Employees at FTX, once a titan in the cryptocurrency exchange realm before its stunning collapse, uncovered a secretive backdoor used by Sam Bankman-Fried’s Alameda Research to siphon billions of dollars, laying bare a complex web of alleged fraud and mismanagement that precipitated the platform’s dramatic collapse.
The Wall Street Journal reports that months before the catastrophic downfall of FTX, a group of its U.S.-based employees stumbled upon a covert backdoor. This secretive channel, allegedly utilized by Sam Bankman-Fried’s Alameda Research hedge fund, enabled the illicit withdrawal of billions of customer funds from the cryptocurrency exchange, according to insiders that spoke to the Journal. The discovery, which was reported up the chain of command, was seemingly disregarded, as the issue remained unresolved.
The backdoor, now a pivotal element in the ongoing legal proceedings against Sam Bankman-Fried, FTX’s founder, permitted Alameda Research to maintain a staggering negative balance of up to $65 billion on the exchange. This was a privilege starkly contrasted with the stringent regulations imposed on regular users, who were subjected to an automatic liquidation process if their balances plummeted below zero.
Breitbart News reported today that the $65 billion backdoor was the topic of testimony by FTX co-founder Gary Wang in Bankman-Fried’s ongoing fraud trial:
Wang testified about the relationship between FTX and Alameda, saying, “We gave special privileges to Alameda Research which allowed it to withdraw unlimited amounts of funds from the platform (FTX) and lied about this to the public.”
He explained that before FTX collapsed, Alameda had borrowed $8 billion from FTX, which was money belonging to FTX customers. Wang said that Alameda was given a $65 billion credit line which gave the hedge fund a huge advantage over other investors.
In a message dated May 5, 2022, Jim Outen, an employee at LedgerX, a small U.S. crypto-derivatives exchange acquired by FTX, noted, “Just wanted to point out that there are currently a few places in the…code base where Alameda gets special treatment in one way or another.” This message, viewed by the Wall Street Journal, underscored the early warnings provided by diligent employees who unearthed the special privileges granted to Alameda.
Despite these revelations, the significance of the discovery was not fully comprehended by the LedgerX team at the time. FTX, still a respected crypto exchange, would continue its operations for another half a year before its implosion, which brought the misuse of customer funds into the harsh light of public scrutiny.