estimate how much customers who hold money in FTX have lost reports varybut the number is probably in the billions. The figure will almost certainly have been exacerbated by Bankman-Fried’s since-deleted tweets in the run-up to FTX’s bankruptcy. The former CEO of FTX assured users that assets on the exchange were fully supported at 1:1, which discouraged users from withdrawing funds. In retrospect, these tweets turned out to be bald lies.

But it wasn’t just Bankman-Fried and his “inner circle” of FTX employees who betrayed customers; US regulators who worked closely with the stock exchange and showed they were lenient are also to blame. Gary Gensler, chairman of the U.S. Securities and Exchange Commission, devoted his organization’s resources to pursuing smaller, less significant DeFi protocols for enforcement action, while the largest fraud in recent crypto history operated right under his nose. Most likely, Bankman-Fried’s status as a major political donor and his active involvement in drafting crypto regulations helped him take the wind out of the SEC’s sails.

The lack of regulatory clarity from regulators like the SEC has also contributed to U.S. crypto users switching to unregulated foreign exchanges like FTX.com. If the SEC had instead worked with US crypto industry stakeholders to craft fair, comprehensive legislation early on, this entire situation could have been avoided or at least reduced in severity.

Just like the Mt. Gox hack before it, the FTX fraud will likely tarnish the sector’s reputation among the current cohort of crypto-curious investors. Many who have been burned will not return. But it’s also important to look for a silver lining in times of darkness. It is better that the rot in the crypto industry is exposed now than in the future when the stakes are higher. While it may seem bleak right now, crypto will be stronger in the long run because crooks like Bankman-Fried have been eradicated early, even if the costs are high.

Disclosure: At the time of writing, the author of this piece owned ETH, BTC, SOL, and several other crypto assets.

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