The secrets of cryptocurrency exchange FTX, which filed for Chapter 11 bankruptcy on Nov. 11, continue to be exposed.
The firm, which was valued at $32 billion in February, caused an earthquake in the crypto industry by confirming that it was running out of cash as its founder Sam Bankman-Fried emerged as the savior of the sector during the liquidity crisis of last summer.
U.S. regulators have opened investigations into FTX’s setbacks. In the Bahamas, where Bankman-Fried lives and where FTX is headquartered, the authorities are conducting a criminal investigation.
The former cryptocurrency emperor was interviewed on Nov. 12. For now he remains a free man. No charge has been officially made against him.
But while awaiting the conclusions of the authorities’ investigations, the media are revealing secrets of FTX, which is suspected of having falsified its accounts. According to Reuters, between $1 billion and $2 billion of FTX client funds have vanished from the platform.
‘Confusing Internal Labeling’
Bankman-Fried reportedly transferred $10 billion of customer funds from FTX to his cryptocurrency trading platform Alameda Research, according to Reuters, which cites two sources that “held senior FTX positions until this week.”
Much of that money has disappeared, says Reuters. There is a shortfall of $1.7 billion, one source told Reuters, while the other source said between $1 billion and $2 billion was missing.
“We had confusing internal labeling and misread it,” Bankman-Fried told Reuters in a text message in which he “disagreed with the characterization” of the transfer.
“We didn’t secretly transfer,” $10 billion he wrote back.
The financial hole was revealed in records that Bankman-Fried shared with other senior executives on Nov. 6.
Reuters also claims that FTX’s financials show there is a “back door” in the books that was created with “bespoke software.”
It was described to the news outlets as a way that Bankman-Fried, who resigned on Nov. 12, could alter the firm’s financial records without alerting other people.
Bankman-Fried Denies ‘Backdoor’
But Bankman-Fried denied the existence of a “back door.”
FTX didn’t immediately respond to a request for comment.
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.
Once this exposure came to light, clients, fearing an FTX collapse, rushed to liquidate their crypto positions and get their money back. Customers on Nov. 6 withdrew a record $5 billion in a run on the exchange. This led to the insolvency of FTX, since it did not have the crypto assets, now on loan or sold, to honor its clients’ sell orders.