Adrian sunk $900,000 into a crypto trading firm. He doesn’t know if he will see it again

Butkus said he had invested with BlockFi even though he knew the accounts weren’t insured. Under BlockFi’s offering, he lent it his $US600,000 for six months, in return for a 6.5 per cent yield. BlockFi converted that money into a digital asset that it used to conduct its cryptocurrency trading business.

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.

Loading

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.

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.

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 per cent 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 US 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 $US20,000, 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 naturalisation 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 $US33,000 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.

Loading

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 $US5,600. 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 $US100 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?”

Loading

Since September 2021, FTX spent $US60 million on TV advertising with its last commercial featuring Brady airing from September 11 to November 4, according to EDO, a data and analytics company.

Nathaniel Whittemore, who was FTX’s director of marketing, said the US 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.

This article originally appeared in The New York Times.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.