VC Firms Ignored Red Flags in FTX’s Financial Statements: Report

VC investors in the embattled crypto exchange FTX may have ignored financial relationships worth over $250 million with related entities that have greatly contributed to the company’s downfall, according to a 2021 document seen by Semafor. The document explores relationships between FTX and unnamed related entities assumed to be the now-defunct trading firm Alameda Research.

FTX Engaged in Suspicious Relationships With “Related Parties”

The fall of FTX is turning into one of the most impactful events in the crypto world this year alongside LUNA’s collapse. However, new data suggests there is a chance escalation could have been prevented.

Namely, venture capital (VC) investors of FTX supposedly ignored certain financial activities that were one of the main reasons behind the crypto exchange’s undoing. According to an audited 2021 financial statement delivered to VC investors earlier in 2022 and seen by Semafor, FTX and “related parties” engaged in “tangled relationships” worth over $250 million.

The statement outlined business activities between FTX and outside entities managed or owned by the company’s leaders. While the document did not mention any entity by name, it is likely the statement was referring to Alameda Research, a crypto trading firm founded by FTX CEO Sam Bankman-Fried.

The document, which suggests that these entities played a pivotal role in the most recent crypto market downturn, is now being reviewed by FTX’s investors who are trying to pinpoint red flags they may have missed. The majority of venture capitalists “are asking whether FTX was hiding larger sums of money flowing to Alameda all along, or whether those flows began later this year, after it sent out its 2021 audited financials,” Semafor reports.

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FTX Paid More than $250M For “Software Royalties” to Related Entities

The statement shows that FTX paid over $250 million to the “related entities for software royalties” last year, as well as an additional $22 million to related parties for market-making and liquidity services. Furthermore, numerous FTX employees were working for those related parties, for which the crypto exchange paid an 8% “administrative overhead markup.”

FTX’s woes first began when previous reports said Alameda Research’s balance sheet was inflated by FTX’s native token FTT. As a result, FTX rival Binance said it plans to sell all of its FTT holdings worth roughly $530 million.

These developments caused a massive sell-off, after which Binance proposed to buy FTX in a rescue deal. However, the world’s largest crypto exchange abandoned those plans shortly afterward citing severe financial issues at FTX.

On Thursday, Twitter leaked a message sent by Bankman-Fried to employees, saying the company intends to raise new funds next week and that Binance “probably never really planned to go through with the deal.”

What do you think happens next for FTX? Let us know in the comments below.