FTX effort to save itself failed on questionable assets

A big chunk of the assets consisted of four thinly traded crypto tokens closely connected to Mr. Bankman-Fried and FTX employees and mostly held by Alameda (Photo: Reuters)
A big chunk of the assets consisted of four thinly traded crypto tokens closely connected to Mr. Bankman-Fried and FTX employees and mostly held by Alameda (Photo: Reuters)


Collateral seized by crypto exchange was likely worth far less than it claimed

When crypto exchange FTX was struggling to raise cash early last month, it seized billions of dollars worth of collateral from its trading arm, Alameda Research, and used it to try to convince investors of its financial health, former FTX Chief Executive Sam Bankman-Fried said.

But much of it didn’t add up. A big chunk of the assets consisted of four thinly traded crypto tokens closely connected to Mr. Bankman-Fried and FTX employees and mostly held by Alameda. The tokens were likely worth far less than the $6.4 billion marked on the balance sheet FTX was shopping to investors in the hope of a bailout, according to market data and crypto researchers.

“It wasn’t meant to be casting a judgment or making a decision for people on what they thought was their worth from a liquidity perspective," Mr. Bankman-Fried said.

The four tokens taken from Alameda were listed as assets in documents dated Nov. 10, Mr. Bankman-Fried said in an interview Friday and according to documents reviewed by The Wall Street Journal. By then, the value of the tokens had roughly halved in less than a week, market data and FTX’s balance sheet show.

Some investors had already been skeptical of the value of these tokens. At its peak price, one had a market value of $127 billion—though only a tiny fraction of that was available for purchase. The value FTX placed on the tokens held on its balance sheet vastly exceeded the total amount in circulation. No investor stepped forward to save FTX, which filed for bankruptcy the next day.

The seizure of the tokens as collateral partially explains the multibillion-dollar cash shortfall that led to the bankruptcy at FTX. Alameda borrowed billions of dollars from FTX and when FTX called the loans, the collateral was worth far less than needed. It also highlights Mr. Bankman-Fried’s strategy of launching tokens and using them to raise money.

The tokens follow the same pattern Mr. Bankman-Fried used for FTX’s own token, FTT, which played a big role in the company’s collapse. FTX and Alameda controlled most of FTT, which helped them raise and borrow billions of dollars. FTX faced a run by customers after a report showed that an outsize chunk of Alameda’s assets were made up of FTT and that it might have overvalued the token.

Crypto firms typically issue tokens to boost revenue by offering trading discounts to buyers and to give founders and early investors a way to bet on the success of the issuer. Investors expect the tokens to be widely traded and not controlled by their issuer.

The four tokens seized as collateral by FTX were part of a plan by Mr. Bankman-Fried and his associates to draw in large numbers of potential new traders to their crypto-trading ecosystem. One, called Serum, was designed to be a crypto exchange that automatically matched buyers and sellers. A second token, Bonfida, backed a project to create trading tools for Serum. Alameda funded both projects.

Tokens from two other firms—Oxygen, a brokerage that lent money to traders, and Maps.me, an offline mapping service that planned to bring in customers using a wallet in the app—were also connected to Serum and backed by Alameda.

The ecosystem Mr. Bankman-Fried envisioned is crumbling without the support of Alameda and FTX. The day before FTX filed for bankruptcy, the value of Serum, Bonfida, Maps and Oxygen tokens were in free fall, cutting the value of those assets on the exchange’s balance sheet by more than half to $2.9 billion. The projects made up nearly a third of FTX’s assets just before bankruptcy, the balance sheet shows.

Serum and three other tokens didn’t appear on FTX’s balance sheet until November when it claimed funds Alameda used for collateral after the trading firm ran out of cash, Mr. Bankman-Fried said.

Two-thirds of all possible Serum coins were held by FTX and Alameda. Much of the trading in Serum was driven by Alameda, and its backers aimed from the beginning to “imbue Serum with incredible liquidity," they said in a news release. Oxygen and Maps.me said in a statement after the bankruptcies that FTX and Alameda held 95% of all of their tokens.

The liquidity dried up after the bankruptcies. “Why is there no volume / active market?" one user asked on a Serum Discord channel soon after the FTX bankruptcy. “Alameda gone, no one else has stepped up," a moderator replied. “We’re on our own now."

Serum, launched with help from Mr. Bankman-Fried in mid-2020, was supposed to be an autonomous decentralized crypto exchange, governed by its users, not FTX, the platform’s documentation says. Instead of depositing funds with a centralized exchange like FTX, bots—called smart contracts—would automatically facilitate trades between buyers and sellers.

Mr. Bankman-Fried helped promote Serum. He said in the interview that he likes to support projects like this, especially when he knows the founders. He hired at least one person to respond to Telegram messages where users discussed issues, while a public-relations firm that promoted FTX also helped market the new exchange, according to employees.

At least two early Serum investors purchased tokens from a company called Cottonwood Grove Ltd., whose CEO was Mr. Bankman-Fried, according to people familiar with the matter and a section of a July 2020 purchase agreement viewed by the Journal. Cottonwood is now among more than 100 FTX affiliates listed in the bankruptcy case.

Before long, Serum seemed to be thriving. In September 2021, each of its tokens traded as high as $12.50, driving the value of its 10.16 billion tokens to more than $127 billion—though only a tiny fraction were actually trading.

In January, Serum’s backers announced they had raised $100 million from 18 investors, including Tiger Global Management and Commonwealth Asset Management. By February, the platform was handling nearly $1 billion in transaction volumes a day, according to crypto data provider CoinGecko—making it the third-largest such exchange in the world at the time.

But in reality, FTX employees still had control. They held the credentials allowing coders to make changes to the platform, according to two people familiar with the project’s development and a Journal review of Telegram chat logs. After the bankruptcy, some Serum backers set up a fork—or duplicate—of the platform to cut off FTX’s access, according to chat logs and several people involved in the project.

Serum’s links to FTX, Alameda and Mr. Bankman-Fried were known in the crypto world. When heavily traded currencies bitcoin and Ethereum were dropping in value, financial-services firm Blockchain.com pulled loans from Alameda, according to people familiar with the matter. It wouldn’t accept other coins such as Serum on the company’s balance sheet because of their close ties to Mr. Bankman-Fried.

The tokens were also red flags for Olaf Carlson-Wee, founder of the cryptocurrency fund Polychain Capital. Mr. Carlson-Wee said in a tweet that his firm was given 24 hours by Mr. Bankman-Fried to decide whether to invest. He repeatedly declined in part because of concerns that the Serum and FTT tokens as well as those issued by Oxygen and Maps.me were overvalued.

Together, the Maps.me and Oxygen tokens raised $90 million. Mr. Bankman-Fried was an adviser to both projects and Alameda an investor along with others, including Genesis Capital, part of Digital Currency Group Inc., and Jump Crypto, a division of the Jump Trading Group. Genesis and Jump declined to comment.

Both Oxygen and Maps were led by two men, Alex Grebnev and Viktor Mangazeev. Mr. Mangazeev said in a LinkedIn message that he ended his involvement in the projects in February. Mr. Grebnev didn’t respond to emails seeking comment.

Maps.me was owned by the Russian internet conglomerate Mail.ru Group, now called VK Co., and in late 2020 the project was sold to a Cyprus-registered firm, according to a news release, before the token was announced.

“We would rather not elaborate on products and related plans which are no longer applicable to the group," a VK spokeswoman said.

Mr. Bankman-Fried also helped run Bonfida, whose tokens later appeared on the FTX balance sheet. Helmed by a former FTX employee, the project raised $4.5 million from investors including failed crypto hedge fund Three Arrows Capital in December 2020.

In reality, the new project was little more than an extension of FTX, said Ezra Lim, a former Bonfida employee who was initially hired by Mr. Bankman-Fried to respond to Serum inquiries via Telegram and later shifted to Bonfida. Mr. Bankman-Fried weighed in on a Bonfida personnel dispute, he said. Its token hit an all-time high of $11 billion in November 2021, according to data from The Tie.

Bonfida’s CEO, David Ratiney, the former FTX employee, said Mr. Bankman-Fried didn’t control the project. He said Mr. Bankman-Fried was consulted on how to handle the personnel dispute because Alameda was a Bonfida investor.

After raising money, Bonfida updates have slowed and it has yet to release finished versions of some of the trading tools it marketed, Mr. Lim said.

“After the launch we went a completely different direction," Mr. Lim said. “I did feel like I lied to investors, but because the token price was going up, no one cared."


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