Despite the focus on FTX after its catastrophic collapse, it is remarkable how little we know about the actual workings of the crypto exchange and its in-house trading firm Alameda Research. New CEO John Jay Ray III has called Sam Bankman-Fried’s crypto trading empire “the biggest failure of corporate controls” he’s seen.
On Wednesday, Coffeezilla, a YouTuber with a rising star who has made a career out of spotlighting sketchy projects in and out of crypto, pressed Bankman-Fried for information on how various client accounts were handled during the exchange. It turns out, there was not very different — at least for the last few days the exchange was in business, Bankman-Fried admitted.
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“Back then, we wanted to treat customers the same way,” SBF said during a Twitter Spaces event. To Coffeezilla, this looks like irrefutable proof that a fraud has been committed.
See also: FTX’s Collapse Was a Crime, Not an Accident | Opinion
If nothing else, it’s at odds with what Bankman-Fried had said minutes before when he was first asked about the exchange’s Terms of Service (ToS). “I think we treat them differently,” Bankman-Fried said, referring to client assets used for “margin versus staking versus cash collateral versus futures.” All of these services carry different levels of risk, different promises made to customers, and different responsibilities for the exchange.
According to FTX’s ToS, everyday users simply looking to buy or store their cryptocurrencies on the centralized exchange could be sure they were doing just that, buying and storing cryptographically unique digital assets. But now, thanks to Coffeezilla’s deft interrogations, we know that there used to be “omnibus” wallets instead, and that spot and derivatives traders took on essentially the same level of risk.
We can also assume that this was a long-standing practice at FTX. Bankman-Fried noted that during the “exchange race” (pardon the language), when people attempted to withdraw their assets before withdrawals closed, FTX allowed “widespread withdrawals” from these omnibus wallets. But he also veered off, saying what, you wanted us to code a whole new process during a liquidity crisis?
Previously, Bankman-Fried had been repeatedly asked about the terms of service of the exchange and often managed to derail the conversation. It often pointed to other sections of the document that indicated clients using margin (taking out debt at FTX) could have their funds used by the exchange.
Or he would set up a vestigial thread process before FTX had banking relationships. Apparently, according to SBF, clients had sent money to Alameda to fund accounts on FTX and somewhere along the lines that capital ended up in a rarely seen sub-account. It also had the added benefit of inflating the books of Alameda, another dark corner of the empire.
Questions remain. We still don’t know when or how Alameda lost money, and how much of it might have been customer funds. According to recent reports, Alameda had a non-closable leveraged account on FTX. Almost by definition, if it was in the red and in debt and there was a wallet that was mixing funds, Alameda was also at least partially funded by some FTX clients without their knowledge or consent.
There would be a “case of billable fraud” if cash assets were not backed 1:1 as promised, or were used as collateral for loans or other purposes, said Renato Mariotti, a former federal prosecutor , to CNBC. Bankman-Fried has previously said that “dollars” on the exchange are “generally fungible” and now he has also admitted that client funds are too, at least in the final hours.
See also: Sam Bankman-Fried Self-Incrimination Tour | Opinion
SBF, during its media tour, said that there had been a series of small decisions in this direction which ended in catastrophic failure. Indeed, there doesn’t appear to have been a single moment when he and his entourage went wrong, or a moment that permanently stalled the business operation.
Instead, Bankman-Fried seems to have been misleading from the start (even choosing the name “Alameda Research” to dismiss banks that don’t want to work with crypto trading firms). FTX was a poorly organized company when it was founded. Client assets were still precariously placed. And we know that now thanks to SBF’s own description of his ending.