Worst scams and “coverups” in 2022

Worst scams and “coverups” in 2022

Hacker who steals password and identity, computer crime.

The value of the cryptocurrency market fell from $3 billion in November 2021 to around $900 billion now. Photo: Getty

With crypto markets reeling after the implosion of the FTX exchange, Yahoo Finance looks back at the past year in a young industry marred by corruption and fraudulent activity, and asks how much it has eroded investor faith.

The combined market capitalization of all cryptocurrencies fell from a high of nearly $3tn (£2.7tn) in November 2021 to a current value of around $900bn (£728bn).

The value of cryptocurrency declined throughout 2022, caused by a series of bankruptcies following the dramatic crash of the Terras UST algorithmic stablecoin in May 2022.

Capital bled out of the combined crypto market, with savvy traders selling quick and parking gains in dollar-pegged stablecoins, such as USDC (USDC) and USDT (USDT).

Read more: ‘Get your money from exchanges’, warns Bitboy Crypto after FTX scandal

After a series of high-profile industry bankruptcies, faith in the cryptocurrency industry plunged, retail and institutional investors began withdrawing funds, with redemptions of stablecoins for physical dollars rapidly increasing.

However, those who withdrew funds were not only cautious investors trying to save what they could while the market spun, the bad actors who contributed to the market turmoil also put large portions of their wealth to themselves.

From the low-key cyber attack of the Wormhole cryptocurrency platform in February to the high-profile collapse of the FTX exchange in November, 2022 was a year of sensational scams, scams and crooked dealings.

February: Cryptocurrency platform Wormhole loses $320 million after attack

Over $320 million in crypto was taken when Wormhole’s cryptocurrency platform Wormhole was hacked.

Although the popular “bridge” connecting ethereum (ETH-USD) and solana later managed to retrieve the stolen assets, the hack exposed the vulnerability of decentralized financial platforms to hackers.

In response to the hack, CertiK co-founder Ronghui Gu told CNBC: “The $320 million hack on Wormhole Bridge highlights the growing trend of attacks against blockchain protocols.

“This attack raises the alarm about growing concerns about security on the blockchain.

Since then, 2022 has shown that fraudsters are becoming more and more creative.

March: Axie Infinity hack saw $615 million stolen

Axie Infinity in game graphics (screen grab Axie Infinity)

Axie Infinity in game graphics (screen grab Axie Infinity)

In March, hackers were able to exploit the ethereum-based sidechain that powers the popular Axie Infinity NFT-based online video game.

The game is developed by the Vietnamese studio Sky Mavis. The hackers were able to siphon off 173,600 Ethereum and $25.5 million in USDC from the web3 game developed by Vietnamese studio Sky Mavis.

In April, US authorities were able to link the attack to the Lazarus and APT38 hacking groups, which conduct cyber attacks for the North Korean government.

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May: Terra’s UST algorithmic stablecoin collapses

Co-founder of Terraform Labs, Do Kwon (screenshot Yahoo Finance US)

Co-founder of Terraform Labs, Do Kwon (screenshot Yahoo Finance US)

The implosion of Terra’s UST (LUNA1-USD) algorithmic stablecoin ecosystem wiped out around $40 billion in market capitalization of the entire cryptocurrency ecosystem. The UST stablecoin broke away from parity with the US dollar and fell from $1 to $0.12 in early May.

Then in September, a South Korean court issued an arrest warrant for Do Kwon, the founder of Terraform Labs, the parent company of crashed stablecoin TerraUSD.

Read more: FTX bankruptcy causes 80,000 UK crypto investors to lose money

In the wake of the collapse of his company, Seoul prosecutors charged Do Kwon with investment fraud, which refers to a variety of deceptive practices in which fraudsters lure individuals into making purchases based on false or misleading information.

According to CNN, South Korean prosecutors seeking to take Do Kwon into custody have tracked him to Serbia.

June: The collapse of Three Arrows Capital

Many cryptocurrency-focused hedge funds, and other cryptocurrency companies, held large amounts of the Luna cryptocurrency that was linked “algorithmically” to the stablecoin UST.

One of the most prominent holders of Luna was the crypto hedge fund Three Arrows Capital (3AC).

Due to staking smart contracts, 3AC was unable to sell large portions of the Luna that they held and were forced to incur up to a 99% loss on their investment.

On July 1, 3AC filed for Chapter 15 bankruptcy. However, Three Arrows Capital had borrowed from other crypto entities in the tightly interdependent cryptocurrency ecosystem. The crypto hedge fund defaulted on a $650 million loan to crypto custody platform Voyager Digital. Now US regulators are investigating the bankrupt crypto hedge fund.

A bankruptcy judge in New York has now stated that he would issue subpoenas against the founders of Three Arrows Capital.

According to Coindesk, United States Bankruptcy Judge Martin Glenn for the Southern District of New York wrote in a court document published in early December that: “The foreign representatives and their agents are authorized to serve subpoenas for the production of documents and testimony on the founders, investment managers and all others who may have information about the Three Arrows’ affairs.”

The document names Su Zhu and Kyle Davies as the founders of Three Arrows Capital, which imploded in July this year, leaving a $3.5 billion debt in its wake.

The hunt is now on to recover remaining assets from the hedge fund so they can be returned to investors.

See: Get Your Money From Exchanges’ Bitboy Crypto Warns After FTX Scandal | Crypto Mile

But according to the New York-based liquidation firm Teneo, which is tasked with recovering the funds, both Su and Davies have been uncooperative.

The Three Arrows Capital founders claim to be in Dubai and Bali, which Teneo claims are conveniently “jurisdictions known for difficulties in enforcing foreign court orders.”

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One of the Three Arrows Capital founders is now planning to film a “life and mental health podcast”, presumably from his new location in Dubai.

But a Twitter follower was quick to remind him of billions of dollars owed to creditors following the collapse of Three Arrows Capital and responded, saying: “do all the proceeds go to creditors?

Yahoo Finance spoke to Alex Svanevik, CEO of blockchain analytics platform Nansen.ai, about the management methods used at Three Arrows Capital, he said: “Of course there was hubris. Just a few weeks ago, Kyle still called 3AC ‘the most successful the fund’. in crypto’. Poor risk management is another element. They also doubled down on certain strategies that failed: GBTC, stETH.

“My understanding from talking first-hand with people who provided capital to 3AC is that they also misled investors in some cases. They positioned themselves as a fund that could help generate high returns with low-risk strategies. And under the hood, they made big directional bets with influence,” Svanevik said.

June: Celsius collapse

When Terra’s UST stablecoin Terra collapsed in May, it created a domino effect that brought the entire crypto market down.

One crypto lending company after another took critical hits in the ensuing crypto crash.

In July, Celsius, formerly one of the largest crypto lenders, ended up filing for bankruptcy.

However, Celsius customers began reporting that they were unable to withdraw their money in June.

Former Celsius CEO Alex Mashinsky tried to calm fears by saying the company was not stopping withdrawals.

Read more: ‘Get your money from exchanges’, warns Bitboy Crypto after FTX scandal

But just days later, Celsius froze everyone’s accounts. It has now been reported by both the Financial Times and Coindesk that Mashinsky withdrew $10 million weeks before the company froze customer accounts and then filed for bankruptcy.

According to the Financial Times, a spokesperson for Alex Mashinsky said the Celsius founder had withdrawn a percentage of cryptocurrency in his account, much of which was used to pay state and federal taxes.”

November: FTX collapse

Sam Bankman-Fried

Sam Bankman-Fried, who founded and led FTX, is escorted out of court following his arrest in Nassau, Bahamas on December 3. Photo: Dante Carrer/Reuters

The FTX exchange was set up in the offshore financial harbor in the Bahamas in May 2019.

In early November, public reports began circulating that cited leaked, internal financial statements and questioned the health and liquidity of both FTX and its trading arm Alameda Research.

Coindesk journalist Ian Allison blew the lid on the irregularities in Alameda Research’s balance sheet. Allison said a large portion of the $14.6 billion in assets held by Alameda Research was in FTX’s own FTT (FTT-USD) token.

The coin that could be freely created by FTX dominated the reserves that Alameda Research used as collateral for loans.

Read more: FTX founder charged with defrauding investors

With outstanding liabilities of an estimated $5.1 billion at Alameda Research, holders of FTT experienced growing panic that margin calls on these loans could decimate the value of FTX’s original token.

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The collapse of FTX began in earnest when Binance CEO Changpeng ‘ZC’ Zhao created a bank run on the FTX exchange with a tweet that his exchange would liquidate its holdings in FTX’s native FTT token.

The unraveling of this once-prominent cryptocurrency exchange, which hosted events with former world leaders Bill Clinton and Tony Blair, was swift, and on November 17, FTX filed for bankruptcy in a Delaware court.

On December 12, the Attorney General of the Bahamas announced Bankman-Fried’s arrest for “economic offenses” against United States and Bahamian laws.

He was subsequently charged by the Securities and Exchange Commission (SEC) with defrauding investors of $1.8 billion.

Read more: FTX Crash Removes Billions from Market as Binance Moves in to Buy Crypto Rival

Thousands of users of the FTX cryptocurrency exchange are now unable to withdraw their money, and according to a lawsuit filed last month, the once-prominent exchange owes its 50 largest creditors nearly $3.1 billion.

FTX’s current CEO, John Ray, told congressional lawmakers on Tuesday that FTX lost $8 billion of customers’ money.

Ray said the company consisted of an “absolute concentration of control in the hands of a small group of grossly inexperienced, unsophisticated individuals.”

On December 13, US federal prosecutors charged Bankman-Fried with wire fraud and conspiracy to commit wire fraud against lenders and customers.

According to CNN, US Congressional maximum sentencing guidelines suggest that Bankman-Fried could face a maximum sentence of 115 years in prison if convicted of all eight counts brought against him.

U.S. Attorney Damian Williams spoke about the charges against Bankman-Fried at a news conference.

He said the FTX founder had “deliberately” defrauded customers and investors and accused Bankman-Fried of secretly and illegally siphoning customer funds from FTX to finance its Alameda operations.

However, he ended his statement with a warning to other bad actors operating in the cryptocurrency industry: “This is one of the biggest financial scams in American history, we are not done.”

Digital asset fraud is on the rise

New figures show that in the UK alone, fraud involving digital assets has increased sharply in the past year. In November, a Freedom of Information request to Britain’s Action Fraud organization showed that financial losses linked to digital assets had risen to £226m ($273m) by 2022, up 32% from the previous year.

According to Cardano founder Charles Hoskinson, the problems that occurred throughout 2022 were not due to the crypto bug itself, but rather caused by flawed and centralized infrastructures run by people who were either incompetent or exploitative.

Hoskinson said: “Crypto didn’t fail. People failed. People in positions of trust. At the end of the day, as much as we like to believe in the principles of cryptocurrency, this had everything to do with people putting their money into centralized exchanges and organizations that trusted centralized businesses to do something on their behalf.”

See: What would Karl Marx think about crypto? – The Crypto Mile episode 7

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