Exclusive: How a secret software change allowed FTX to use client money

Dec 13 (Reuters) – In mid-2020, FTX’s chief engineer made a secret change to the cryptocurrency trade’s software.

He tweaked the code to exempt Alameda Research, a hedge fund owned by FTX founder Sam Bankman-Fried, from a characteristic on the buying and selling platform that might have mechanically offered off Alameda’s belongings if it was dropping an excessive amount of borrowed money.

In a notice explaining the change, the engineer, Nishad Singh, emphasised that FTX ought to by no means promote Alameda’s positions. “Be further cautious not to liquidate,” Singh wrote within the remark within the platform’s code, which it confirmed he helped creator. Reuters reviewed the code base, which has not been beforehand reported.

The exemption allowed Alameda to hold borrowing funds from FTX regardless of the worth of the collateral securing these loans. That tweak within the code acquired the eye of the U.S. Securities and Exchange Commission, which charged Bankman-Fried with fraud on Tuesday. The SEC stated the tweak meant Alameda had a “just about limitless line of credit score.” Furthermore, the billions of {dollars} that FTX secretly lent to Alameda over the subsequent two years did not come from its personal reserves, however moderately had been different FTX clients’ deposits, the SEC stated.

The SEC and a spokesperson for Bankman-Fried declined to remark for this story. Singh didn’t reply to a number of requests for remark.

The regulator, which referred to as the trade “a home of playing cards,” alleged Bankman-Fried hid that FTX diverted buyer funds to Alameda so as to make undisclosed enterprise investments, luxurious actual property purchases, and political donations. U.S. prosecutors and the Commodity Futures Trading Commission additionally filed separate felony and civil prices, respectively.

The complaints – together with beforehand unreported FTX paperwork seen by Reuters and three individuals aware of the crypto trade – present new insights into how Bankman-Fried dipped into buyer funds and spent billions greater than FTX was making with out the data of buyers, its clients and most staff.

Police within the Bahamas, the place FTX was primarily based, arrested Bankman-Fried on Monday night, capping a beautiful fall from grace for the 30-year-old former billionaire. His firm collapsed in November after customers rushed to withdraw deposits and buyers shunned his requests for extra financing. FTX declared chapter on Nov. 11 and Bankman-Fried resigned as chief government.

Bankman-Fried has apologized to clients, however stated he did not personally assume he had any felony legal responsibility.

The auto-liquidation exemption written into FTX code allowed Alameda to frequently improve its line of credit score till it “grew to tens of billions of {dollars} and successfully turned limitless,” the SEC criticism stated. It was one in every of two ways in which Bankman-Fried diverted buyer funds to Alameda.

The different was a mechanism whereby FTX clients deposited over $8 billion in conventional forex into financial institution accounts secretly managed by Alameda. These deposits had been mirrored in an inside account on FTX that was not tied to Alameda, which hid its legal responsibility, the criticism stated.


As Bankman-Fried grew FTX into one of many world’s largest crypto exchanges, client safety was a central tenet of his pitch for crypto regulation within the United States. Bankman-Fried burdened this theme in numerous statements to clients, buyers, regulators and lawmakers. FTX’s auto-liquidation software would shield everybody, he defined.

In congressional testimony on May 12, he referred to as FTX’s software “secure, examined and conservative.”

“By rapidly unwinding the riskiest, most undercollateralized positions, the chance engine prevents build-up of credit score threat that would in any other case cascade past the platform, leading to contagion,” Bankman-Fried testified.

He didn’t inform lawmakers concerning the software change to exempt Alameda. Indeed, he informed buyers that Alameda acquired no preferential remedy from FTX, the SEC criticism stated.

Bankman-Fried had directed subordinates to replace the software in mid-2020 to allow Alameda to keep a damaging steadiness on its account, the SEC criticism stated. No different buyer account at Alameda was allowed to accomplish that, the criticism added. This would enable Alameda to hold borrowing extra FTX funds with out the necessity to present extra collateral.

In software tweaks made in August 2020, Alameda was designated because the “Primary Market Maker” or “PMM,” in accordance to a Reuters evaluation of its codebase. Market makers are sellers who allow buying and selling in an asset by standing prepared to purchase and promote it.

To clarify the change, Singh, the chief engineer, inserted a remark into the code: “Alameda could be liquidating, prevented.” He included a warning “not to liquidate the PMM.”

Only Singh, Bankman-Fried and a few different prime FTX and Alameda executives knew concerning the exemption within the code, in accordance to three former executives briefed on the matter. A digital dashboard utilized by workers to monitor FTX buyer belongings and liabilities was programmed so it could not bear in mind that Alameda had withdrawn the client funds, in accordance to two of the individuals and a screenshot of the portal that Reuters has beforehand reported.

Bankman-Fried’s home of playing cards “started to crumble” in May 2022, the SEC criticism stated.

As the worth of crypto tokens plummeted that month, a number of of Alameda’s lenders demanded compensation. Since Alameda did not have the funds to meet these requests, Bankman-Fried directed Alameda to faucet its “line of credit score” with FTX to acquire billions of {dollars} in financing, the criticism stated.

Ultimately, when FTX clients dashed to withdraw their money this November, spooked by media experiences concerning the firm’s monetary well being, many found that their funds had been now not there.

Reporting by Angus Berwick in London, John Shiffman in Washington, and Koh Gui Qing in New York
Editing by Paritosh Bansal and Chris Sanders

Our Standards: The Thomson Reuters Trust Principles.


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