Buenos Aires — Months before going bankrupt and shaking the foundations of the global cryptocurrency ecosystem, the Sam Bankman-Fried-led crypto exchange FTX invested in Argentine fintech Lemon Cash at the beginning of 2022, as a minority investor in an extension of its Series A round, news that has only just come to light, despite Lemon’s denial last week of the possibility of a negative impact from FTX’s collapse.
And this is not the only revelation that Bloomberg Línea has been able to confirm in the last few hours. Lemon Cash still has its own funds held in the exchange, and although the fintech has explained that it is not a significant amount, there is no longer any expectation of recovering the funds.
Lemon Cash’s CEO Marcelo Cavazzoli confirmed the above in an exclusive interview with Bloomberg Línea, in which he also revealed that Lemon has had to reduce its workforce by 38%, a decision that he described as “very difficult”, but which will allow the company to face the next three years having to depend on future investments in a context of very low liquidity at a global level.
The decision, Cavazzoli explained, will affect around 100 of the 273 people working at Lemon, and will affect employees in both Argentina and Brazil.
However, he added that “these changes in structure are not made overnight”, and are largely explained by the current context in which startups and the tech industry in general are going through, affected by the global liquidity crisis.
The following interview has been edited for length and clarity:
Bloomberg Línea: Earlier this year Lemon Cash made an extension of its 2021 Series A and FTX entered as a minority investor. How much was that investment?
The extension was $27.8 million, bringing the total to $44.1 million, one of the largest Series A investment rounds for a startup in Argentine history. Of this amount, FTX participated with a very small investment. FTX was one of the investors that participated in this capital raising, and was one of the those that invested the least, and one of the ones that had the smallest portion of the cap-table.
Why wasn’t that communicated at the time? Wasn’t it good news at that time to say that FTX invested in Lemon?
In addition to FTX, whose participation was minimal, we had other important investors such as DST Global, Valor Capital Group, CMP Digital, Cadenza, and which were more relevant when it came to communicating it. But we did not announce this extension due to a strategic issue, we did not see an advantage in announcing it at that time.
But now we want to make everything transparent, so we decided to disclose all this information. That round today made us one of the most-funded crypto companies in Argentina, with $44.1 million of Series A plus another million more. That gives us a very big back to face the bear market that is coming and not have to depend on new investments and be able to focus on growing new products and continue on this path of bringing more people to Web3.
How was the relationship with FTX from that moment on? As an investor in Lemon, did you have any communication with FTX?
We didn’t know the FTX team, we knew the FTX Ventures team. The relationship is like the one we have with other investors, sending updates, asking for some information about a product, or specific information about the market. In fact, the person who decided to invest in Lemon, who is called Adam, is an excellent professional, now he has left FTX and is setting up something new. Not everyone was aware of what was going on, least of all FTX Ventures.
Was it Coindesk’s note that triggered the pullback?
Lemon is one of the largest crypto companies in Argentina, and as such we have an investment risk committee that constantly makes moves and consolidations. Upon learning of some of the news that was made public on November 2, the committee decided to start withdrawing due to a risk issue. We must remember that the industry had already been hit by the Luna and Three Arrows Capital cases, there was no room to take unnecessary risks.
Were you able to withdraw all the funds of Lemon’s clients?
During those first few days of November we withdrew all user funds. The last Alameda withdrawal was requested on the November 3 and went out on November 4. And the FTX funds arrived between November 3 and 7, in total. Then WE decided to remove FTX and Alameda from the Terms and Conditions, that we were not going to use them anymore. That’s what triggered a controversy, which with a little bit of self-criticism, we could have communicated earlier. We felt that we were simply removing an option that we were not going to use anymore.
Did you have any subsequent contact with the FTX team?
No, we had no contact, nor did we have to talk to Ventures to make thOse moves. The last communication that I, personally, had with them, was in April.
But were there Lemon’s own funds that were retained?
Before its collapse, FTX was the second-largest exchange in the world, with the best investors and a funding of more than $2 billion. In that context, we had decided to make an investment equivalent to the investment they had made in Lemon. We no longer expect to recover it, but this has no effect either for the users or a significant impact on the company. It is the equivalent of the investment they had made, which we do not expect to recover.
Lemon introduced a new way of showing proof of bookings, which users will be able to see in the app in real time. Did you feel that more information was needed to clear up the doubts?
We felt that last week we needed to give a shock of confidence and transparency. It was important to dispel rumors and everything that had been circulating. But now we decided to go a step further. And this is going to be a constant from Lemon going forward, in everything that refers to transparency. This new version allows you to see all the assets in real time in the app. What’s more, it’s already published. Lemon users can already see all the funds in all the wallets.
What are the next steps in that regard?
We not only want that to happen at the asset level, but also at the debt level. We are working on the second part of a debt test with a technology that uses cryptography and allows the validation of deposits. And we are also taking a step further: from the country’s fintech chamber, where I am on the board of directors, we are proposing that this should be a standard for Argentine companies. I believe that whether this is promoted or not, the market will demand it. It is a first step to creating a more transparent ecosystem and with this live proof of reserves and also the proof of liabilities with cryptography, I think it is going to be a very good standard. In fact, I’ve already talked to colleagues from other companies who are willing to join. It is a proposal that was well received by the community and colleagues from other companies.
Do you think that the demand for transparency will be what prevails in the crypto ecosystem from now on?
Out of all this commotion something good will come, and that will be all the transparency that we will see from now on. In this new cycle, which begins after the fall of FTX, Three Arrows, Celsius and others, one of the most important pillars will be transparency. And at Lemon we want to be the main promoters of that. Not only for philosophical reasons. From now on, users will choose the crypto exchange that is more transparent, the one that gives you more confidence. In this new cycle that is coming, after this huge blow to trust, I think the good thing is that the industry will mutate to becoming much more transparent, because the market will demand it.
It is often said that trust takes years to build, but seconds to destroy.
I tend to be very optimistic on a personal level. Obviously, it is very sad what has happened. Many people lost billions of dollars. But I also think it leaves us with a cleaner scenario, where we have to go back to the roots of crypto, especially in what it means to not rely on a counter party. In the wake of this bear market comes something new, and which is going to be better. There’s been a blow to trust, but we can build solutions that don’t rely on the trust of a third party. And I think it’s going to be good for the ecosystem in the medium and long term. I think it’s going to rebuild, and what’s left will be much better. At some point you could say it’s better that it happened earlier rather than later. The impact in one or two years could have been greater. All of this teaches us a great lesson, and will lead us to go back to our roots and build more products based on crypto pillars.
As a result of this increased demand for transparency, do you think the era of expectation of double-digit monthly returns is over?
The CeFi [centralized finance] yielding experiment, of interest from a centralized, hidden point of view, has failed. What the market teaches us is that that’s not going to work. Now, there is an alternative, which is DeFi [decentralized finance], where you don’t have to trust that an exchange is doing things right, you can see it in real time, where there is an open and free market. This is exactly where we are going with Lemon. We are going to a cycle in which you will be able to choose which protocol you want to invest with. I believe that what failed was the centralization and the lack of transparency, they were chasing to see who would give the highest rate and those who gave it were the first to fall. That is why I believe that now we are going to move towards greater transparency, where more than the rate, we are going to look for what is the most secure, stable and transparent.
Does it generate a greater challenge for the industry that the expectation of unusually high returns is already being lost?
There are many ways to attract people. And I think at Lemon we’re the best at doing it. We already did it with the card, with which we managed to get more than 780,000 people to receive cashback, with the Lemmy NFTs, with which we managed to get 1% of Argentines to have their first NFT. So, I think it is a challenge, but we believe that at Lemon we are very good at doing it, we have a track record to prove it, and we will continue doing that: making products that bring crypto closer to people, and that do not necessarily mean running after a fee.
At what level would you say confidence is at today in the crypto industry?
I was both fortunate and unfortunate to live through the bear market from 2013 to 2015 and 2017 to 2018. I think we are close to hitting a floor. Maybe that floor will happen in a few months or a year, but we are close to touching it and starting a new bull cycle that will probably even be the biggest bear market we have ever seen. But we still have a way to go, we are close to the confidence floor of this bearish cycle.
The weekend after the FTX collapse, Lemon suffered a heavy outflow of deposits. How much was that outflow and how long did it extend for?
Yes, there was a spike in withdrawals, not only at Lemon but in the industry in general. But it normalized between Monday and Tuesday. And even now, bookings are up again. Everyone who wanted to withdraw was able to do so, and we think that speaks well of Lemon as a platform. And now people who are wanting to come back are also being able to do so. So we believe that the more transparency we provide, the more they’re going to want to come back to Lemon.
How close is Lemon to profitability?
We are very close to being profitable. We could reach breakeven now, but we would give up a large part of the investment we make in innovation and new products, and that is not what we are aiming for right now. With the capital we have, we know that we have a three-year runway in which we can create new products and continue to expand.