Close
Top

FTX Statement and FAQs

This page was updated with FAQs on 26 November 2022.

Our Blockchain strategy

Innovative technologies, including blockchain technology, are enablers with the potential to transform sectors and create a more connected world. The nascency of the blockchain and digital asset industry presents innumerable opportunities as well as significant risks.

As such, we closely track the risks involved and have taken a calibrated two-pronged approach for exposure in this space – venture building and investing.

  • Our venture building efforts have been focused on programmable money, digital assets tokenisation, and decentralised identity and data. Several of these entities are not blockchain-based at this stage but rely on the technology and focus on delivering open data solutions and open networks.

  • Our blockchain investment activity focuses on:

    • Financial market service providers to the digital asset space providing protocol agnostic and market neutral exposure; and

    • Technology infrastructure including protocols, wallets, developer tools, cross-chain messaging, metaverse and gaming infrastructure
       

Background on our investment in FTX

We believe that exchanges form a key part of global financial systems.

The thesis for our investment in FTX was to invest in a leading digital asset exchange providing us with protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk.

We invested US$210 million for a minority stake of ~1% in FTX International1, and invested US$65 million for a minority stake of ~1.5% in FTX US, across two funding rounds from October 2021 to January 2022. The cost of our investment in FTX was 0.09% of our net portfolio value of S$403 billion as of 31 March 2022.

There have been misperceptions that our investment in FTX is an investment into cryptocurrencies. To clarify, we currently have no direct exposure in cryptocurrencies.


Our risk-return framework and due diligence processes

Our investment discipline, centred around intrinsic value and our risk-return framework, guides our due diligence for new investments and ongoing engagement with our investee companies. 

As an investor-owner seeking sustainable returns over the long term, we believe that we have to invest in new sectors and emerging, nascent business models to understand the applications and impact they may have on the business and financial models of our existing portfolio, or be drivers for future value in an ever-changing world. This is why we invest in early stage companies and accept the binary risks associated with such investments. Our early stage investments constitute ~6% of our portfolio, and as a group have generated good returns for us, with IRRs in the mid- teens. However, we do recognise the inherent risks of investing in early stage companies and take a very measured approach to such investments by applying an illiquidity risk premium on the cost of capital. In addition, we also add on a venture risk premium for the early stage they are in. Our blockchain direct investments are not a significant part of our early stage investments.

Similar to all investments, we conducted an extensive due diligence process on FTX, which took approximately 8 months from February to October 2021. During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable. In addition, our due diligence efforts focused on the associated regulatory risk with crypto financial market service providers, particularly licensing and regulatory compliance (i.e. financial regulations, licensing, anti-money laundering (AML)/ Know Your Customer (KYC), sanctions) and cybersecurity. Advice from external legal and cybersecurity specialists in key jurisdictions was sought, with legal and regulatory review done for the investments.

Separately, we also gathered qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants, and other investors.

Post investment, we continued to engage management on business strategy and monitor performance.

We recognise that while our due diligence processes may mitigate certain risks, it is not practicable to eliminate all risks.

Reports have since surfaced that customer assets were mishandled and misused in FTX. If these statements are true, then this amounts to serious misconduct or fraud at FTX. All of this is currently being investigated by the regulators.

It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.

We expect companies that we invest in to comply with their obligations under the laws and regulations of jurisdictions in which they have investments or operations; abide by sound corporate governance; and above all act ethically always. As we only had a ~1% stake in FTX, we did not have a board seat. However, we take corporate governance seriously, engage the boards and management of our investee companies regularly and hold them accountable for the activities of their companies.


Going forward

We are supportive of the efforts of the regulators and the courts, and we encourage the principals involved with FTX to cooperate for an orderly resolution of outstanding matters.

We continue to recognise the potential of blockchain applications and decentralised technologies to transform sectors and create a more connected world. But recent events have demonstrated what we have identified previously – the nascency of the blockchain and crypto industry and the innumerable opportunities as well as significant risks involved.

In view of FTX’s financial position, we have decided to write down our full investment in FTX, irrespective of the outcome of FTX’s bankruptcy protection filing.

There are inherent risks whenever we invest, divest, or hold our assets, and wherever we operate. While this write down of our investment in FTX will not have significant impact on our overall performance, we treat any investment losses seriously and there will be learnings for us from this.

We will continue to remain prudent and exercise caution even as we explore opportunities that are aligned with our structural trends, to deliver sustainable returns over the long term for our overall portfolio.


________________________

1 Series B (concurrently across B and B-1 in October 2021) and Series C (January 2022).
 

*** END ***

FAQs

 

Following the issuance of our statement on FTX on 17 November 2022, we note that there have been additional queries regarding this investment. Our policy remains not to comment on individual investments as we report our performance on a portfolio basis, but we will seek to address as many of these queries as we can here. Please note that while court proceedings and regulatory investigations are underway, we will be limited in our ability to discuss FTX in full.

All figures cited below on Temasek’s portfolio are as of financial year ending 31 March 2022.

How did Temasek come to invest in FTX?

We believe that innovative technologies, including blockchain technology, are enablers with the potential to transform sectors and create a more connected world. The nascency of the blockchain and digital asset industry presents innumerable opportunities as well as significant risks.

As a forward looking global investor, we have to be open to invest in emerging business models, technologies and trends. In doing so, and being mindful of risks, our approach is to engage in a calibrated manner.

We therefore decided to track blockchain technologies and the space even more closely in 2018. Our view was that the impact of this technology would be geography and sector agnostic. We wanted to seek opportunities that harness the technology to address changing consumption patterns and new use cases, and understand the impact of such technologies on our existing portfolio.

There has been steady progress in our efforts in this space – from starting our own ventures, to increasing indirect exposure to the blockchain space through fund investments, and more recently, to making direct investments.

Our venture building efforts have been focused on programmable money, digital assets tokenisation, and decentralised identity and data. Several of these entities are not blockchain-based at this stage but rely on the technology and focus on delivering open data solutions and open networks.

Our blockchain investment activity focuses on:

  • Financial market service providers to the digital asset space, providing protocol agnostic and market neutral exposure (e.g., exchanges); and
  • Technology infrastructure including protocols, wallets, developer tools, cross-chain messaging, metaverse and gaming infrastructure.

The thesis for our investment in FTX was to invest in a leading digital asset exchange providing us with protocol agnostic and market neutral exposure to crypto markets with a fee income model and no trading or balance sheet risk. Such exchanges could play a key role in the financial systems of tomorrow where a variety of assets can be tokenised and traded on these exchanges.

Despite being founded only in 2019, FTX was a fast-growing company that showed promise, and had attracted external early investors at the time of our investments. We reviewed FTX International’s audited financial statement as part of our due diligence, which suggested that it was performing well and was profitable. FTX International was on track to reach US$1b in revenue and generate net income in excess of US$350m in 2021 at the time of our investment.

Our investment was also underpinned by other strengths of the company. It had:

  • shown a willingness to engage with regulators to obtain the necessary licenses;
  • a resilient technology platform and liquidation engine;
  • a growing market share; and
  • a committed and growing customer base, that included leading market makers, institutions, and high net worth individuals, because of its proven technology and wide product offerings.

We invested in FTX over the course of October 2021 to January 2022. We invested US$210 million in FTX International for a minority stake of ~1%, and US$65 million in FTX US for a minority stake of ~1.5%. There was a fundraising round in FTX in July 2021 which we did not participate in, as we were undertaking due diligence which had yet to be completed.

There is a misconception that our investment in FTX is an investment into cryptocurrencies. This is not the case. We invested in market infrastructure and we currently have no direct exposure to cryptocurrencies.

What due diligence did Temasek conduct?

The investment in FTX was subject to the same analysis and due diligence process that we would conduct for other investments of a similar risk and type.

There are many different forms of due diligence and the level of due diligence done is commensurate with the type of investee company, its business, process of share purchase (e.g., block-trade, public markets, competitive bid), and the percentage shareholding being acquired. 

For a 1-1.5% stake (such as our investment in FTX), it is neither feasible nor the market norm to conduct due diligence equivalent to an investment where a significant shareholding or a controlling stake is being acquired. 

Nevertheless, in line with the global regulatory focus on cryptocurrencies and exchanges and in spite of our small shareholding, we conducted significant regulatory and licensing due diligence on the business model of FTX, particularly on financial regulations, licensing, anti-money laundering (AML) / Know Your Customer (KYC) and sanctions across multiple jurisdictions. The due diligence process also included a review of audited financial statements and a cybersecurity review.

External legal counsel for key jurisdictions were appointed to carry out the legal and regulatory due diligence.

Throughout the multiple rounds of due diligence, FTX demonstrated a clear willingness to discuss and engage with us, which indicated that they were willing to do business in the right way. During this process, we enquired about the relationship, preferential treatment, and separation between Alameda and FTX, and were given appropriate confirmations that were contractually binding.

Separately, we gathered qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants, and other investors.

As part of due diligence, we had identified possible enhancements around FTX’s regulatory stance and gaps around leadership roles. We engaged FTX management on addressing these leadership gaps in the lead up to and post-investment. This approach is not uncommon for investors when investing in companies in their early stages of development.

Ultimately, we recognise that there are inherent risks in all investments and due diligence processes have their limitations. While due diligence may identify and mitigate certain risks, it is not feasible to eliminate all risks in the investment.

Because due diligence is conducted from an outside-in perspective and access to information is limited, there is the risk that a well-concealed fraud by a small group of people, as reports on FTX suggest, can go on undetected. 

How did Temasek engage FTX management?

Post investment, we continued to monitor performance and engage management on business strategy, as well as legal, policy and regulatory matters. We also encouraged FTX to improve and upgrade their regulatory and legal functions, as well as to appoint experienced executives to strengthen their leadership team in these areas, which they did. This is similar to how we engage other early stage investments as an active investor and shareholder.

Investors with a small shareholding are usually not granted board seats. With a ~1% stake in FTX International and a ~1.5% stake in FTX US, our shareholding did not entitle us to a board seat.

We recognise that FTX had a young leadership team. It is not uncommon for investors to back talented young founders and management teams in early stage ventures. Such founder-led structures form the typical profile for digital and technology-based start-ups, and the founders are often the key drivers in every operational aspect of their companies. Many large technology companies we see today were created by young founders with a vision and the tenacity to build towards that. Key person risks are inherent risks for these start-ups.

Reports have recently surfaced of mismanagement by FTX's executives, including misuse of customer assets. These reports allege serious misconduct or fraud at FTX. We do not condone misconduct in any of our investee companies. We are unable to comment further on FTX given that there are ongoing investigations.

What follow ups will Temasek be doing?

In view of FTX’s financial position, we have decided to write down our full investment in FTX. We treat investment losses seriously, and have an independent team reviewing this investment as part of our review process.

As an active investor, we engage the companies in our portfolio and conduct regular internal reviews of our investments. For each investment, the relevant investment team monitors the performance of the company and engages its management team. We have a formal review each quarter to assess all investments individually, and therefore, the performance of our portfolio.  

Should there be a significant and permanent loss in value for an investment, we conduct a review to understand what went wrong, to discern the learnings and share it with our wider investment group to ensure that the organisation benefits from such learnings when overseeing our portfolio and future investments.

In the case of FTX, we continue to monitor the ongoing developments surrounding the situation.

What is Temasek's track record for early stage investments?

At a portfolio level, early stage investments have generated good returns for us, with internal rate of returns in the mid-teens over the last decade. This is higher than the industry averages.

For each investment we make, we conduct a bottom-up intrinsic value analysis, with investments in riskier sectors or markets having higher costs of capital. We then add an illiquidity risk premium for unlisted investments and a venture risk premium for early stage investments. We also use risk-adjusted cost of capital to normalise the risks in order to compare the relative attractiveness among investment opportunities.

Our early stage investments, which constitute about 6% of our portfolio, allow us to gain insights into innovation in disruptive technology and business models. This enables us to better assess future opportunities and segments, as well as better understand potential implications for our broader portfolio. 

A diversified portfolio is key for our early stage investments. The risks in early stage investing is binary. Therefore, early stage investing requires the investments to be spread out over a diversified portfolio and we need to look at the overall return of the portfolio to determine performance. Our portfolio is also spread across geographies and sectors, and the early stage companies in our portfolio have the potential to achieve significant growth over time and deliver attractive risk-adjusted returns. Several of these companies have matured from early stage into successful growth stage entities and generated attractive returns for our portfolio.

Subscribe to our newsletter

Stay up to date with our latest news, insights and stories

Select a type of content
    Please select Stories you are interested in.
    Please give us your consent.
    Please confirm that you are not a robot.