How a secret software change allowed FTX to use client money Codelist

In the middle of 2020, the chief engineer of FTX made a secret change to cryptocurrency exchange software.

Modified the code to exempt Mall Researcha hedge fund owned by the founder of FTX, Sam Bankman-friedof a function of the trading platform that would have automatically sold the assets of Mall if he lost too much borrowed money.

In a note explaining the change, the engineer, Nishad singstressed that FTX You should never sell the positions of Mall. “Be very careful not to liquidate“, wrote sing in the comment in the platform code, which showed that he helped write. Reuters revised the codebase, which had not been previously reported.

The exemption allowed Mall continue to borrow funds from FTX regardless of the value of the collateral backing those loans. This modification of the code caught the attention of the US Securities and Exchange Commissionwho on Tuesday accused bankman-fried of fraud the second said the adjustment meant that Mall I had one”virtually unlimited line of credit”. Furthermore, the billions of dollars that FTX secretly lent to Mall for the next two years they did not come from its own reserves, but from deposits of other clients of FTXaccording to second.

the second and a spokesperson for bankman-fried declined to comment for this article. sing He did not respond to multiple requests for comment.

The regulator, who described the action as “house of cards“, I affirm that bankman-fried i hid that FTX funds diverted from clients to Mall to make undisclosed venture investments, luxury real estate purchases, and political donations. The United States Attorney’s Office and the Commodity Futures Trading Commission they also filed separate criminal and civil charges, respectively.

The complaints – together with the documents of FTX previously unrevealed and seen by Reuters and three people familiar with the crypto exchange – please provide new data on how bankman-fried entered client funds and spent billions more than what FTX he was earning without the knowledge of investors, his clients, and most of the employees.

the police of bahamaswhere it had its headquarters FTXstopped bankman-fried on Monday night, capping off the 30-year-old former billionaire’s stunning fall from grace. His company went bankrupt in November after users rushed to withdraw their deposits and investors rejected his requests for more funds. FTX filed for bankruptcy on November 11 and bankman-fried resigned as CEO.

bankman-fried He has apologized to customers, but has said that he personally does not believe he bears any criminal liability.

The self-assessment exemption provided for in the code of FTX allowed Mall Continually increase your line of credit until “grew to tens of billions of dollars and effectively became unlimited”, according to the complaint of the second. It was one of the two ways that bankman-fried diverted client funds to Mall.

The other was a mechanism by which customers of FTX deposited more than 8,000 million dollars in traditional currency in bank accounts secretly controlled by Mall. These deposits were reflected in an internal account of FTX that was not linked Mallwhich hid his responsibility, according to the complaint.

“SAFE, TESTED AND CONSERVATIVE”

Weather bankman-fried grown to FTX until it became one of the largest cryptocurrency exchanges in the world, consumer protection was a central tenet of its discourse in favor of cryptocurrency regulation in condition United. bankman-fried He emphasized this issue in countless statements to clients, investors, regulators, and lawmakers. Auto Settlement Software FTX it would protect everyone, he explained.

In testimony before Congress on May 12, he called the software FTX of “safe, proven and conservative”.

“By rapidly unwinding the most risky and least safe positions, the risk engine prevents buildup of credit risk that could otherwise spread beyond the platform and cause contagion,” he said. bankman-fried.

He did not inform legislators of the software change to exempt Mall. In fact, he told investors that Mall did not receive preferential treatment from FTXaccording to the complaint of second.

bankman-fried had ordered his subordinates to update the software in mid-2020 to allow Mall maintain a negative balance in your account, according to the complaint from the second. To any other customer account in Mall he was allowed to do so, the complaint added. This would allow Mall continue to borrow more funds from FTX without the need to provide further guarantees.

In software adjustments made in August 2020, Mall was designated as thePrimary Market Maker” either “PMM”, according to a review of Reuters of your codebase. Market makers are brokers who enable the trading of an asset by being willing to buy and sell it.

To explain the change, singthe lead engineer, inserted a comment in the code: “Alameda would be liquidating, prevented”. He included a warning: “Do not liquidate the PMM”.

Unique sing, bankman-fried and some other top executives from FTX Y Mall They were aware of the exemption in the code, according to three former executives briefed on the matter. A digital dashboard used by staff to keep track of customer assets and liabilities of FTX was programmed so that it did not take into account that Mall had withdrawn client funds, according to two of the people and a screenshot from the portal that Reuters has previously reported.

the house of cards bankman-fried “began to fall apart” in May 2022, according to the complaint from the second.

As the value of crypto tokens plummeted that month, several of the lenders of Mall They demanded a refund. Given the Mall did not have the funds to meet these requests, bankman-fried addressed to Mall to take advantage of yourcredit line” with FTX to obtain billions of dollars in funding, the complaint said.

Finally, when customers of FTX They rushed to withdraw their money in November, spooked by media reports about the company’s financial health, and many found their funds were no longer there.

(C) Reuters.-