Insights into FTX: Paradigm's Perspective

Police & Regulations
Martin Walker
Oct 6, 2023 at 06:30 am

Matthew Huang, a co-founder and managing partner at the renowned crypto investment firm Paradigm, has shed light on Sam "SBF" Bankman-Fried's strong aversion to the notion of involving investors in FTX's board of directors. This intriguing revelation comes against the backdrop of a fallout experienced by Paradigm and an array of notable venture capital firms, including the likes of Sequoia, Temasek, and BlackRock, due to their entanglement with the now-insolvent crypto exchange. These entities have found themselves under intense scrutiny and subsequently felt compelled to release formal statements regarding their investments in FTX.

During the course of Bankman-Fried's trial in a New York Federal Court, Huang testified with conviction that Bankman-Fried firmly held the belief that the inclusion of investors on FTX's board would not yield substantial benefits. Allegedly, FTX's board composition was quite concise, featuring Bankman-Fried, an undisclosed legal expert hailing from Antigua and Barbuda (the jurisdiction of FTX's incorporation), and Jonathan Cheesman, a former FTX executive who gracefully stepped down from the board in the month of June.

Prior to Paradigm's monumental $125 million investment in FTX, which took place during the eye-catching $900 million Series B funding round in July 2021, Huang engaged in an array of in-depth conversations with Bankman-Fried. Huang candidly admitted that, in hindsight, he had not conducted as exhaustive due diligence as he ideally should have and had leaned significantly on the information provided by Bankman-Fried.

Intriguingly, despite some reservations regarding FTX's rather informal structural setup and potential entanglements with its sibling hedge fund, Alameda Research, investors were unequivocally drawn in by FTX's meteoric rise in market share within the crypto industry. However, Huang went on to emphasize that both he and other key investors at Paradigm remained palpably concerned that Bankman-Fried might have been allocating an inordinate amount of his focus and energy towards Alameda, potentially at the expense of FTX—a distraction that could have repercussions on Paradigm's substantial investment.

Furthermore, Huang expressed his apprehensions about the possibility of Alameda receiving preferential treatment from FTX, highlighting his genuine concern about the potential reputational damage this could inflict upon the company. Huang underscored that Bankman-Fried had given him assurances that Alameda did not enjoy any distinct privileges from FTX. However, intriguingly, on that very day, FTX co-founder Gary Wang provided a contrasting account, affirming that Alameda was indeed granted access to a virtually limitless flow of capital from the exchange.

Additionally, Huang revealed that he had no prior knowledge of the alleged commingling of funds between FTX and Alameda Research. When pressed by the prosecution regarding whether his investment decision in FTX would have been different had he been privy to the alleged use of customer deposits for investment purposes, Huang's unequivocal response was, "Yes," underscoring the fundamental and widely accepted principle that customer deposits are sacrosanct and should be treated with the utmost caution.

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