Silicon Valley-based Sequoia Capital has announced that it will write off its $214 million in FTX, citing the crypto exchange’s solvency risk as the reason.
“In recent days, a liquidity crunch has created solvency risk for FTX,” a statement by Sequoia Capital read. “Based on our current understanding, we are marking our investment down to $0.”
Here is the note we sent to our LPs in GGFIII regarding FTX. pic.twitter.com/Cgp1Yxk1pz— Sequoia Capital (@sequoia) November 10, 2022
Sequoia Capital told its investors it had run a “rigorous due diligence process” when investing in FTX. The venture capitalist said that in the year it invested in the crypto exchange, 2021, FTX was worth $18 billion and earning $1 billion in revenue.
Nevertheless, Sequoia Capital assured investors that its investment size of $150 million in FTX only accounted for less than three percent of its private fund, the Global Growth Fund III. It added that its separate investment of $63.5 million in FTX through SCGE Fund accounted for less than one percent of the fund’s entire portfolio.
Other venture capitalists investing in FTX have also announced investment write-offs. SoftBank Group reported a $100 million loss from its FTX investment, while Paradigm had invested $300 million in the crypto exchange.
The issue started when stakeholders began questioning the financial situation of Alameda Research, a sister firm of FTX, following a leak of its balance sheet. It revealed that a large portion of Alameda’s collateral was in the form of FTT, which is the native token of FTX.
Investors were reportedly worried because if FTT’s price dropped, it would result in illiquidity for Alameda and FTX. Binance CEO Changpeng Zhao took to Twitter to announce the plans to liquidate its FTT reserve.
As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of https://t.co/FQ3MIG381f.— Binance (@binance) November 9, 2022
FTX investors did large selloffs, which caused the crypto exchange to reach a total of $6 billion in liquidity within several days. Investors also could not pull out their funds from their FTX accounts for two days starting on Tuesday.
Reports said that FTX CEO Sam Bankman-Fried had reached out to Zhao for aid, and on Tuesday, Binance announced a non-binding agreement to acquire FTX’s non-U.S. unit. The next day, however, the deal fell through following a thorough analysis of FTX’s accounting book.
Wall Street Journal reported that Alameda had used $10 billion of FTX customers’ funds to help bail out numerous crypto companies and bet on crypto tokens.
FTX’s issue caused BlockFi to pause customer withdrawals as well. BlockFi said it could not operate normally due to the “lack of clarity on the status” of FTX and Alameda. The digital asset lender received a $250 million loan from Bankman-Fried earlier this year.
Measures by regulators
The Securities Commission of The Bahamas has taken action by freezing the assets of FTX’s subsidiary in the region and appointing a liquidator. According to the commission, FTX cannot transfer its assets from the Bahamas without receiving the approval of a provisional liquidator.
On the other side of the world, authorities in Australia advised FTX customers against depositing funds or performing any transaction on the platform. Japanese authorities also looked into the case and ordered FTX’s subsidiary in the country to halt some aspects of its operation.
In the U.S., the Securities and Exchange Commission reportedly launched an investigation into FTX. According to reports, the SEC looked into possible securities law violations in FTX’s practices.