What blockchain analysis can and cannot do to find FTX’s missing funds: Blockchain.com CEO

by · January 2, 2023

Blockchain.com’s founder and CEO, Peter Smith, believes that chain analysis will play a significant role in finding the billions in missing FTX customer funds, although it will have its limitations.

On December 20, Fox Business host Liz Claman said blockchain’s selling point was that it makes crypto transactions transparent and traceable, and asked Smith what was traceable in the case of FTX’s missing client funds.

Smith said blockchain sleuths have already done a fair amount of work chasing the money trail, adding that it may actually be the banking system where the trail may go cold:

“The most challenging for [blockchain analytics] Companies working on this today is when money moves off the chain and into the banking system because they are no longer able to track it.”

He cited an example of when Sam Bankman-Fried or affiliates bought real estate, when it would have come from a bank. Those assets would be difficult to trace back to FTX or a blockchain once they leave the crypto ecosystem, he said.

The interviewer also questioned whether shadow banking was used. This is a system of lenders, brokers and other credit intermediaries operating outside the traditional regulated banking business, which can be used to mask transactions.

Smith explained that for funds still in the crypto ecosystem, chain analysis will be hugely helpful to liquidators in their efforts to unravel the FTX mess, “since there are records that cannot be altered or changed.”

Things that can be tracked on the chain include where FTX lost customers’ money, such as in trading games, liquidity farming or withdrawals for real estate or venture investments. On-chain analytics can also be used to see how much crypto users deposited with FTX, he added.

“A lot of the money was lost in trading positions … real estate, venture capital investments … all this is happening outside the on-chain ecosystem in crypto.”

In a related development, FTX’s new chief financial officer, Mary Cilia, told a Dec. 20 procedural hearing that the firm has identified over $1 billion in assets.

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FTX reportedly found about $720 million in cash in US financial institutions authorized to hold funds by the Department of Justice. Cilia stated that about $130 million was held in Japan and that $6 million was held for operating expenses. Most of the remaining $423 million is stored at unauthorized U.S. institutions — mostly at a single broker, she said, declining to elaborate.

Prosecutors and liquidators have been sifting through the FTX wreckage in an attempt to recover as much as $8 billion in missing customer funds.