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According to a source, the quantum trading firm founded by Sam Bankman-Fried has been able to quietly use client funds from its FTX exchange in a way that investors, employees and auditors do. during tracking.
The source said that the way they do it is using billions from FTX users without their knowledge.
Alameda Research, the fund founded by Bankman-Fried, has borrowed billions of dollars in customer funds from its founder’s exchange, FTX, according to a source familiar with the company’s operations, who requested anonymity. because the details are kept secret.
According to the source, the crypto exchange has significantly underestimated the amount of FTX needed if someone wants to withdraw. Trading platforms are required by their regulator to hold enough funds to match what clients deposit. They need the same buffer, if not more, in case the user borrows money to make a transaction. According to the source, FTX barely has enough on hand.
Its biggest client, according to one source, is hedge fund Alameda. The fund was able to partially cover this activity because the assets it was trading in had never touched its own balance sheet. The source said that instead of holding any funds, it borrowed billions of dollars from FTX users, then traded.
None of this was disclosed to customers, to CNBC’s knowledge. It is generally illegal to mix client funds with counterparties and trade them without express consent, under US securities laws. It also violates FTX’s terms of service. Sam Bankman-Fried declined to comment on allegations of embezzlement of client funds, but said its recent bankruptcy filing was the result of problems with leveraged trading positions.
“A margin position took a big hit,” Bankman-Fried told CNBC.
In doing some of these leveraged trades, the quantum fund used a cryptocurrency created by an exchange called FTT as collateral. In a loan agreement, collateral is usually the borrower’s commitment to guarantee repayment. It’s usually dollars, or something else of value – like real estate. In this case, a source said Alameda is borrowing from FTX and using the exchange’s in-house cryptocurrency, the FTT token, to repay those loans. The price of the FTT token fell 75% in a day, leaving collateral insufficient to cover the transaction.
In the past week, FTX has crashed from a $32 billion crypto powerhouse, into bankruptcy. The blurred line between FTX and Alameda Research has resulted in a massive liquidity crunch for both companies. Bankman-Fried has resigned as CEO of FTX and said Alameda Research will be shutting down. The company has said that it remove trades and withdraw moneyand move digital content offline later suspect $477 million hacks.
When asked about the blurred lines between its companies in August, Bankman-Fried denied any conflict of interest and said that FTX is a “neutral part of the market infrastructure.”
“I’ve put in a lot of effort over the last few years trying to eliminate the conflict of interest there,” Bankman-Fried, 30, told CNBC in an interview. “I don’t run Alameda anymore. I don’t work for it, neither does FTX. We have separate staff — we don’t want preferential treatment. We want to treat everyone fairly. possibilities. “
According to the same source, part of the problem is due to FTX’s complex network of leverage and margin trading. Its “spot margin“The trading feature allows users to borrow from other customers on the platform. For example, if a customer deposits a bitcoin, they can lend it to another user and earn a profit from it.
But every time an asset is borrowed, FTX subtracts the borrowed asset from the amount it needs to hold in its wallet to match customer deposits, one source said. In a typical situation, an exchange’s wallet needs to match what a customer sends. But because of this practice, assets are not backed up one-on-one and the company is underestimating how much it owes customers.
Alameda trading company can also take advantage of this spot margin feature. One source said Alameda can borrow money from customers, essentially for free.
The source explained that Alameda can post the FTT tokens they hold as collateral and borrow money from customers. Even if FTX generates more FTT tokens, it will not reduce the value of the coins as these coins never appear on the open market. These tokens thus retain their market value, allowing Alameda to borrow against them – essentially getting free coins for trading.
FTX has been able to maintain this model as long as it maintains the FTT price and there is no client withdrawal on the exchange. The source said that in the week before filing for bankruptcy, FTX did not have enough assets for customers to withdraw.
External auditors may have missed this discrepancy because client assets are an off-balance sheet item and, therefore, will not be reported on FTX’s financial statements, the source said.
It all fell apart last week.
CoinDesk report that much of Alameda’s balance sheet consists of FTT tokens, shaking consumer and investor confidence. Changpeng Zhao (CZ), the CEO of one of its biggest rivals, Binance, has publicly threatened to sell its FTT tokens on the open market, causing the FTT price to plummet.
This sequence of events caused a rush on the exchange, with customers withdrawing about $5 billion before FTX halted withdrawals. Sources said that when customers cashed out, FTX had no funds.
Former employees also told CNBC that the financial information they obtained about the company was inaccurate due to these accounting methods. CNBC reviewed screenshots of FTX financial data that a source said was taken last week. Although the company was insolvent at the time, one former employee said the data inaccurately showed that even if all customers withdrew their funds, FTX would still have more than a billion dollars left.
Three sources familiar with the company told CNBC they were blindsided by the company’s actions and that to their knowledge, only a small group knew that customer deposits were being misused. Employees say that in some cases their life savings are tied to FTX.
“We were shocked and devastated,” said a current FTX employee. “I felt like I was in a movie playing in real time. No one saw this coming.”
Due to public backlash, FTX has been faced with this missing amount, employees say they are just as devastated as customers are currently experiencing financial difficulties, harassed around corruption. Their relationship with the company and future employment prospects are dimmed.
“We couldn’t believe how betrayed we were,” said one former employee.