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Newsletter: March - Seeing Past the Headlines: Understanding the Realities of Cryptocurrency Fraud

Updated: Jun 23, 2023

As we venture into the exciting world of cryptocurrencies and decentralized finance, it's impossible to ignore the (seemingly) nonstop headlines of hacks, frauds, and scams in the crypto space. While bad actors in the crypto space do exist, they're disproportionately covered by the media, just like in traditional finance. A drama-filled scam is far easier to sell than explaining Ethereum’s Shapella upgrade and withdrawal queue mechanisms.

Traditional financial (TradFi) world has continually experienced frauds and scams over the years that would make Sam Bankman-Fried blush. However, the biotech industry didn’t disappear after Elizabeth Holmes, electric cars weren’t outlawed after Nikola, and all banks weren’t shut down after their habitual, decades-long, borderline-systemic infractions totaling hundreds of billions of dollars.

TradFi Fraud

By understanding the lessons from traditional finance, we can better identify and mitigate risks in the crypto space. In this newsletter, we'll take a look at some of the most notorious financial frauds in history, including Enron's collapse, Bernie Madoff's Ponzi scheme, and other infamous cases.

Enron and Ken Lay:

Enron, once a leading energy company, became synonymous with corporate fraud and corruption after it filed for bankruptcy in 2001. The company's downfall was the result of complex accounting fraud orchestrated by its top executives, including CEO Ken Lay. Enron manipulated its financial statements to hide billions of dollars in debt and inflate its profits, leading investors to believe the company was more financially stable than it actually was. When the truth was revealed, Enron's stock price plummeted, wiping out billions in market value and causing massive losses for investors.

Bernie Madoff's Ponzi Scheme:

Bernard Madoff, a former stockbroker and investment advisor, was responsible for one of the largest and most sophisticated Ponzi schemes in history. For decades, Madoff defrauded thousands of investors who believed they were earning returns through a legitimate investment strategy. In reality, Madoff used new investors' money to pay returns to earlier investors, creating the illusion of profit. The scheme unraveled in 2008 with Madoff's arrest, and it's estimated that investors lost approximately $65 billion.

The WorldCom Scandal:

In 2002, WorldCom, a telecommunications giant, became another emblematic case of corporate fraud. Under the leadership of CEO Bernard Ebbers, the company used fraudulent accounting practices to inflate its revenues and hide operating expenses. When the scandal was exposed, WorldCom filed for bankruptcy, and investors lost billions of dollars.

Charles Ponzi and the Birth of the Ponzi Scheme:

Charles Ponzi, an Italian con artist, is the man behind the notorious Ponzi scheme's inception. In the early 20th century, Ponzi promised investors high returns by buying international postal reply coupons and selling them at a profit. However, Ponzi used the money from new investors to pay off earlier investors, creating an unsustainable cycle that ultimately collapsed, leading to massive losses for those involved.

These historical cases of fraud in traditional finance serve as a reminder that the financial world is not immune to deception and malpractice. As we explore the rapidly-evolving cryptocurrency and decentralized finance landscape, it's essential to remain vigilant and informed to recognize and avoid potential threats. Understanding these past instances can help us maintain a healthy skepticism and ensure that we tread carefully, even as we embrace the potential of new financial innovations.

FTX Fraud

FTX, a now-formerly leading cryptocurrency exchange, has recently come under scrutiny for fraudulent activities, shaking the confidence of investors and users in the crypto space. In this synopsis, we'll explore the details of the alleged fraud, its consequences, and the lessons to be learned.

The Fraud:

Reports emerged alleging that FTX manipulated trading volumes, engaged in wash trading, and artificially inflated the prices of certain cryptocurrencies on its platform. Wash trading refers to the practice of creating misleading trading activity by buying and selling the same asset simultaneously, typically to inflate the trading volume and create a false sense of market demand.

The perpetrators behind the fraud were reportedly part of a coordinated group that exploited FTX's platform to manipulate the market, making substantial illicit profits in the process. The group allegedly had ties to FTX's management, raising further concerns about the exchange's transparency and integrity.


As the news of the FTX crypto exchange fraud spread, the exchange's reputation took a significant hit. Trust in the platform was severely damaged, leading to users withdrawing their assets and seeking alternative options. Regulatory authorities have begun investigations into the matter, with potential fines and legal actions looming over FTX.

Additionally, the scandal has raised broader concerns about the cryptocurrency market's vulnerability to manipulation and fraud, potentially delaying widespread adoption and increasing regulatory scrutiny.

Lessons Learned:

The FTX crypto exchange fraud serves as a stark reminder of the risks present in the rapidly-evolving cryptocurrency landscape. Investors and users should exercise due diligence when choosing an exchange, prioritizing platforms with strong security measures, transparency, and a proven track record.

The scandal also highlights the need for appropriate regulation and oversight to protect investors and ensure a fair and transparent market. As the crypto industry matures, it must develop mechanisms to identify and address fraudulent activities to maintain its credibility and foster long-term growth.

March 2023 Banking Crisis

FTX’s collapse has had far-reaching consequences for the banking sector, with the downfall of two major banks: Silvergate and Silicon Valley Bank (SVB). Following FTX's collapse, depositors withdrew over $8 billion in Q4 2022, forcing Silvergate to cut its workforce by 40% and wind down operations. In contrast to other institutions, Silvergate took the high road, choosing to protect depositors and creditors over its institutional pride.

SVB, a banking giant in the startup industry, found itself in the midst of a financial disaster following Silvergate's liquidation announcement. The bank attempted to raise $2.25 billion in share sales, which proved insufficient as panicked venture firms advised startups to withdraw capital, leading to a bank run with $42 billion in withdrawals. Despite efforts from banking regulators, SVB was unable to meet its obligations and ultimately failed, with the Federal Deposit Insurance Corporation (FDIC) taking receivership.

These banks’ demise has had significant implications for the crypto industry, particularly for stablecoin USDC, which saw its value drop as low as $0.82 on centralized exchanges. Circle, USDC's issuer, had reserve accounts with both SVB and Silvergate, causing panic-selling and liquidity issues. Although Circle announced it would backstop any shortfalls in USDC reserves, the events have given regulators an opportunity to further scrutinize the stablecoin market.

The FDIC has created the Deposit Insurance National Bank of Santa Clara to manage insured deposits from the failed banks. Regulators have confirmed that all depositors will have full access to their funds with no losses borne by taxpayers. Instead, any shortfalls will be recovered by a special assessment of banks, as required by law.

The Federal Reserve has also introduced the Bank Term Funding Program (BTFP) to offer term loans to banks and other eligible depository institutions, using U.S. Treasuries, agency debt, and other qualifying assets as collateral. The program allows banks to monetize the spread between the market value of certain securities and their par value, effectively offering undercollateralized loans to banking institutions.

However, the events surrounding Silvergate and SVB’s collapse highlight the fractional reserve banking system’s fragility in a technologically-enabled society. The advent of online banking and the rapid spread of information via social media allows bank runs to happen faster than ever before. The case of SVB serves as a cautionary tale, demonstrating the potential havoc that a tech-savvy, uninsured depositor base can wreak on the banking sector, adding another massive concern for regulators.

The banking landscape is changing rapidly and regulators will need to adapt their risk frameworks and oversight to account for new technological capabilities and the potential for widespread panic in the face of financial uncertainty.

Blockchain Solutions

Blockchain technology has gained significant attention in recent years due to its innovative approach to digital data storage, management, and security. As an underlying technology for cryptocurrencies, such as Bitcoin, blockchain has revolutionized the financial sector by providing a trustless, transparent, and efficient solution for financial transactions. This article delves into the benefits of blockchain technology with a focus on removing trust, eliminating middlemen, and enabling greater transparency and auditability for financial transactions.

Removing Trust

One of blockchain technology’s core benefits is its ability to remove the need for trust between parties engaging in a financial transaction. Traditional financial transactions often require trust in intermediaries, such as banks or clearinghouses, to facilitate, verify, and settle transactions. Blockchain, on the other hand, relies on a decentralized network of computers, or nodes, to validate transactions through a consensus mechanism. This decentralized approach removes the need for trust in a central authority, as the entire network is responsible for the accuracy and authenticity of the transactional data.

Eliminating Middlemen

Blockchain technology can eliminate middlemen in financial transactions, which can lead to reduced costs, increased efficiency, and faster transaction times. Traditional financial systems involve several intermediaries, such as banks, payment processors, and other financial institutions, which often each charge fees for their services. These intermediaries can also slow down transaction times and create potential points of failure or fraud. With blockchain, transactions are conducted peer-to-peer, directly between parties, without intermediaries. This can result in significant cost savings, as fees are reduced or eliminated, and transactions can be settled more quickly.

Enabling Greater Transparency and Auditability

Transparency and auditability are crucial aspects of any financial system, and blockchain technology excels in these areas. A blockchain is a distributed ledger that records all transactions in a transparent and immutable manner. Each transaction is time-stamped and linked to the previous transaction, creating a tamper-proof chain of records. This immutability makes it extremely difficult for anyone to alter or delete transaction data, ensuring the ledger’s integrity.

Furthermore, the blockchain’s transparency allows all parties to view and verify transactions, promoting accountability and reducing the likelihood of fraud or manipulation. This is particularly beneficial for industries with complex supply chains or those that require regulatory compliance, as the blockchain can provide a clear and verifiable record of transactions.

In addition to transparency, blockchain technology enables enhanced auditability. Since all transactions are recorded on the ledger, auditors can easily trace the flow of funds and verify transactions’ authenticity. This can lead to more efficient and accurate auditing processes, reducing the time and resources required to conduct audits.


Blockchain technology offers a transformative solution for financial transactions by removing trust, eliminating middlemen, and enabling greater transparency and auditability. As the technology continues to evolve and gain adoption, it's poised to disrupt traditional financial systems and pave the way for more efficient, secure, and transparent financial processes. Embracing blockchain technology’s potential will undoubtedly bring significant benefits to businesses, consumers, and the broader financial ecosystem.

Our Take

At Event Horizon Capital (EHC), we believe select cryptoassets will outperform all other asset classes over the next five, ten, and possibly even twenty years due to their superior qualities as new money/assets for the internet age. Because of this, we seek the best risk-adjusted exposure to protocols that personify the blockchain benefits outlined above. With crypto markets being one of the world’s most dynamic markets, our agile and active management provides the flexibility required for swift, decisive action while also never compromising on security.

EHC’s multi-strategy approach is built upon:

  • Qualitative fundamental research,

  • Quantitative tools and valuation metrics

  • Narrative and sentiment-driven market swings

This newsletter from Event Horizon Capital is intended for informational and illustrative purposes only and has been prepared to provide insights on the market. It should not be construed as an offer, solicitation, or recommendation to buy or sell any security or financial instrument, nor participate in any investment strategy. The opinions and information expressed in this newsletter are as of the date it was written and are subject to change without notice due to various factors, including changing market conditions and regulations. This newsletter is not intended as investment advice and should not be considered as such. Third-party data presented in this newsletter is sourced and deemed reliable, but no guarantee is made as to its accuracy or completeness. All investments carry risk, and there is no assurance that any specific investment, strategy, or product referenced directly or indirectly in this publication will be profitable or suitable for your portfolio.


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