Did Sam Bankman-Fried in Effect Pay VC Firms Like Paradigm to Invest in FTX in a Circular Funding Arrangement?

New revelations indicate that there were some close links between Sam Bankman-Fried, the disgraced founder of collapsed cryptocurrency exchange FTX, and some of his major backers.

According to a new report by the Financial Times, Bankman-Fried invested $20 million in a fund managed by crypto venture capital firm Paradigm in late 2021. The same fund later invested in FTX and FTX US exchanges.

“That’s just weird,” Charles Whitehead, a professor at Cornell Law School, reportedly said in a comment. He added that while there was “nothing inherently wrong” with such arrangements, “it raises your eyebrows”.

Founded in 2018, Paradigm is a major venture capital firm that invests in cryptocurrency, financial services, information technology, media, telecommunication, SaaS, and web3 sectors.

A spokesperson for the San Francisco-based company has allegedly claimed that the VC had made a general conflicts-of-interest disclosure to investors in Paradigm One that said the fund may invest in companies run by its limited partners.

Aside from Paradigm, there are also other examples of SBF investing in specific funds that then backed his FTX businesses. 

For instance, the disgraced crypto boss invested $5 million in a fund launched by UVM, an arm of Singaporean bank United Overseas Bank, and Signum Capital through his trading firm Alameda. The fund later invested in FTX, the FT reported. 

In December, it was revealed that SBF invested hundreds of millions of dollars into VC funds run by firms such as Sequoia Capital which also backed FTX. Alameda also had smaller investments in funds run by FTX venture capital backers Paradigm, Altimeter Capital Management, Sino Global Capital and Multicoin Capital

As reported, Bankman-Fried was arrested in The Bahamas in December last year after US prosecutors formally filed criminal charges against him. He was eventually extradited to the US where he was released from jail after posting a $250m bond in a New York court.

The Southern District of New York has charged SBF on eight criminal charges including wire fraud and conspiracy by misusing customer funds. Separately, the SEC has charged SBF with “orchestrating a scheme to defraud equity investors in FTX.”

Following the collapse of FTX, Paradigm co-founder Matt Huang took to Twitter to explain the impact of the exchange on the crypto VC. “We are shocked by the revelations about FTX, Alameda, and SBF,” he said at the time, adding that the investments in FTX constituted a small part of their total assets and has been written down to zero. 

The blow-up of FTX has caused some to question crypto’s value. But the issues at FTX are precisely ones that decentralized finance can solve through increased transparency and security. Crises such as this one help to clarify the true merits of what we’re all building towards.

— Matt Huang (@matthuang) November 15, 2022