The software of the cryptocurrency exchange was altered in secret by FTX’s main engineer in the middle of 2020.
He changed the code to remove Sam Bankman- Fried’s hedge fund Alameda Research from a provision that would have automatically sold Alameda’s assets if it was losing too much-borrowed money. Alameda Research is controlled by FTX.
Engineer Nishad Singh highlighted that FTX should never sell Alameda centers in a note outlining the modification. Singh stated in the commentary on the platform’s code, which indicated he helped write it, “Be especially careful not to filter.” The codebase was examined by reporters; this was unreported beforehand.
In spite of the value of the collateral used to secure those loans, Alameda was able to continue borrowing money from FTX thanks to the exemption. The US Securities and Exchange Commission became aware of the code alteration and on Tuesday filed a fraud complaint against Bankman-Fried. Alameda now has a “virtually infinite line of credit,” according to the SEC. In addition, according to the SEC, FTX obtained the billions of dollars it surreptitiously gave to Alameda during the following two years not from its own reserves but rather from deposits made by other FTX customers.
A representative of Bankman-Fried and the Securities and Exchange Commission, declined to comment on this article. Multiple requests for comment from Singh went unanswered.
The regulator claimed that Bankman-Fried hid the fact that FTX, transferred customers’ monies to Alameda in order to make covert investments, purchases of opulent real estate, and political donations. The regulator referred to the exchange as a “house of cards” and described it as such. Separate criminal and civil allegations were also brought, by US authorities and the Commodity Futures Trading Commission, respectively.
The complaints, along with previously unreported FTX documents seen by reporters and three individuals with knowledge of the cryptocurrency exchange, offer fresh perspectives on how Bankman-Fried spent billions more than FTX was planning to without the consent of investors, clients, or the majority of its employees.
Bankman-Fried was taken into custody by police in the Bahamas, where FTX is based, on Monday night, marking a remarkable fall from grace for the 30-year-old former billionaire. After customers rushed to withdraw deposits and investors ignored his demands for additional funding, his company failed in November. On November 11, FTX filed for bankruptcy, and Bankman-Fried left his position as CEO.
Although Bankman-Fried expressed regret to his clients, he insisted that he did not personally consider himself to be criminally responsible.
According to the SEC complaint, Alameda was able to keep raising the credit limit thanks to the auto-liquidation exception that was incorporated into the FTX code until it “grew to tens of billions of dollars and was effectively infinite.” It was one of two methods by which Bankman-Fried sent client money to Alameda.
The second method involves FTX customers depositing more than $8 billion in conventional currency into accounts that are surreptitiously under Alameda’s control. According to the complaint, those deposits were represented in an internal FTX account that was unrelated to Alameda, hiding its obligation.
It is “Safe, Tested, and preserved.”
Consumer protection has been a key tenet of Bankman- Fried’s push for bitcoin regulation in the United States as it has grown FTX into one of the biggest cryptocurrency exchanges in the world. In several statements to clients, investors, regulators, and lawmakers, Bankman-Fried has made this point. He clarified that everyone will be protected by FTX’s auto-liquidation policy. He characterized the FTX software as “safe, tested, and conservative” in testimony to Congress on May 12.
According to Bankman Fried’s testimony, “the risk driver prevents a build-up of credit risk that could cascade out of the platform, resulting to contagion, by quickly liquidating the riskiest and most unsecured positions.”
He kept lawmakers in the dark about the program change that exempted Alameda. According to the SEC lawsuit, he already informed investors that Alameda did not receive any special treatment from FTX.
According to the SEC lawsuit, Bankman-Fried instructed its employees to alter the software in the middle of 2020 so Alameda could continue to have a negative amount on her account. No other Alameda customer account had permission to do this, the complaint added. As a result, Alameda will be able to continue borrowing money from FTX without having to put up further collateral.
According to an investigation of its codebase, Alameda was identified as a “principal market maker” or “PMM” in August 2020 software updates. Dealers that act as market makers by offering to purchase and sell an asset facilitate trading in that asset.
Singh, the chief engineer, added a remark to the code that read, “Alameda will be liquidated, and prevented,” to explain the modification. A caution not to “liquidate the prime minister” was included.
According to three former executives who were briefed on the situation, only Singh, Bankman Fried, and a small number of top executives at FTX and Alameda were aware of the exemption in the code. According to two persons and a screenshot of the portal previously revealed, a digital dashboard used by employees to track the assets and liabilities of FTX clients was configured not to take into account that Alameda had withdrawn client monies.
According to the SEC lawsuit, Bankman- Fried’s house of cards “began to collapse” in May 2022.
Several Alameda lenders demanded repayment as the tokens’ value fell during that month. According to the complaint, Bankman Fried instructed Alameda to use its “line of credit” with FTX in order to get billions of dollars in financing because Alameda lacked the resources to meet these demands.
In the end, many FTX clients learned that their cash was gone when they hurried to withdraw it in November due to media concerns regarding the company’s financial situation.
