Crypto

African web3 startup Nestcoin has laid off some of its employees as its business was impacted by FTX’s demise. This information was shared by the startup’s CEO Yele Bademosi, who, in a tweet, said last week’s events impacted his one-year-old startup “as we held our assets (cash and stablecoins) at FTX to manage our operational expenses.” Since Sam Bankman-Fried’s crypto empire, made up of FTX, Alameda Research and FTX Ventures, collapsed last week, there have been various reports of companies whose money are stuck on FTX, its crypto exchange platform. Some of them include Galois Capital, a hedge fund with half of its assets stuck on FTX; Genesis Trading, who had about $175 million locked on the crypto exchange; Multicoin, the famed web3 venture capital firm which had nearly 10% of its assets under management trapped. Nestcoin joins that list which seems to be growing by the day; it seems all its assets (cash and stablecoins, as mentioned by the CEO). According to several reports, companies with money stuck on FTX might get their money back depending on how much FTX’s assets are ultimately worth. From its 23-page bankruptcy filing, FTX has more than 100,000 creditors with assets in the range of $10 billion to $50 billion, as well as liabilities ranging from $10 billion to $50 billion. Nestcoin is one of a handful of companies that have received capital from FTX and Alameda Research, alongside other U.S.- and Western-based companies. FTX, for instance, led the $150 million Series C extension round in Chipper Cash, an African payments company; Alameda Research, on the other hand, has backed Nestcoin, Nigeria- and Kenya-based web3 company Mara, Congolese web3 startup Jambo. It’s still unclear if these other startups held their assets in FTX, but that’s likely the case given what’s come to light with Nestcoin, even though Alameda Research, its investor, has less than 1% equity. We used the closely-associated exchange, FTX, as a custodian to store a significant proportion of the stablecoin investment we raised – i.e. our day-to-day operational budget,” said Bademosi in his tweet. “We were not undertaking any trading, but simply custodied our assets on the FTX exchange. While there are uncertainties, including the outcome of our assets held at FTX, we as a company have to adjust our plans, rethink our strategy and take steps to better position ourselves for the future.” To that end, Nestcoin has had reduce its headcount. According to two people familiar with the matter, Nestcoin layoffs will affect at least 30 employees from sub-departments, including Breach, Brunch and MVM, a sister product that raised $3 million months ago; for those remaining, they will see their salaries cut as much as 40%, the people said. While this is a challenging time for us and the industry as a whole – we see this as a wake up call to focus on building a more decentralized crypto future where no one organization or person can amass enough power to influence a nascent industry that has the potential to do good. In the past few days l’ve strengthened my resolve and remain committed to “doing crypto” in line with its true spirit and founding ethos. At Nestcoin we have a renewed sense of purpose – we realize that for crypto to truly go mainstream, we must accelerate the transition to self custody by building compelling trustless crypto products. To succeed, we will remain relentless, resourceful and flexible as we navigate these hard times. Please note, the products Nestcoin has released to-date are DeFi protocols & non-custodial in nature and, as such, we have never held customer funds and this incident has no impact on our customers financially. This is a developing story…

If you want to better understand exactly how big a deal it is that the cryptocurrency exchange FTX just imploded, you could do worse than talk with David Pakman, an entrepreneur turned venture capitalist. After logging 14 years with the investment firm Venrock, Pakman — who led Venrock’s investment in the digital collectibles company Dapper Labs and even mined bitcoin at his own home years back — leaned into his passion for digital assets and last year joined the now seven-year-old crypto venture firm CoinFund. His timing was either very good or very bad, depending on your view of the market. Indeed, in part because CoinFund was an early investor in the collapsing cryptocurrency exchange FTX, we asked Pakman to jump on the phone with us today to talk about this very wild week, one that began with high-flying FTX on the ropes, and which ended with bankruptcy filings and the resignation of FTX founder, Sam Bankman-Fried, as CEO. Excerpts of that conversation follow, edited lightly for length. TC: The last time we talked, almost two years ago, the NFT wave was just getting underway. Now, we’re talking on a day where one of the biggest cryptocurrency exchanges in the world just declared bankruptcy. Actually, it’s declaring bankruptcy for 130 additional affiliated companies. What do you make of this development? DP: I think it’s absolutely terrible on a bunch of levels. First, it was an entirely avoidable tragedy. This failure of the company was brought on by a bunch of flawed human decision-making, not by a failing business. The core business is doing great. In fact, it’s highly profitable and growing, even in a bear market. It’s not like it was running out of capital or a victim of the macro environment. But its leadership, with almost no oversight apparently, made a bunch of terrible decisions and did things really wrong. So the tragedy is how avoidable it was, and how many victims there are, including employees and shareholders and the hundreds or even thousands of customers who will be affected [by this bankruptcy]. There’s also the reputational harm to the entire crypto industry, which already suffers from questions like, ‘Isn’t this a scammy place with scammy people?’ This sort of Enron-esque meltdown of one of the most highly valued and arguably most successful companies in the space is just really bad, and it will take a long time to dig out of it. But there are also positives. Positives? Well, what’s positive is the technology did not fail; the blockchains did not fail. The smart contracts were not hacked. Everything we know about the tech behind crypto continues to work brilliantly. So it would be different if this was a meltdown because of flawed software design, or the blockchains aren’t scaling, or big hacks that injured people. The long-term promise of the software and the technology architecture about crypto is intact. It’s the people who keep making mistakes. We’ve had two or three pretty big human-generated mistakes this year. There are plenty of news stories out there outlining what happened in broad strokes. How do you explain it? I don’t have firsthand knowledge about what they really did or didn’t do. But apparently FTX and [the trading desk also owned and run by Sam Bankman-Fried] Alameda Research had a relationship that maybe was not known to all shareholders, employees, or customers. And it sounds like FTX took FTT, which is their token that was held in great amounts by Alameda, and they pledged it as collateral and took big loans in fiat against that. So they took a highly volatile asset, and they pledged as collateral. One could imagine if a board of corporate executives or investors knew about that, someone would say, ‘Hang on. What happens if FTT goes down by 50%? It happens in crypto with high frequency, right? So, like, why are we pledging this super highly volatile asset? And by the way, half a billion dollars’ worth of the asset is held by our biggest rival [Binance]. What happens if they dump it in the market?’ So just the act of borrowing against it was ill-advised. And then it sounds like they also took the proceeds of that borrowing, and they invested that in highly illiquid assets, like maybe to rescue BlockFi or all these other private companies that FTX recently bought. But it’s not like they could quickly sell out of those if they needed to return the proceeds of their borrowing. They were also apparently using customer funds and loaning that out or maybe even loaning it to their trading arm. So all this stuff is just stuff that I think a board, if they knew about it, would be like, no, no. But there was no board, which is mind blowing, considering that VCs poured $2 billion into this company. Your firm is among those firms. I joined CoinFund a little bit more than a year ago, so the investment that the firm made in FTX was a long time ago, before my time, and it’s a tiny, tiny amount. We’re barely on the cap table. We didn’t hold any FTT tokens. But I will address your big question, which I think is about the governance of this company. I come from a traditional tech investing background, where maybe 99% of the time, there’s just a standard set of governance that every entrepreneur agrees to when they take venture capital, which is: there’s going to be a board; the board is going to be made up of investors and employees and maybe outside experts; there’s going to be a set of controls; the controls usually say things like, ‘You have to disclose any related party transactions’ so you don’t shuffle coconuts between one company and something else that we don’t know about. The board also has to approve things, so that whenever you’re going to pledge assets as collateral for borrowing, you can’t issue new shares without [the board] knowing about