MobileCoin: The project that doomed FTX a year before Terra Luna

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The turmoil that hit digital assets markets last year plunged several prominent exchanges and hedge funds into bankruptcy. Among the most high-profile was the collapse of the gargantuan, once-$29 billion Terra LUNA ecosystem which, many will say, was the first domino that eventually destroyed Sam Bankman-Fried’s (SBF) FTX. However, this would be a misunderstanding of causality. In actual fact, it started with MobileCoin (MOB).

Indeed, FTX might have been insolvent for over a year by the time of the Terra LUNA implosion. In April 2021, MobileCoin, an ICO associated with the encrypted messenger Signal, had gone parabolic, pumping from under $2 in December 2020 to over $71 (MobileCoin is again worth less than $2 today).

That spectacular round-trip cost Alameda up to $1 billion — more than the $800 million it optimistically hoped to have made in profit since inception.

FTX raised $900 million in July 2021 — a curious coincidence when we consider both the timing and the dollar amount of its MobileCoin loss.

In addition, starting with that $900 million raise in July 2021, FTX and Alameda founder SBF began to cash out with personal “loans” that he would, of course, never repay. By the time FTX’s fundraisers of July 2021, October 2021, and January 2022 had closed, SBF had personally withdrawn hundreds of millions of dollars.

These disbursements occurred months before Terra LUNA collapsed. Indeed, it was more likely that MobileCoin — plus these dubious “loans” to FTX executives — caused the downfall of FTX than Terra LUNA, which didn’t collapse until May 2022.

Alameda lost everything on MobileCoin

In early 2021, a trader on FTX acquired a massive amount of MobileCoin and used it as collateral to borrow other assets. According to a source cited by the Financial Times (FT), this was “potentially a scheme to extract dollars from the exchange.” As that position went against the trader, Alameda overtook that suite of MobileCoin positions “to protect FTX.”

Although the Financial Times didn’t specify whether Alameda lost money on the long or short side of the squeeze to $71, it did report its losses peaking at $1 billion.

The MobileCoin pump coordinators could have been Signal insiders and a few outside co-conspirators. Signal had loans to pay back and a poor monetization model (more on these points later).

SBF’s fundraising abilities at FTX provided a rare opportunity to extract hundreds of millions worth of assets from an overconfident liquidity source who had an incentive to protect the reputation of his FTX brand. Indeed, with FTX and Binance as the only two major exchanges listing MobileCoin trading pairs of meaningful liquidity, MobileCoin provided an easy way for a China-connected trading group to extract money from Binance’s top competitor, FTX.

It’s also worth noting that SBF was a relative newcomer to the digital asset space. Early MobileCoin token purchasers enjoyed a cost basis of just a few cents — its official ICO price was $0.80 with pre-sale rounds at even cheaper prices — and with just two major exchange listings, MobileCoin was an opportunity to overwhelm SBF with a surprising short squeeze.

At the time, FTX touted a unique liquidation engine that incentivized large traders to absorb trades when it needed to liquidate margins. Advanced traders often posted margin, or collateral, to place bets on other assets. If they lost their combined bets, the exchange could sell their collateral.

However, sometimes the collateral cannot be sold for reasonable prices. In these cases, the exchange’s market-maker might assume the position and attempt to trade out of the position manually. This occurred when Alameda assumed the MobileCoin suite of positions to protect its sister exchange, FTX, from this rogue trader.

When the price of MobileCoin spiked, the trader posted a large amount of collateral in MobileCoin to access margin for other assets — likely an attempt to exploit FTX’s liquidity engine as well as its banking and fundraising relationships. As reported by FT, Bankman-Fried’s Alameda Research eventually absorbed losses from a suite of MobileCoin-associated positions from that trader to protect FTX from bankruptcy.

Two anonymous sources estimated Alameda’s losses at up to $1 billion on that bad margin. This wiped out any profits the company had hoped to have ever earned since inception.

Crypto whale stuck in $150M short squeeze during battle for tiny altcoin

Moxie Marlinspike was involved since the beginning

Signal founder Moxie Marlinspike (Matthew Rosenfeld’s pseudonym) also served as one of MobileCoin’s earliest technical advisors. MobileCoin raised $30 million in a seed round led by Binance Labs in 2018 and $66 million in a Series B round in 2021.

According to CoinDesk, early versions of MobileCoin’s technical documents listed Marlinspike as CTO, and before April 2018, MobileCoin’s website clearly referred to Marlinspike as part of its team.

However, MobileCoin denies that Marlinspike was ever more than an advisor despite a long list of evidence. CEO Joshua Goldbard claimed that the MobileCoin team never wrote the 2017 draft of the whitepaper which contained contributions from Marlinspike.

An ICO was an easy way to make money from an unprofitable app

By early 2021, Signal was struggling with debt and was generating minimal revenue. In April, it announced MobileCoin as its payment option for UK users. This was the major announcement used to justify MobileCoin’s rocketing price over $70 — a price it would never reclaim.

Of course, at the time, the Signal team had pressing debts payable to a WhatsApp founder. Despite Signal’s virtue signaling about private, peer-to-peer payment technology, it didn’t have any monetization strategy gaining meaningful traction with users. Encrypted messaging apps were and remain commonplace; vanishingly few users pay for this commoditized service.

As such, an ICO and price pump was a surefire way to raise capital.

Marlinspike touted the privacy features of Signal and MobileCoin, claiming that it could improve privacy for activities like accessing and paying for remote mental health services. MobileCoin provided lengthy documentation with claims about end-to-end encryption, yet Signal refuses to allow public access to its servers. Moreover, Signal could have integrated any number of other privacy-focused cryptocurrencies for free, including Monero, Zcash, Secret, Decred, Keep, and Dash.

Bitcoin Core developer Matt Corallo bluntly referred to Signal’s integration of MobileCoin as an attempt “to sell the future tokens to a captive audience.” He interpreted Marlinspike’s close involvement to mean that Signal was indeed behind MobileCoin’s creation.

Neither did Signal’s integration help MobileCoin gain meaningful use across the crypto industry. Today, MobileCoin has negligible use outside of Signal. The price of MobileCoin still languishes 98% lower than its all-time high.

Worse, MobileCoin refuses to verify its circulating and outstanding token supply, making it impossible for users to know its market capitalization and fully diluted value.

Final notes

More than a year and a half after the MobileCoin pump and dump, FTX froze withdrawals and then filed for bankruptcy in November 2022. John Ray III, a bankruptcy expert best known for presiding over Enron’s final days, took over. He confirmed that FTX’s finances were in complete disarray and he shockingly revealed billions of dollars worth of missing assets and the company’s Ponzi-like schemes.

It’s public knowledge that the team behind MobileCoin comprised one of the wealthiest groups in crypto: Li Xiaolai, Moxie Marlinspike, Eric Meltzer, Dax Hansen, and Todd Huffman. The group was connected to a number of early Bitcoiners in China — especially Xiaolai and Meltzer, both of whom lived there. “China’s richest Bitcoin billionaire” Xiaolai was particularly wealthy due to his participation in Dan Larimer’s enormous ICOs of EOS and BitShares.

In addition, one of Meltzer’s partners at Primitive Ventures, Dovey Wan, is rumored to have had a romantic relationship with Binance chief Changpeng Zhao (CZ).

In any case, we now know the rest of the story. The FTX dominos had already been toppling for over 18 months — not due to Terra LUNA but because of MobileCoin. The minor altcoin with an unknown market cap extracted hundreds of millions of dollars from Alameda and wiped out any hope of FTX achieving profitability.

Obviously, the collapse of Do Kwon’s Terra LUNA and SBF’s shady financial practices didn’t help. Nevertheless, even SBF would have had a hard time brushing off a $1 billion loss on a bad margin takeover. He now awaits his day in court.

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