The funds that enter the banking system, according to Peter Smith, are the most difficult to trace.
Peter Smith, the founder and CEO of Blockchain.com, believes that on-chain analytics will play a significant role in locating the missing FTX funds, though it will have limitations.
On December 20, Fox Business host Liz Claman stated that the selling point of blockchain is that it makes crypto transactions transparent and traceable, and she asked Smith what it could trace in the case of FTX’s missing customer funds.
“The most challenging thing for [blockchain analytics] firms working on this today is when money moves off chain and into the banking system because they’re no longer able to track it,” Smith said, adding that blockchain sleuths have already done a fair amount of work in chasing the money trail.
He used the purchase of real estate by Sam Bankman-Fried or associates as an example, which would have come from a bank. Once those assets leave the crypto ecosystem, he believes they will be difficult to trace back to FTX or a blockchain.
The interviewer also inquired about the use of shadow banking. This is a network of lenders, brokers, and other credit intermediaries that operate outside of traditional regulated banking and can be used to conceal transactions.
Smith explained that for funds that are still in the crypto ecosystem, on-chain analytics will be extremely beneficial to liquidators in their efforts to untangle the FTX mess “because those are records that cannot be changed or altered.”
Where FTX and its customers lost money, such as in trading bets or liquidity farming, or where they withdrew it for real estate or venture investments, can be traced on-chain. It can also be used to determine how much cryptocurrency users have deposited in FTX, he added.
“A lot of money was lost in trading positions… real estate, venture capital investments… all of that happens outside of the crypto on-chain ecosystem.”
In a related development, FTX’s new chief financial officer Mary Cilia stated at a procedural hearing on December 20 that the company had identified over $1 billion in assets.
According to reports, FTX discovered $720 million in cash assets in U.S. financial institutions authorised by the Department of Justice to hold funds. Cilia stated that approximately $130 million was held in Japan, with $6 million set aside for operational expenses. She stated that the majority of the remaining $423 million at unauthorised US institutions is held by a single broker but declined to elaborate.
Prosecutors and liquidators have been combing through the FTX wreckage in an attempt to recover up to $8 billion in missing customer funds.