As FTX bankruptcy proceedings are ongoing, some hidden internal practices that could have contributed to the collapse of the cryptocurrency exchange have continued to surface.
A Secret Backdoor
According to a new report from the Wall Street Journal (WSJ), FTX created a secret backdoor that allowed Alameda Research – Sam Bankman-Fried’s (SBF) trading firm – to have a negative balance of up to $65 billion on the international exchange platform.
Prosecutors noted that this special feature allowed SBF to steal from FTX customers while allowing Alameda to treat the crypto exchange as a giant slush fund.
The WSJ report, which cited people familiar with the matter, stated that while the feature allowed Alameda to go negative on FTX, the same did not apply to normal customers.
“Normal users couldn’t go negative on FTX. They were subject to an automatic liquidation process, in which FTX sold off their assets if their balances fell below zero. But that didn’t apply to Alameda,” the report said.
Employees Found Secret Backdoor Ahead of Bankruptcy
The report stated that some of FTX’s US-based employees, led by Julie Schoening, found out about the backdoor months before the collapse of the exchange and raised concerns to the head of their division, Zach Dexter.
According to the report, Dexter later discussed the matter with FTX’s former engineering director, Nishad Singh.
“Dexter believed that problem was fixed after Singh removed a section of code,” the report said,” citing one of the people familiar with the matter.
In February, Singh pleaded guilty to federal criminal charges related to his role in the collapse of FTX. Singh told prosecutors he knew Alameda was borrowing FTX customer funds without customers’ knowledge. He also stated that he would forfeit all proceeds from the scheme.
Two of SBF’s closest associates, including Caroline Ellison and Gary Wang, have also pleaded guilty to charges related to their involvement in the case. However, SBF has denied any wrongdoing and is currently on trial.
