US regulators said the change allowed hedge fund Alameda to keep borrowing funds from FTX irrespective of the value of the collateral securing those loans.
| In mid-2020, FTX’s chief engineer made a secret change to the cryptocurrency exchange’s software.
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, whichThe 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.
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 usersand investors shunned his requests for more financing. FTX declared bankruptcy on November 11 and Mr Bankman-Fried resigned as chief executive.
Mr Bankman-Fried stressed this theme in countless statements to customers, investors, regulators and lawmakers. FTX’s auto-liquidation software would protect everyone, he explained.“By quickly unwinding the riskiest, most under-collateralized positions, the risk engine prevents build-up of credit risk that could otherwise cascade beyond the platform, resulting in contagion,” Mr Bankman-Fried testified.He did not tell lawmakers about the software change to exempt Alameda.
To explain the change, Mr Singh, the chief engineer, inserted a comment into the code: “Alameda would be liquidating, prevented.” He included a warning “not to liquidate the PMM.”
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