The future of a program aimed at helping formerly incarcerated Chicago residents hangs in the balance after the company that was supposed to pay for it, cryptocurrency giant FTX, has imploded amid accusations of fraud before paying most of its promised $1 million grant.
FTX’s participation was announced by Mayor Lori Lightfoot in May, when the cryptocurrency exchange moved its U.S. headquarters to Fulton Market.
Brett Harrison, the now-former president of FTX US, pledged that the company would give at least $1 million to help expand a universal basic income program run by the not-for-profit organization Equity and Transformation.
The nonprofit, also known as EAT, got the first installment of the grant — just over $393,000 — to support administrative costs. But, without the second payment — more than $600,000 — the program can’t be launched, according to Richard Wallace, EAT’s co-founder and executive director.
Now, the organization is scrambling to find replacement donors just as the program was gearing to launch this month.
Wallace had gotten off a plane in South Africa for a business trip when he got a text message from a colleague about news brewing regarding FTX. A day later, the company filed for bankruptcy and is facing accusations of using billions of dollars in customer assets to fund risky bets or other ventures.
“On Nov. 10, we received an email from the FTX Foundation team, saying, ‘We are still learning things in real time, and a proposal has been shared with our leaders, and we will update you,’ ” Wallace said. “Later that day, we received another email from them, saying the team at FTX Foundation had resigned. The entire team. We haven’t heard anything since.”
Wallace said EAT was finalizing the 100 participants in the program — who live in Englewood, West Garfield Park and Austin and were going to get $500 a month for a year and financial literacy training.
The $600,000 from the FTX Foundation would have supported those monthly payments.
“Our hope is we can still fulfill the commitment, and we are in the process of raising those resources,” Wallace said. “At the end of the day, that is most important.”
Researcher warns cities about relying on crypto
Researcher Tonantzin Carmona, a fellow at Brookings Metro, said the meteoric rise and fall of FTX should remind mayors across the country to be cautious of promoting industries that have few safeguards in place for consumers and that they should be especially wary of selling it as a means of helping financially insecure communities.
“I think local officials are faced with a tremendous amount of pressure to innovate and adapt to new technologies and serve residents and businesses, and I think crypto comes in and makes promises to solve these issues,” Carmona said. “It’s really seductive, but there is rarely anything to those promises.”
In May, Lightfoot welcomed FTX and declared Chicago a leader in the financial technology sector.
“What this new program and initiative has the potential to do is completely transform the lives of residents who are desperate for help but also to set the stage and challenge the traditional banks and financial lenders to get on board with the new reality,” Lightfoot said at a news conference then. “This is a mechanism and a tool to bring traditionally underrepresented and ignored populations into the world of crypto so they can take ownership and control of their own financial destiny.”
The support for crypto in Chicago also was heavily backed by Samir Mayekar, Lightfoot’s deputy mayor for economic and neighborhood development, who championed the idea that crypto could be used to help underserved communities.
On social media, Mayekar wrote that financial technology, like cryptocurrency, could bring about “inclusive economic growth.” On May 10, the day the program was announced, Mayekar tweeted: “Many cities focus on the sizzle of crypto / blockchain technologies. Here in #Chicago we like steak and substance. Leveraging new technology to help our residents.” He also said more programs like this were coming.
In August, Mayekar doubled down on how Web3 — an idea for a new stage of the Internet built around decentralization, blockchain technology and token-based economies — could help people facing barriers to financial security.
“The question is how can Web3 really be relevant in the lives of people on the South and West side as an example?” Mayekar said. “And that’s why we partnered with FTX … They stood up with us and said, ‘You know what, we’re going to launch the largest universal basic income pilot that’s led by the private sector here in Chicago.’ ”
A month later, FTX founder and now-former CEO Sam Bankman-Fried announced on Twitter that he was moving the headquarters of FTX from Chicago to Miami. The Fulton Market office remains empty.
Kyle McDonald, director of engineering for Foxtrot, works on the same floor as FTX’s former Chicago office and said he rarely saw anyone working there. Several weeks ago, he said, the company moved all of its furniture out.
“Was always weird how big and nice of a space they had when no one was really in the office,” McDonald said.
A spokesperson for the mayor’s office said the city’s financial technology “entrepreneurial ecosystem in Chicago is comprised of over 300 companies that raised over $4.5B in 2021” and is much bigger than one company.
The spokesperson said that, though the city wasn’t a party to the agreement between EAT and FTX, it is helping find alternate funding.
“Like many others, the city is shocked at the downfall of FTX and hopes that regulators take a deep look at the company to hold the right individuals accountable for the staggering loss of customer funds,” the spokesperson said.
Carmona has been sounding an alarm for months about cities promoting cryptocurrency as a means for solving inequality.
“For starters, crypto and crypto-related projects aren’t really regulated, and there aren’t strong consumer protections in place, so, when things go wrong, they go wrong,” Carmona said. “Not only is this technology risky, but it is also unproven.
“If you aren’t doing your due diligence around these technologies, there are real people that can be harmed, and city leaders shouldn’t be putting people at risk,” she said.
Carmona said it’s important to realize that cryptocurrency transaction fees are often more expensive than those of traditional financial institutions and that the use of cryptocurrency is seen more as a means of speculative investing than as a form of payment.
Bankman-Fried has said in interviews he was guided by a social movement called effective altruism for using his wealth to help others. He leveraged that wealth with the FTX Foundation, which already had pledged to distribute more than $100 million in 2022 to “some of the world’s most effective charities and programs.”
“We, like most nonprofits, are shocked by this because they presented this ‘effective altruism’ model to everyone and seemed to push for racial equity,” Wallace said. “Come to find out it was not real.”
According to the FTX Foundation’s website, it had been supported mostly by funding from Bankman-Fried and other FTX leaders. Users and employees of the platform also support the foundation “through FTX’s Giving Program by contributing to FTX Philanthropy Inc., a nonprofit organized for tax-exempt purposes.”
None of these organizations is listed with the Internal Revenue Service.
The FTX Foundation has not responded to requests over several months about its structure, whether it is a tax-exempt organization or, if not, where the foundation was registered.
Wallace said his organization was against receiving any cryptocurrency to prop up the program and pushed instead for accounts that were insured by the Federal Deposit Insurance Corp.
FTX agreed to providing cash assistance, but there was a disagreement over which app to use. FTX wanted its app to be used, so participants could track their balances and spending habits, but Wallace wanted a third-party banking app, and FTX ultimately agreed.
“In our contract, it is clearly defined [participants] were getting cash with FDIC-insured accounts,” Wallace said. “We told them from the beginning we have very little knowledge around crypto, and we don’t think it is a benefit for our community to be engaging in crypto since it is such a speculative market.”
Wallace declined to provide a copy of the contract, citing a clause he says prohibits him from doing so.
City Hall and FTX said at the time of the announcement that participants would receive $500 monthly in an FTX “wallet” and an FTX debit card.
“I put Sam [Bankman-Fried] now in the same category as payday loans and currency exchanges that are exploiting people in these communities consistently left behind,” Wallace said. “We need the city to step up and remedy these conditions.”
Contributing: David Jackson