In mid-2020, FTX’s chief engineer made a secret change to the cryptocurrency exchange’s software.
He tweaked the code to exempt Alameda Research, a hedge fund owned by FTX founder Sam Bankman-Fried, from a feature on the trading platform that would have automatically sold off Alameda’s assets if it was losing too much borrowed money.
In a note explaining the change, the engineer, Nishad Singh, emphasised that FTX should never sell Alameda’s positions. “Be extra careful not to liquidate,” Mr Singh wrote in the comment in the platform’s code, which it showed he helped author. Reuters reviewed the code base, which has not been previously reported.
The exemption allowed Alameda to keep borrowing funds from FTX irrespective of the value of the collateral securing those loans. That tweak in the code got the attention of the US Securities and Exchange Commission, which charged Mr Bankman-Fried with fraud on Tuesday (Wednesday AEDT).
The SEC said the tweak meant Alameda had a “virtually unlimited line of credit.” Furthermore, the billions of dollars that FTX secretly lent to Alameda over the next two years didn’t come from its own reserves, but rather were other FTX customers’ deposits, the SEC said.
The SEC and a spokesperson for Mr Bankman-Fried declined to comment for this story. Mr Singh did not respond to several requests for comment.
The regulator, which called the exchange “a house of cards,” alleged Mr Bankman-Fried concealed that FTX diverted customer funds to Alameda in order to make undisclosed venture investments, luxury real estate purchases, and political donations. U.S. prosecutors and the Commodity Futures Trading Commission also filed separate criminal and civil charges, respectively.
The complaints – along with previously unreported FTX documents seen by Reuters and three people familiar with the crypto exchange – provide new insights into how Mr Bankman-Fried dipped into customer funds and spent billions more than FTX was making without the knowledge of investors, its customers and most employees.
Police in the Bahamas, where FTX was based, arrested Mr Bankman-Fried on Monday evening, capping a stunning fall from grace for the 30-year-old former billionaire. His company collapsed in November after users rushed to withdraw deposits and investors shunned his requests for more financing. FTX declared bankruptcy on November 11 and Mr Bankman-Fried resigned as chief executive.
Mr Bankman-Fried has apologised to customers, but said he didn’t personally think he had any criminal liability.
The auto-liquidation exemption written into FTX code allowed Alameda to continually increase its line of credit until it “grew to tens of billions of dollars and effectively became limitless,” the SEC complaint said. It was one of two ways that Mr Bankman-Fried diverted customer funds to Alameda.
