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Ordinary investors who jumped into Crypto are saying: Now what?

When a bank or brokerage fails, there are government-guaranteed funds to ensure that investors generally get their money back. The cryptocurrency industry, for the most part, has no such guardrails.

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Written by Matthew Goldstein

In early November, Adrian Butkus, a 43-year-old father of two, put $600,000 — much of his life savings — into an account at BlockFi, a cryptocurrency trading firm. BlockFi had marketed the account as risk-free, yielding 6.5% interest, more than Butkus could get anywhere else.

Just days later, as the collapse of cryptocurrency exchange FTX shook the entire crypto industry, Butkus asked BlockFi for his money back. But the firm had suspended customer withdrawals, citing its close financial ties to FTX. By late November, BlockFi, too, had filed for bankruptcy.

Butkus doesn’t know when — or if — he will see his money again. He is one of millions of individual investors around the world who poured money into digital assets, believing the cryptocurrency industry was a stable financial system. They were cleareyed about the volatility and big price swings of bitcoin and other cryptocurrencies. But what has come as a big surprise to many is that the firms where they deposited their money lacked the basic protections offered by a brokerage or a bank.

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As companies such as FTX took on the marketing tactics and girth of mainstream financial firms, their customers came to believe they were safe places to deposit cash in exchange for cryptocurrency. The fact that big-name venture capital and other funds backed some of these companies only added to their allure.

“It just angers me,” Butkus said. “Now I’m in a fight to get back some of my money.”

Cryptocurrency firms, led by FTX, exploded into the mainstream in the past couple of years, pitching their products in extensive advertising campaigns as stable and safe investments. Unlike traditional banks and brokerages, which are limited in what they can say, the crypto firms aren’t subject to the same rules.

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“These companies are all giving the impression of banklike security,” said Joshua Fairfield, a professor at Washington & Lee University Law School in Virginia who specializes in technology issues. “These companies want to have customer trust but with none of the responsibility that comes with a regulated financial entity. And that just doesn’t work.”

Moreover, when a bank or brokerage fails, there are government-guaranteed funds to ensure that investors generally get their money back. The cryptocurrency industry, for the most part, has no such guardrails. And with the companies in bankruptcy and the value of some crypto assets uncertain, ordinary customers stand at the end of a long line when it comes to getting their money back, behind the large trading firms and lenders.

Butkus said he had invested with BlockFi even though he knew the accounts weren’t insured. Under BlockFi’s offering, he lent it his $600,000 for six months, in return for a 6.5% yield. BlockFi converted that money into a digital asset that it used to conduct its cryptocurrency trading business.

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When BlockFi’s marketing materials and sales agents said his investment was safe and redeemable at any time, he took them at their word.

“They sold it to me, that there was no risk,” Butkus said, adding that he was unaware that BlockFi, which had borrowed money from FTX, was so closely tied to the exchange.

Much of the money that Butkus, a self-employed businessman, invested came from the recent sale of his home in Plainfield, Illinois. He was hoping to increase his savings with the interest on his BlockFi loan and then use the money to build a new home for his family. Now he wonders where his family, who are temporarily staying with his in-laws, will ultimately live.

Lawyers for FTX and BlockFi did not respond to requests for comment.

FTX, founded by Sam Bankman-Fried and once a behemoth of the crypto industry, imploded last month after some big trading firms withdrew their money amid allegations that the exchange had used billions of dollars in customer deposits to bail out Alameda Research, the crypto trading firm that he co-founded. The exchange’s fall was all the more stunning because FTX had acquired an air of legitimacy through a splashy advertising campaign showing off its product as safe, fun and easy to use.

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Federal authorities in New York are now trying to determine whether criminal charges should be filed against Bankman-Fried and others over the company’s collapse and the potentially inappropriate use of customer deposits. Bankman-Fried, during a media blitz this past week, has insisted he never intended to defraud anyone and was not fully aware of how much customer money had been transferred to Alameda.

Frank Friemel, 39, is among the FTX customers wondering whether they will get back any of their money from the now-bankrupt exchange. When he opened an account with FTX in March, Friemel said, he knew it was unregulated but wasn’t too concerned.

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He figured that, as the second-biggest cryptocurrency trading platform in the world, with the financial backing of well-known professional investment firms like Sequoia and SoftBank, FTX was on solid footing.

“I’m a seasoned investor, and I knew who was investing with them,” said Friemel, a technology professional who lives in Jena, Germany. “If big investors are putting money with them, then they must know that the company is good.”

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After seeing reports that FTX could collapse, Friemel tried to get his money out Nov. 8, but it was too late. He said he got a notification that the withdrawal was being reviewed but never heard from FTX again. Friemel did not want to disclose his losses but said the collapse of FTX had led to an “erosion of trust” in crypto.

Because FTX is based offshore in the Bahamas, most of its customers come from Europe, Asia and well-known tax havens like the Cayman Islands and British Virgin Islands. Only 2% of its customers are in the United States, where they trade through FTX US, a subsidiary, according to its bankruptcy filings.

In the days leading up to FTX’s bankruptcy filing, the U.S. unit told customers they were free to withdraw their money. It’s unclear how many did; FTX US has since also filed for bankruptcy.

Mashood Alam, an actor from Pakistan who lives in North Hollywood, California, and was an FTX US customer, said he wasn’t fully aware of the problems at the company until the bankruptcy filing. Alam, 32, said he hoped to get back $20,000, but the experience has soured him on crypto. He had been planning to use that money to help pay a lawyer to work on his naturalization and citizenship application. Now Alam said he will have to find another way to come up with the money.

Scott Jerutis, 58, a real estate broker in the New York City borough of Queens, has about $33,000 of the digital currency ethereum in a frozen BlockFi account, he said. He called himself an experienced investor who had made profitable crypto trades in the past and said he understood that losses were part of the game.

But, he added, “I never thought if you had a debacle like this, they wouldn’t let you withdraw your funds. Jerutis said he now believed that regulation was needed to safeguard customer money.

Angry investors are only now finding out that they have little recourse. Andrew Stoltmann, a securities litigation lawyer, said that his firm had been getting about 10 calls a day even before the FTX collapse — “ever since the crypto winter began,” he said, referring to the early wobbles in the market in the spring as investors turned away from risky assets.

Many customers want to know if they can sue to recover lost or stolen money, Stoltmann said. Since traditional Wall Street firms have stayed away from providing financing to crypto firms, he said, there are few other stable financial institutions to tap.

So far, about two dozen individuals have filed claims in bankruptcy court seeking to reclaim money they lost on FTX. Most are from Taiwan and have losses ranging from just a few thousand dollars to tens of thousands.

One of those customers, Chen Mei-Sha, filed a claim for $5,600. After FTX stopped allowing withdrawals, she said in an email, she began to suspect that most of Bankman-Fried’s “Twitter posts and speeches were lies.” Chen described herself as a housewife who has invested in cryptocurrencies on three other trading platforms and believed FTX “misappropriated” customer money.

FTX was particularly effective at cultivating its brand. Beginning last year, it signed multiyear naming-rights deals worth more than $100 million with a professional basketball arena in Miami and for a football stadium at the University of California, Berkeley. The company also struck marketing deals with MLB and the Golden State Warriors basketball team.

FTX signed up a number of well-known athletes and celebrities, including Stephen Curry, Tom Brady, Gisele Bündchen and Larry David, as “brand ambassadors,” who made humorous TV commercials or other ads for the company. In one of the company’s best-known commercials, Brady and Bündchen, who were married at the time, are seen calling lots of friends — and even some frenemies — with a simple question: “Are you in?”

The ad’s tagline was: “Crypto. FTX. You in?”

Since September 2021, FTX spent $60 million on TV advertising with its last commercial featuring Brady airing from Sept. 11 to Nov. 4, according to EDO, a data and analytics company.

Nathaniel Whittemore, who was FTX’s director of marketing, said the U.S. marketing and ad campaign was focused primarily on “brand building” and raising the “profile of FTX and crypto overall.”

Eric Goldman, a professor at Santa Clara University School of Law and a director of its High Tech Law Institute, said big marketing and sports stadium branding campaigns are a popular way for tech startups to convey that their businesses are there for the long haul.

“It sends a signal to consumers that the advertiser has enough money and is staking enough of its fortune on advertising to say that it will be around,” Goldman said.

First published on: 08-12-2022 at 15:52 IST
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