13 Biggest Crypto Scandals and Controversial Stories of 2022

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The cryp­to mar­ket behav­ing errat­i­cal­ly is noth­ing new, but absolute­ly no one saw such epic lev­els of fund mis­man­age­ment com­ing from estab­lished giants. The young industry’s turn to a more sor­did state of affairs hit every­one by sur­prise, espe­cial­ly after the heady rush of the bull run last year.

2022 was marred by cor­rup­tion and fraud­u­lent activ­i­ty. An indus­try that claims to have trace­able and pub­lic trans­ac­tions saw big bucks being fun­neled mali­cious­ly with much audac­i­ty and unique­ness. NFTs were being stolen, but no one knew what to do. Rug pulls wreaked hav­oc in DeFi space. Tril­lions have been wiped from the mar­kets so far.

All that remains now are the tales of incom­pe­tence and arro­gance of some of the fall­en big­wigs that serve impor­tant lessons for those watch­ing close­ly. Let’s look at the year that was.

The True Face of Sam Bankman-Fried

FTX’s col­lapse weighs heav­i­est on the mar­ket mark­ing the fall of the gold­en boy of the indus­try. Sam Bankman-Fried resigned as CEO of FTX as the com­pa­ny filed for Chap­ter 11 bank­rupt­cy in Novem­ber. He is now being tout­ed as the new Bernie Madoff.

sbf_image
Source: The Japan Times

His media tour com­ments that chimed some­thing along the lines of – “I’m an idiot, not a crook” – did not sit well with the com­mu­ni­ty. The for­mer FTX exec was slapped with a litany of charges and accused of rip­ping off near­ly one mil­lion people.

Bankman-Fried and his once close­ly-knit cir­cle of friends/colleagues were accused of com­mit­ting inter­na­tion­al fraud in bil­lions of dol­lars and sink­ing mil­lions into polit­i­cal can­di­dates in just three years. From the wild DM exchange between him and a reporter to post-scan­dal inter­views, it has been a train wreck for the 30-year-old dethroned billionaire.

It all came crash­ing down for SBF as his exchange faced a mas­sive liq­uid­i­ty crunch in a storm of with­drawals and a com­plete fail­ure to hon­or the redemp­tion requests. A quick thread on some of the most shock­ing find­ings that liq­uida­tors brought to light can be found here:

Terra’s Downfall

What exact­ly hap­pened with Ter­ra ecosystem’s algo­rith­mic sta­ble­coin, UST, is still a mys­tery. But reg­u­la­tors and Do Kwon crit­ics have been quick to dis­miss it as a case of mar­ket manipulation.

Its once arro­gant CEO hum­bling came only after the ecosys­tem descend­ed to a dis­as­trous fall from grace. The sub­se­quent cryp­to crash wiped out an esti­mat­ed $60 bil­lion, shak­ing the entire glob­al dig­i­tal cur­ren­cy market.

In any case, the col­lapse of the entire ecosys­tem led to increased scruti­ny of sta­ble­coins, in gen­er­al. Fol­low­ing the melt­down, glob­al reg­u­la­tors start­ed propos­ing var­i­ous ways to reg­u­lar sta­ble­coins bet­ter in an attempt to pre­vent sim­i­lar inci­dents from occur­ring in the future.

Nev­er­the­less, the con­ta­gion spread through­out the mar­ket like wild­fire, which leads us to the next point.

Three Arrows Capital Goes Bye

What was one of the industry’s largest hedge funds turned out to be a firm oper­at­ing with par­tic­u­lar­ly lenient risk man­age­ment, hav­ing been over­ex­posed on mul­ti­ple fronts.

The trad­ing firm, spear­head­ed by com­mu­ni­ty pow­er­hous­es Kyle Davis and Zhu Su, was ordered into liq­ui­da­tion by a British Vir­gin Islands court in June. Cit­ing sources famil­iar with the mat­ter, Sky News report­ed that the “liq­ui­da­tion would be a sig­nif­i­cant moment in the cur­rent unrav­el­ing of the cryp­tocur­ren­cy sec­tor, which has grown at break­neck speed in recent years.”

This, in itself, had an impact on the indus­try as a lot of cryp­tocur­ren­cy busi­ness­es had funds man­aged by 3AC. But it didn’t stop there.

Shady Mashinsky

Sev­er­al CEOs exit­ed this year as the bear mar­ket took hold. Alex Mashin­sky too, resigned as the head of the bank­rupt cryp­to lender Cel­sius in September.

Alex_Mashinsky
Source: Cryp­toPota­to Archives

But his shady moves con­tin­ued to make noise. A report of Mashin­sky and top com­pa­ny exec­u­tives cash­ing out just before the plat­form halt­ed user with­drawals emerged.

It turned out that some­one like Mashin­sky, who sim­ply par­rots sim­ple­mind­ed slo­gans such as “banks are not your friends,” end­ed up build­ing a con­ven­tion­al bank, hop­ing to churn in gains from cryp­to trad­ing and speculation.

His hubris showed no end, yet as the say­ing goes, if it sounds too good to be true, it prob­a­bly is. Cel­sius, as report­ed, filed for Chap­ter 11 bank­rupt­cy pro­tec­tion after acknowl­edg­ing a $1.2 bil­lion hole in its bal­ance sheet. A sep­a­rate law­suit now accus­es Cel­sius of “oper­at­ing a “Ponzi scheme.”

The Undoing of Axie Infinity

Sev­er­al dif­fer­ent forms of cryp­to scams pro­lif­er­at­ed this year. But cryp­to game Axie Infinity’s Ronin bridge bore the max­i­mum man­age in a high-pro­file hack car­ried out in an elab­o­rate phish­ing scheme involv­ing fake LinkedIn job ads.

The noto­ri­ous North Kore­an group – Lazarus – was respon­si­ble for Axie’s undoing.

Accord­ing to reports, the scam­mers tar­get­ed employ­ees of Sky Mavis and reached out over LinkedIn on behalf of a fic­ti­tious com­pa­ny. One senior engi­neer took the bait and pro­ceed­ed with mul­ti­ple rounds of the inter­view that had an “extreme­ly gen­er­ous” fake com­pen­sa­tion pack­age. Upon click­ing a PDF sup­pos­ed­ly con­tain­ing the offi­cial offer, the hack­ers were able to com­pro­mise the engineer’s computer.

At its peak, Axie Infin­i­ty was huge, boast­ing 2.7 mil­lion dai­ly active users and over 200 mil­lion in week­ly trad­ing vol­ume for its in-game NFTs in Novem­ber last year.

A Highly Profitable Trading Strategy… or Not?

Man­go Mar­kets attack­er Avra­ham “Avi” Eisen­berg drained the Solana-based trad­ing and lend­ing market’s liq­uid­i­ty pools.

While main­tain­ing that his actions were legal, Eisen­berg said that the trad­ing strat­e­gy he applied was a “high­ly prof­itable” one which was made pos­si­ble because the devel­op­ers of the DeFi trad­ing plat­form “did not ful­ly antic­i­pate all the con­se­quences of set­ting para­me­ters the way they are.”

The reg­u­la­tors feel dif­fer­ent­ly. The self-described game the­o­rist was charged with com­modi­ties fraud and mar­ket manip­u­la­tion by US pros­e­cu­tors and was arrest­ed in Puer­to Rico on Decem­ber 26th.

Shaking the Belief System

NFT mar­ket­place Superrare’s senior com­mu­ni­ty man­ag­er Ash­ni Chris­tensen and Ethereum Name Ser­vice (ENS) direc­tor of oper­a­tions Brant­ly Mil­le­gan came under sharp scruti­ny in Feb­ru­ary over past tweets. The usage of racist lan­guage and tweets about trans­pho­bic abuse caused a stir in the com­mu­ni­ty, with a wide major­i­ty call­ing for the execs’ removal.

This was the time when “woke” cul­ture clashed head-on with cer­tain beliefs in the cryp­to indus­try that vouch­es for inclusivity.

American Actor Seth Green Got Phished

Actor Seth Green’s Bored Ape Yacht Club (BAYC) NFTs were stolen. The Robot Chick­en cre­ator had his entire NFT col­lec­tion swiped from him after suc­cumb­ing to a phish­ing scam in May. His NFT loss­es includ­ed Bored Ape Yacht Club #8398, two Mutant Apes, which is anoth­er NFT project by Bored Ape Yacht Club cre­ators Yuga Labs, and a Doo­dle NFT.

Blockchain sleuth, ZachXBT lat­er uncov­ered that the theft of the actor’s NFTs was part of a sophis­ti­cat­ed mul­ti­mil­lion-dol­lar scam oper­a­tion that has roped in numer­ous victims.

Outrage Over Tornado Cash Sanctions

OFAC sanc­tion­ing con­tro­ver­sial cryp­to mix­er, Tor­na­do Cash, hit crypto’s lib­er­tar­i­an roots.

Always seen as an ene­my by law enforce­ment agen­cies, Tor­na­do Cash was believed to be heav­i­ly relied on by North Kore­an state hack­ers who were behind the $625 mil­lion heist from the Ronin Bridge as well as $100 mil­lion from the Hori­zon Bridge. Short­ly there­after, a 29-year-old devel­op­er of Tor­na­do Cash was arrest­ed by Dutch Crime Agency (FIOD).

The cryp­to indus­try respond­ed with out­rage and law­suits.

Kyle Roche Recordings

Law firm Roche Freed­man is noto­ri­ous for bring­ing class action suits against some of the most pop­u­lar cryp­to firms. Sta­ble­coin issuer Teth­er and sis­ter exchange Bitfinex, the Tron Foun­da­tion, and Bit­MEX are a few of them.

How­ev­er, things turned embar­rass­ing for part­ner Kyle Roche in August when he was caught on video call­ing jurors “10 idiots” and boast­ing that he “sues half the com­pa­nies in the industry.”

What fol­lowed was a com­plete mock­ery of him­self and some aston­ish­ing claims about indus­try insid­ers. Roche claimed that his law firm had a “secret pact” with Avalanche blockchain devel­op­er Ava Labs to go after its rivals in exchange for “a mas­sive quan­ti­ty” of stock and mil­lions of dol­lars worth of AVAX tokens.

The judge called him “unique­ly stupid.”

Endorsing Securities Became a Costly Affair for This Kardashian

Celebri­ty influ­encer Kim Kar­dashi­an was fined with $1.26 mil­lion set­tle­ment with the SEC over her endorse­ment of Ethereum­Max (EMAX).

Kim_kardashian
Source: Cryp­toPota­to Archives

Kar­dashi­an had pro­mot­ed the obscure token to her 225 mil­lion fol­low­ers on Insta­gram with­out dis­clos­ing that the post was an ad. She was paid $250,000 for the same.

Elon Musk’s Chaotic Twitter takeover

The Tes­la chief has only been in charge of Twit­ter since late Octo­ber, but a lot of things have changed in the social media platform.

From boot­ing top execs, slash­ing rank-and-file head­count by 50%, to bom­bard­ing its remain­ing employ­ees with an ulti­ma­tum with regards to their work eth­ic and instat­ing a num­ber of new fea­tures such as includ­ing charg­ing users to get or keep a ver­i­fi­ca­tion check mark, the Blue Bird has been turned upside down.

You can check the full series of events that led to the acqui­si­tion in our thread here:

BBC’s Puff Piece

No one loves a rags-to-rich­es sto­ry more than BBC and almost ran a “puff piece” on a cryp­to scam­mer. Hanad Has­san is a 20-year-old refugee who said that he “wants to use his wealth to help peo­ple” and claimed that the cryp­to project he found­ed deployed $270,000 on good caus­es. He was report­ed­ly the founder of Orfano X in 2021.

But it wasn’t until this year that BBC took note of him. The broad­cast­er pre­pared an almost 30-minute doc­u­men­tary on a cryp­to scam­mer titled “We Are Eng­land: Birmingham’s Self-Made Cryp­to-Mil­lion­aire.” Social media did what it does best. Users across Twit­ter accused the founder of steal­ing users’ funds after cre­at­ing a scam project.

BBC then launched an inter­nal inves­ti­ga­tion after qui­et­ly tak­ing down the arti­cle. The sched­uled air­ing was also pulled hours before it was sup­posed to go live in Feb­ru­ary. BBC is now fac­ing ques­tions over how much due dili­gence it actu­al­ly con­duct­ed on the project and into the scammer’s work.

That’s a Wrap

There’re sure­ly more sto­ries that fit the cri­te­ria of a scan­dal, and we might have for­got­ten some in what seemed an end­less list.

For what is worth, let’s at least hope that 2023 will pro­vide more tales of pride than of sordid.

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