As the FTX meltdown continues, worried users are turning to inventive, risky, and most probably illegal workarounds to attempt to extract what funds they can from the Bahamas-based crypto exchange.
Withdrawals of customer funds from FTX were first frozen on Tuesday, just hours before CEO Sam Bankman-Fried announced that his exchange would be acquired by competitor Binance. The day before, he’d claimed in a series of now-deleted tweets that “FTX is fine. Assets are fine.”
Relief was short-lived for FTX users hoping to retrieve their money as it became clear that the exchange’s problems were more serious than expected. Binance CEO Changpeng Zhao announced that his company would be backing out of the deal the following day:
With hopes of rescue waning, and reports of preferential treatment circulating, users with trapped funds were desperate for an escape route.
The Bahamas’ Security Commission froze the assets of FTX International yesterday, in addition to insisting that Bahamian-registered accounts be able to withdraw funds.
While this was likely no help for the majority of FTX users (presumably, residents of the tiny Caribbean islands make up a fraction of the exchange’s user base), it also opened up a loophole for those desperate enough to try.
With direct transfers between FTX accounts apparently blocked, a number of inventive workarounds are being used to siphon funds out of FTX via Bahamian-KYC’d accounts, which have suddenly found themselves in high demand.
The simplest method is offering bribes to FTX employees to process or change an existing account’s KYC. Algod, a high-profile pseudonymous Twitter user who won a $1 million public bet against now-defunct Terra’s Do Kwon, previously tweeted about having funds locked in FTX: “Still can’t believe I lost 40% of my portfolio because I wasn’t KYC’d,” they said.
In a series of (now-deleted) tweets, Algod offers $100,000 to FTX employees in exchange for processing a pending KYC application. Another user has even offered $1 million plus “unlimited legal fees” to change the KYC settings of their account to the Bahamas, in order to withdraw funds.
The next loophole (closed this morning) utilizes NFTs to their full money-laundering potential in transferring funds between accounts.
Using FTX’s marketplace, users with trapped funds buy NFTs, previously worth very little, for the entirety of their balance from a Bahamian seller, who is then able to withdraw the proceeds and return it on-chain, after taking a hefty fee.
Users are also reportedly coordinating in order to organize pump-and-dump ‘transfers’ between accounts. In this situation, a Bahamian account buys up large quantities of a low market cap, illiquid token on FTX, after which the user with frozen funds also buys, pumping the price. The KYC’d account then dumps its tokens, and the resulting gain acts as the transfer of funds, which can then be withdrawn and sent on, again, at a cost.
Exactly how much Bahamian-KYC’d accounts are charging for this ‘service’ is unclear, but panicked users are likely paying cents on the dollar for their funds.
Plenty of funds are still being withdrawn, with this account accumulating batches of USDT from FTX and sending on lump sums to an address that’s already cashed out over $21 million.