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FTX Scandal: $663 Million Funds Drained As The Crash Was Happening

As FTX crashed, unknown hackers made off with hundreds of millions of dollars. Blockchain analysis for crypto-tracking might provide insight.

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The theft of cryptocurrency has always presented a unique set of risks and opportunities. Because it is digital currency, and because it is stored in multibillion-dollar quantities on networks that are vulnerable to hacking because of their connection to the internet, it is an attractive target. Once bitcoin has been stolen, however, every transaction can be tracked using blockchains, the underlying technology of almost every cryptocurrency. This makes it easy to frequently track down and punish the perpetrators. After yesterday's massive heist, in which nearly half a billion dollars were stolen from the already faltering FTX cryptocurrency exchange, crypto tracers around the world are now closely monitoring the whereabouts of that loot in an effort to identify whether the thief was an insider at FTX or merely a hacker looking to capitalize on the exchange's demise.

FTX Scandal

More than $663 million worth of bitcoin seems to have been taken on Friday, hours after the big cryptocurrency exchange FTX filed for bankruptcy in the aftermath of its catastrophic, 10-figure collapse. An FTX administrator posted, "FTX has been hacked," in the FTX Telegram group. Even though FTX hasn't publicly acknowledged any theft, the company has issued a statement saying, "FTX applications are malware." Delete them." It's unclear how FTX may have been penetrated or whether its apps are in fact compromised. While the corporation's US general counsel tweeted that "unauthorized access to some assets has happened," the company itself was not hacked.

The $663 million disappearance was first thought to be the result of a strange heist, but it was soon uncovered that FTX had moved funds into its own storage wallets. Although TRM Labs estimates that just $338 million was stolen, Elliptic estimates that $477 million was taken. Within twenty-four hours of the theft, the majority of the stolen funds had been transferred to a small number of cryptocurrency addresses, which are now being closely monitored by the entire crypto-tracing industry, a massive community of amateur crypto sleuths, and, no doubt, law enforcement agencies around the world.

Any crook attempting to convert their FTX assets or other stolen crypto to fiat currency faces an enormous obstacle due to this transparency. It could confirm that insiders were responsible for the theft, or it could show that external hackers took advantage of the chaos at FTX to pull off a burglary, which would be useful information in this case because regulators and an army of angry creditors are looking for any sign that FTX's staff or owners may themselves be the culprits.

Chris Janczewski, chief of investigations at TRM Labs and a former special agent in the IRS's criminal investigations section, adds, "We're obviously following the movements of this cash." The hypothetical crook has hundreds of millions of dollars, but it's like if they robbed a bank, stole as much money as they could carry, and then the dye packets went off, so now everyone knows that the money is tied to the heist. What use is it now?

Elliptic found that at least $220 million in stolen cryptocurrencies were immediately moved onto decentralized exchanges (websites where users can buy and sell digital assets without disclosing their identities) in order to purchase ether and dai. However, in order to convert those coins and the remainder of the stolen wealth into fiat currency, they will need to be traded on a centralized exchange, which often necessitates the disclosure of personal information. The criminals may attempt to utilize a "mixing" service, which is a kind of currency laundering in which the stolen coins are combined with those of other users. However, blockchain experts that specialize in crypto-tracing have shown they can frequently beat such mixers, especially when consumers pour in extremely significant quantities of money. In addition, many cryptocurrency exchanges are unable to process transactions involving bitcoin that have been mixed using certain mixers, such as the Tornado Cash service that was blacklisted by the US Treasury in August.

According to Michelle Lai, a cryptocurrency privacy advocate, investor, and consultant who claims to have been following the whereabouts of the stolen FTX funds with "morbid fascination," it will be difficult for the thieves to make off with their profits in a spendable form without being identified. However, the real question, Lai says, is whether identifying the thieves will offer any recourse. "The concern is not whether they will know who did it, but rather whether that knowledge will be actionable," adds Lai. And if they're on land, where are they?

FTX Scandal

Meanwhile, Lai and other crypto observers have been focusing on a single Ethereum address that is reportedly storing around $192 million. A number of cryptocurrency exchanges, Ethereum creator Vitalik Buterin, and a Ukrainian cryptocurrency fundraising account have all received tiny amounts of tokens based on the Ethereum blockchain from this account. In Lai's opinion, the purpose of these exchanges is more to confuse law enforcement and other observers than to really launder or withdraw the funds.

Tobias Silver, creator of crypto service Just.Money, made a key observation on Twitter: it seems that one of the criminals' transactions was paid for using transaction fees financed from an account on the Kraken cryptocurrency exchange, which is likely obligated to hold identifying information for that account under "know-your-customer" legislation. Kraken's chief security officer, Nicholas Percoco, subsequently tweeted, "We know the name of the user." When WIRED reached out to Percoco for comment, a Kraken representative said, "We have closely observed recent events with the FTX estate, are in communication with law enforcement authorities, and have blocked Kraken account access to some monies we believe to be involved with "fraud, carelessness, or misconduct" related to FTX (as set out in our Terms of

Even if the full amount of $477 million is stolen, the looting of FTX is not unprecedented in the world of cryptocurrency crime. In late March, North Korean thieves stole $540 million from the Ronin Bridge, a gaming cryptocurrency exchange. Earlier this year, cryptocurrency tracing led to the bust of a New York couple accused of laundering $4.5 billion in crypto.

However, in the case of the high-profile FTX theft and the collapse of the exchange as a whole, tracking the missing funds could help put to rest—or confirm—swirling suspicions that someone within FTX was responsible for the theft. The company's Bahamas-based CEO, Sam Bankman-Fried, who resigned on Friday, lost nearly his entire $16 billion fortune in the collapse.

Despite these reservations, TRM Labs' Janczewski argues that the confusion surrounding FTX's meltdown may have provided hackers with an opportunity to exploit panicked employees by, for example, tricking them into clicking on a phishing email. Alternatively, as Michelle Lai points out, bankrupt insider employees may have collaborated with hackers in an effort to recover some of their own lost assets.

The theft of $500 million worth of bitcoins from Mt. Gox, the first cryptocurrency exchange, was discovered in 2014, and the case has begun to resemble that heist more than any other recent crypto heist. In that case, blockchain analysis performed by cryptocurrency tracing firm Chainalysis and law enforcement helped pin the theft on external hackers.

Conclusion

It is not at all apparent if history will repeat itself and cryptocurrency tracing will reveal the innocence of FTX's workers. However, as more eyes than ever before comb the blockchains of the cryptocurrency economy, it is a safer bet that the whodunit behind the theft of FTX will, sooner or later, yield an answer.

FTX Scandal

FAQ

How much money was lost at FTX?

According to Reuters's sources, the exchange's founder, Sam Bankman-Fried, transferred $10 billion in customer funds to his trading company, Alameda Research, in a secret transaction. Since then, a lot of this money has gone missing. One source says that the amount that has gone missing is around $1.7 billion.

Where did FTX go wrong?

Mr. Bankman-Fried, who was once likened to financial tycoons like John Pierpont Morgan and Warren Buffett, saw his empire crumble last week when his cryptocurrency exchange, FTX, saw a run on deposits that left it short $8 billion and forced it to declare bankruptcy.

When does the FTX breakdown occur?

The defunct cryptocurrency exchange FTX generated actual money off of its own digital currency, dubbed FTT, which is basically worthless today, yet investors continue to trade it despite its low value.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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