FTX founder Bankman-Fried secretly used $10 billion in customer funds, an action that had been explicitly barred in FTX's terms of use, to pay for some of his other projects.
As customers withdrew billions of dollars from crypto exchange FTX one frantic Sunday this month, founder Sam Bankman-Fried worked the phones in a futile bid to raise $7 billion in emergency funds.
Some details of what happened at FTX have already emerged: Reuters reported Bankman-Fried secretly used $10 billion in customer funds to prop up his trading business, for instance, and that at least $1 billion of those deposits had vanished. – One of Bankman-Fried’s close aides tweaked FTX’s accounting software. This enabled Bankman-Fried to hide the transfer of customer money from FTX to Alameda. A screenshot of FTX’s book-keeping system showed that even after the massive customer withdrawals, some $10 billion in deposits remained, plus a surplus of $1.5 billion. This led employees to believe wrongly that FTX was on a solid financial footing.
Bankman-Fried told Reuters in an email that due to a “confusing internal account,” Alameda’s leverage was substantially higher than he believed it was. He added that FTX processed roughly $6 billion of client withdrawals. Alameda found early trading success by arbitraging cryptocurrency prices on international markets, with half of profits going to charity, according to the same profile. By 2019, the company handled $55 million for clients, an Alameda company booklet said. Reuters could not independently confirm these details.
In October 2021, Bankman-Fried, then 29 years old, landed on the cover of Forbes, which pegged his net worth at $26.5 billion – the 25th richest person in America. FTX said on its website that “FTX, its affiliates, and its employees have donated over $10m to help save lives, prevent suffering, and ensure a brighter future.”
FTX was also planning partnerships with some of the world’s largest companies. An FTX document from June 2022, which has not been previously reported, shows a list of FTX’s “select partners” for business-to-business services. Prospective partners included retail giant Walmart Inc., social media titan Meta Platforms Inc., payment-system provider Stripe, and financial website Yahoo! Finance, according to the document.
FTX expected to take its international and US businesses public, an investor due-diligence document from this June said. The document is reported here for the first time. Some of the $10 billion in removed customers’ money went to cover losses that Alameda sustained earlier this year on a series of bailouts, including in failed crypto lender Voyager Digital, according to the three FTX sources briefed on the company’s finances.
According to the three FTX sources, only Bankman-Fried’s innermost circle of associates knew about his use of client deposits: his co-founder and chief technology officer, Gary Wang; the head of engineering, Nishad Singh; and Caroline Ellison, chief executive of Alameda. Wang and Singh both worked with Bankman-Fried at Alameda previously.
Over the years, Alameda accumulated a huge holding of FTT, valued at around $6 billion before last week, according to a balance sheet later sent to investors. It used the FTT reserves to secure corporate loans, people familiar with its finances said. This meant that Bankman-Fried’s business empire was dependent on the token.On November 2, news outlet CoinDesk reported a leaked balance sheet disclosing Alameda’s reliance on FTT.
Staff initially remained calm. The finance team could still see ample assets on the book-keeping portal as of last week. About $10 billion in client deposits remained, with a $1.5 billion surplus to cover any further withdrawals, according to a screenshot of the database seen by Reuters.Several hours after Zhao’s Sunday tweet, Bankman-Fried has told Reuters, he gathered his lieutenants Wang and Singh at his apartment to decide on a plan.
To make up the shortfall, they calculated that Alameda could sell around $3 billion of the assets within hours, mainly money held in company trading accounts on other crypto exchanges. The rest would take days or weeks to offload because it was hard to trade those assets. And FTX urgently needed a further $7 billion in cash to survive.
For most FTX employees, this was the first they heard about the company’s dire situation. “Just complete disbelief and feelings of betrayal,” Zane Tackett, FTX’s head of institutional sales, wrote on Twitter the day after. He declined to comment.
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