BitGo refused to unwind $50 million in wrapped bitcoin for Alameda

Digital asset custodian BitGo refused to allow Alameda Research to unwind $50 million worth of wrapped bitcoin days before the latter firm went into bankruptcy, BitGo CEO Mike Belshe said today in a Twitter Spaces hosted by crypto personality and MakerDAO delegate Chris Blec.

BitGo is the custodian for WBTC, a tokenized version of bitcoin that can be deployed on the Ethereum network. Belshe said that someone from Alameda contacted BitGo about unwrapping 3,000 WBTC ($50 million) to get back bitcoin days before the Nov. 11 bankruptcy filing. He noted that the redemption request was unusual because it came from an Alameda representative that BitGo had not dealt with previously.

The BitGo custodian knows all operative personnel of each firm that owns WBTC, according to Belshe. He also said that the Alameda representative did not pass its security verification process and was not familiar with WBTC burns — the process in which wrapped bitcoin is redeemed for BTC by sending it to the burn address, which then triggers the release of the bitcoin that was used to mint it.

“So, we [Bitgo] held it up and said this is not what a burn looks like and we need to know who this person was,” Belshe said. “While we were holding it, waiting for a response on those issues, they [Alameda] went bankrupt and of course, once they went bankrupt, everything halted.”

Screenshot showing the attempt by Alameda to redeem 3,000 WBTC is still pending. Image: WBTC dashboard

Still pending

Alameda attempted to unwind the 3,000 WBTC anyway, and on-chain data from Etherscan shows 3,000 WBTC were sent from an Alameda wallet to the WBTC controller contract on Nov. 9. The tokens were sent to the burn address and so have effectively been destroyed.

Under normal circumstances, that would have triggered a redemption of 3,000 BTC from BitGo to Alameda’s coffers, but BitGo has to approve any redemption requests before any bitcoin is released. The WBTC dashboard still shows this particular redemption attempt as pending, and WBTC is thus presently overcollateralized by 3,000 BTC. The WBTC dashboard currently shows that BitGo holds 202,255 BTC in custody against 199,238 WBTC in circulation.

Belshe hailed BitGo’s handling of the matter as indicative of the company’s robust security apparatus. The BitGo chief said, however, that the redemption attempt could have been legitimate but did not meet established protocols. Belshe said the company will not do anything with the 3,000 BTC that corresponds to the WBTC in question, adding that he expects the tokens will be dealt with by the trustees handling the Alameda bankruptcy proceedings.

BitGo did not immediately respond to The Block’s request for additional comment.

Disclaimer: Beginning in 2021, Michael McCaffrey, the former CEO and majority owner of The Block, took a series of loans from founder and former FTX and Alameda CEO Sam Bankman-Fried. McCaffrey resigned from the company in December 2022 after failing to disclose those transactions.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.