Another FTX Scandal Exposed: A Secret Software Change Enabled FTX to Use Client Money

Now that the former CEO of FTX is in custody and is facing serious charges, another story has popped up to fuel the fire even more. In mid-2020, the chief engineer of FTX made a hidden change to the cryptocurrency exchange’s software.

He tweaked the code to exempt Alameda Research from a feature on the trading platform that would have automatically sold off Alameda’s assets if it ever started losing too much-borrowed money.

While explaining the change in a note, the engineer, Nishad Singh, stressed that FTX should never sell Alameda’s locations. “Be extra careful not to liquidate,” Singh noted in the comment on the platform’s code, which indicates he helped the author. Reuters did in fact review the code base, which has not been previously reported.

In fact, the exemption permitted Alameda to keep borrowing funds from FTX irrespective of the value of the collateral to secure those loans. That code change had drawn the attention of the US Securities and Exchange Commission, which on Tuesday had charged Bankman-Fried with fraud.

According to the SEC, the tweak indicates that Alameda had a “virtually unlimited line of credit.” The SEC also stressed that the billions of dollars that FTX discreetly lent to Alameda over the next two years did not come from its own reserves, but instead were deposited from other FTX customers.

The SEC and a spokesperson for Bankman-Fried have declined any requests to comment on this story. Even Singh himself did not respond to any requests for comment either.

The regulator, who called the exchange “a house of cards,” alleged that Bankman-Fried concealed the fact that FTX diverted customer funds to Alameda to make undisclosed venture investments, luxury real estate purchases, and political donations. It’s important to note that the U.S. prosecutors and the Commodity Futures Trading Commission have also filed separate criminal and civil charges, respectively.

The allegations, together with previously unreported FTX documents analyzed by Reuters and three people aware of the crypto exchange, offer new insights into how Bankman-Fried dipped into customer funds and spent billions more than what FTX was making without the knowledge of investors, its customers, and even most of its employees.

The SEC complaint cited that the auto-liquidation exemption jotted down into the FTX code permitted Alameda to increase its line continuously of credit until it finally “grew to tens of billions of dollars and effectively became limitless,”. It was one of two ways that Bankman-Fried used to divert customer funds to Alameda.

The other way was a process in which FTX customers deposited more than $8 billion in traditional currencies into bank accounts that were secretly controlled by Alameda. These deposits were reflected in an internal account on FTX that was separate from Alameda, which helped in concealing its liability, the complaint said.

It is also important to note that The Securities and Exchange Commission (SEC) has charged FTX founder and former CEO Sam Bankman-Fried officially for defrauding investors. The charges against the SBF come just a day after Bahamian authorities arrested him at the request of US authorities. Just hours after Bankman-Fried’s arrest, the SEC announced that they were preparing to press charges against him. According to the SEC, this will be separate from the ones that lead to his most recent arrest in the Bahamas.

Source- Unlock. Media