Despite the focus on FTX following its catastrophic collapse, it’s remarkable how little we know about how the crypto exchange and its in-house trading firm Alameda Research actually operated. New CEO John Jay Ray III has called Sam Bankman-Fried’s crypto trading empire the “greatest failure of corporate controls” he’s seen.
Wednesday, Coffeezilla, a YouTuber with a rising star who has made a career of shining a light on sketchy projects in and out of crypto, pressed Bankman-Fried for information related to how different customer accounts were treated at the exchange. It turns out, there wasn’t much differentiation – at the very least during the final days the exchange was in business, Bankman-Fried admitted.
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"At the time, we wanted to treat customers equally,” SBF said during a Twitter Spaces event. “That effectively meant that there was, you know, if you want to put it this way, like fungibility created” between the exchange’s spot and derivatives business lines. For Coffeezilla, this looks like a smoking gun that fraud was committed.
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At the very least, this is a contradiction of what Bankman-Fried had said just minutes before when first asked about the exchange’s terms of service (ToS). “I do think we're treating them differently,” Bankman-Fried said, referring to customer assets used for “margin versus staking versus spot versus futures collateral.” All of those services come with different levels of risk, different promises made to customers and different responsibilities for the exchange.
According to FTX’s ToS, everyday users just looking to buy or store their cryptocurrencies on the centralized exchange could trust they were doing just that, buying and storing cryptographically unique digital assets. But now, thanks to skillful questioning by Coffeezilla, we know there were instead “omnibus” wallets and that spot and derivatives traders were essentially assuming the same level of risk.
We can also assume this was a longstanding practice at FTX. Bankman-Fried noted that during the “run on the exchange” (pardon the language), when people were attempting to get their assets off before withdrawals were shut down, FTX allowed “generalized withdrawals” from these omnibus wallets. But he also deflected, saying what, you wanted us to code up an entirely new process during a liquidity crisis?
Before now, Bankman-Fried had been asked multiple times about the exchange’s ToS and often managed to derail the conversation. He would often point to other sections of the document that stated clients using margin (taking out debt from FTX) could have their funds used by the exchange.
Or he would bring up a vestigial wire process in place before FTX had banking relationships. Apparently, according to SBF, customers had sent money to Alameda to fund accounts on FTX and somewhere along the lines this capital ended up in a rarely seen subaccount. This also had the benefit of inflating Alameda’s books, another dark corner of the empire.
Questions remain. We still don’t know when or how Alameda lost money, and how much of that could have been client funds. According to recent reporting, Alameda had an unclosable leveraged account on FTX. Almost by definition, if it was in the red and in debt and there was a wallet that commingled funds, Alameda was also partially funded by some FTX customers without their knowledge or consent.
There would be a “chargeable fraud case” if spot assets weren’t backed 1:1 as promised, or were used as collateral for loans or other purposes, Renato Mariotti, a former federal prosecutor, told CNBC. Bankman-Fried has said previously that “dollars” on the exchange and hedge fund were “generally fungible,” being used to reportedly fund personal loans to emloyees and make venture deals. Now, too, did he admit client funds were "effectively" interchange – at least in the final hours.
See also: Sam Bankman-Fried's Self-Incrimination Tour | Opinion
SBF has said repeatedly throughout his media tour there were a series of small decisions along the lines that added up to a catastrophic failure. Indeed, it doesn’t look like there was just one moment where he and his inner circle went bad, or one moment that permanently kneecapped the trading operation.
Instead, Bankman-Fried appears to have been deceptive from the beginning (even choosing the name “Alameda Research” to throw off banks unwilling to work with crypto trading firms). FTX was an improperly organized firm at its founding. Customer assets were always precariously placed. And we know this now because of SBF’s own description of its end.