In mid-2020, cryptocurrency company FTX’s chief engineer interfered to secretly make changes in the cryptocurrency exchange’s software.
He altered the code to remove Sam Bankman-hedge Fried’s fund Alameda Research from a feature that would have automatically auctioned off Alameda’s assets if it was losing too much-borrowed money.
Explaining the interference in the software, the engineer Nishad Singh in a note highlighted that FTX should never sell Alameda’s positions. In the comment in the platform’s code, he wrote, “Be extra careful not to liquidate.” He further emphasized that this explained that he helped the author.
Due to the exception, Alameda was able to continue borrowing money from FTX regardless of the value of the collateral used to secure those loans. The U.S. Securities and Exchange Commission noticed that alteration in the code and on Tuesday accused Bankman-Fried with fraud. Alameda now has a “virtually infinite line of credit,” according to the SEC. In addition, the SEC claimed that the billions of dollars that FTX secretly provided to Alameda during the following two years were not from its own reserves but rather were deposits made by other FTX customers.
The regulator claimed Bankman-Fried disguised that FTX routed consumer monies to Alameda in order to make covert startup investments, pricey real estate purchases, and political donations. The regulator referred to the exchange as “a house of cards.” 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 Reuters, three people with knowledge of the cryptocurrency exchange, and others, offer fresh perspectives on how Bankman-Fried improperly spent billions more than FTX was making without the consent of investors, customers, and the majority of its staff.
Bankman-Fried was taken into custody by police in the Bahamas, where FTX had its headquarters, on Monday night, marking a remarkable fall from grace for the 30-year-old former billionaire. In November, his business failed as customers hurried to withdraw their cash and investors turned down his pleas for additional funding. On November 11, FTX filed for bankruptcy, and Bankman-Fried was fired as CEO.
Although Bankman-Fried expressed regret to his clients, he insisted that he didn’t believe he was legally responsible.
Alameda was able to keep expanding its line of credit thanks to the auto-liquidation exception included in the FTX legislation, which, according to the SEC complaint, “increased to tens of billions of dollars and basically became infinite.” It was one of two methods used by Bankman-Fried to redirect client money to Alameda.
The second method included FTX clients depositing more than $8 billion in conventional money into accounts that were surreptitiously under Alameda’s control. The complaint claimed that these deposits were reported in an internal FTX account that was unrelated to Alameda, concealing Alameda’s culpability.
Consumer protection was a key part of Bankman-argument Fried’s for crypto regulation in the United States as he built FTX into one of the biggest cryptocurrency exchanges in the world. This point was repeatedly emphasized by Bankman-Fried in speeches to clients, investors, regulators, and lawmakers. Everyone will be safeguarded by FTX’s auto-liquidation program, he claimed.
He referred to the software developed by FTX as “safe, tested, and conservative” in testimony to Congress on May 12.
