Collapses across crypto industry leave small-time investors in limbo
In early November, Adrian Butkus, a 43-year-old father of two, put $600,000 — much of his life savings — into an account at BlockFi, a cryptocurrency trading firm. BlockFi had marketed the account as risk-free, yielding 6.5 percent interest, more than Butkus could get anywhere else.
Just days later, as the collapse of cryptocurrency exchange FTX shook the entire crypto industry, Butkus asked BlockFi for his money back. But the firm had suspended customer withdrawals, citing its close financial ties to FTX. By late November, BlockFi, too, had filed for bankruptcy.
Butkus doesn’t know when — or if — he will see his money again. He is one of millions of individual investors around the world who poured money into digital assets, believing the cryptocurrency industry was a stable financial system. They were clear-eyed about the volatility and big price swings of bitcoin and other cryptocurrencies. But what has come as a big surprise to many is that the firms where they deposited their money lacked the basic protections offered by a brokerage or a bank.
“These companies are all giving the impression of banklike security,” said Joshua Fairfield, a professor at Washington & Lee University Law School in Virginia who specializes in technology issues. “These companies want to have customer trust but with none of the responsibility that comes with a regulated financial entity. And that just doesn’t work.”
Moreover, when a bank or brokerage fails, there are government-guaranteed funds to ensure that investors generally get their money back. The cryptocurrency industry, for the most part, has no such guardrails. And with the companies in bankruptcy and the value of some crypto assets uncertain, ordinary customers stand at the end of a long line when it comes to getting their money back, behind the large trading firms and lenders.
Butkus said he had invested with BlockFi even though he knew the accounts weren’t insured. Under BlockFi’s offering, he lent it his $600,000 for six months, in return for a 6.5 percent yield. BlockFi converted that money into a digital asset 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 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, Ill. 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.
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 the exchange had used billions of dollars in customer deposits to bail out Alameda Research, the crypto trading firm 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.
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 percent 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 U.S. 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, Calif., 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 $20,000, 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 naturalization and citizenship application.
Scott Jerutis, 58, a real estate broker in the New York City borough of Queens, has about $33,000 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.
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 regulation was needed to safeguard customer money.
Angry investors are only now finding out they have little recourse. Andrew Stoltmann, a securities litigation lawyer, said 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 $5,600. 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.