Alameda $65B Backdoor

📢 Sponsor | 💡 Telegram | 📰 Past Editions

Good Morning,

SBF trial continues. We’re learning more shenanigans that the old FTX management did, such as firing an employee who discovered a $65B backdoor.

Turns out, it was not a good idea to entrust billions to a band of 20-year-olds without strong corporate governance. What a shocker.

In Today's Email:

• What Matters: Alameda $65B backdoor 🚪

• Founders Highlight: Luca Prosperi of M^ZERO 💱

• Deal Flows: CMCC $100M crypto fund 💰

BROUGHT TO YOU BY…?

This spot could be your company - in front of thousands of web3 builders and investors! We are looking for early sponsorship partners. Fill out this form and we'll get in touch :)

WHAT MATTERS

FTX Employees Found Alameda's $65B Backdoor

State of play: US-based FTX employees found a backdoor for affiliated firm Alameda Research months before the crypto exchange's November 2022 collapse, according to the Wall Street Journal.

• Court filings reveal a backdoor secretly coded in FTX’s systems that allowed Alameda to incur up to $65B in negative balances.

• Employees reported the discovered backdoor to their division head and Nishad Singh, lieutenant to former FTX CEO Sam Bankman-Fried.

• The issue remained unresolved, and the team leader, Julie Schoening, who raised the concern was subsequently fired.

• Schoening was an employee of LedgerX, which was acquired by FTX's US arm in 2021. She discovered a backdoor in FTX’s international platform code while examining its compliance with US regulations in the spring of 2022.

• Schoening's attorney threatened to sue over her dismissal, leading to a $5M settlement agreement that was not finalized before the exchange's collapse.

During the jury selection process for Sam Bankman-Fried’s fraud trial, jurors were questioned about their varying experiences and views on cryptocurrency.

• Several jurors or their family members had traded cryptocurrency and all experienced losses.

• Some jurors voiced a strong aversion to cryptocurrency.

• A potential juror, who was eventually not chosen, was employed by a firm that incurred losses with FTX.

Why it matters: These jurors’ selection and new findings that are starting to come out of the court procedure will provide more clarity on the future of SBF.

• Bernie Madoff, the architect of a $65B Ponzi scheme, received a 150-year sentence.

• FTX let Alameda cover up to $65B in liabilities with customer funds. Will SBF receive a 150-year sentence?

For builders and investors: Strong corporate controls, disclosure practices, board oversight, and government oversight would have protected VCs that bet on FTX and lost billions in the crash.

• Do not rush - VCs rushed the due diligence process for fear of losing hot deals.

• Good corporate governance would have ensured a more transparent diligence process, giving investors a comprehensive understanding of investment risks.

BUILDER-INVESTOR HIGHLIGHT

Luca Prosperi, CEO & Co-Founder of M^ZERO

Luca Prosperi is the CEO & co-founder of M^ZERO Labs, a decentralized infrastructure layer for digital asset value transfer.

• Luca was a core contributor to MakerDAO’s Lending Oversight from December 2021 to August 2022, focusing on establishing MakerDAO as DeFi ecosystem's ultimate lender of last resort.

• Luca publishes his own research on dirtroads.substack.com.

• He is also an advisor for Cherry Venture’s crypto investments.

Previous backgrounds: Prior to crypto, Luca worked for 12 years in the banking and investment sector in companies including Oliver Wyman and Morgan Staley.

• He holds an MBA from London Business School and an MSc and BA in Mathematics and Economics from Bocconi University.

The big idea: “You can think about M^ZERO as an infrastructural overlay on Ethereum, where large providers of asset and liquidity around the world can exchange value, and builders can create solutions.” — Luca

• M^ZERO raised a $22.5M Seed Round in April 2023.

Take a peek at our referral reward at the bottom of this issue. Share this newsletter and receive our list of 100 smart crypto investors' wallet addresses 👇

INSIGHTS

$7B of Crypto Laundered

Elliptic's study reveals that DEXs, cross-chain bridges, and coin swaps were used to launder $7B.

• Last year, Elliptic forecasted that $6.5B would be laundered by the end of 2023. Its recent study reported the number exceeded the prediction.

• The recent study reveals that the predicted $6.5B in funds laundered through various methods was already reached by July this year. 

• Criminals have been using sophisticated cross-chain techniques to conceal their activities.

• From July 2022 to July 2023, Elliptic reported $2.7B laundered through coin swaps, bridges, and DEXs.

• Elliptic identified North Korea's Lazarus Group as the main offender, laundering over $900M through cross-chain methods, making it the largest source of illicit funds laundered through cross-chain bridges and the third-largest source of all cross-chain crime.

DEAL FLOWS

CMCC Global Launches $100M Fund

Deal flows soared back 📈 — we saw $180M+ in deals.

Hong Kong-based crypto VC firm CMCC Global raised $100M to support Asian blockchain startups.

• The fund has more than 30 investors, including Block.one, Pacific Century Group, Winklevoss Capital, Jebsen Capital, and Animoca Brands founder Yat Siu.

• CMCC Global’s fourth fund, called the Titan Fund, will provide equity investments to early-stage blockchain start-ups.

• The fund will focus on blockchain infrastructure, consumer applications like gaming and NFTs, and financial services including exchanges, wallets, and lending platforms.

Deal flows in the past week:

• Convergence RFQ, $2.5M Pre-Seed

• L1 Advisors, $1.6M Pre-Seed Round

• Cicada, $9.7M Pre-Seed Round

• ParaFinance, $5M Seed Round

• Phaver, $7M Seed Round

• Blackbird, $24M Series A

• AirDAO, $7.5M Strategic Round

• Supra, $24M Private Round

• CMCC Global, $100M VC fund

• TON, Undisclosed $ Private Round

• Accumulated Finance, Undisclosed $ Private Round

• Fountain, Undisclosed $ Private Round

• Hadean, Undisclosed $ Private Round

QUICK BITES

• Ledger cuts 12% of staff.

• Developers are fleeing Crypto, data shows.

• JPM said Ethereum has become more centralized.

• DOJ said that current laws are sufficient to charge SBF.

• Alameda has a secret backdoor allowing $65B of negative balance.

• Sui Foundation reallocates 117M SUI to support growth.

• US Crypto Legislation could stall amid Republican leadership drama.

• Polygon Co-Founder steps away from his full-time duties.

• BlackRock Executive says SEC likely to approve all spot bitcoin ETFs at once.

• SBF & other FTX Execs committed financial crimes, Co-Founder Wang testifies.

NOTEWORTHY READS

• Maven11 Research’s read on the cross-domain thesis part 2.

• Hasu’s read on proposed goals for Lido DAO.

• 0x_emperor’s read on a list of open problems in crypto part 2.

If you enjoy reading this issue, please consider subscribing. It takes 1 minute of your time but it would mean the world to us 🙇

Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.