FTX Crypto Collapse: At Least $1 Billion Client Fund Says Missing

At least $1 billion (roughly Rs. 8,050 crore) of client funds disappeared in the collapse of crypto exchange FTX, according to two people familiar with the matter.

Exchange founder Sam Bankman-Fried secretly transferred $10 billion (about Rs. 80,500 crore) of client funds from FTX to Bankman-Fried’s trading firm Alameda Research, the people told Reuters.

A large part of that total has disappeared, they said. Another source put the shortfall at around $1.7 billion (roughly Rs. 13,700 crore). Another said the gap is between $1 billion and $2 billion (about Rs. 16,100 crore).

While it is known that FTX has moved client funds to Alameda, the missing funds are being reported here for the first time.

The financial hole was revealed in memos Bankman-Fried shared with other senior executives last Sunday, according to two sources. The records provide the latest information about the situation at the time, they said. Both sources held senior positions at FTX until this week and said they were briefed on the company’s finances by senior staff.

Bahamas-based FTX filed for bankruptcy on Friday after customer withdrawals earlier this week. A rescue agreement with the exchange Binance has failed, resulting in the fall of the highest profile crypto in recent years.

In messages to Reuters, Bankman-Fried said he “does not agree with the interpretation” of the $10 billion transfer.

“We didn’t pass it in secret,” he said. “We had some confusing internal labeling and misread it,” he added, without elaborating.

Asked about the missing funds, Bankman-Fried replied: “???”

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said she was “putting together” what happened at FTX. “I was shocked to see things unfold the way they did earlier this week,” he wrote. “Soon, I will write a complete script about the gameplay.”

At the heart of FTX’s problems was a loss at Alameda that many FTX executives were unaware of, Reuters previously reported.

Customer withdrawals intensified last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance would sell its entire stake in the FTX digital token, for at least $580 million (roughly Rs. 4,700 crore), “due to recent revelations.”

That Sunday, Bankman-Fried held a meeting with several officials in the capital of the Bahamas, Nassau, to calculate how much funding he needed to meet FTX’s shortfall, said two people with knowledge of FTX’s finances.

Bankman-Fried confirmed to Reuters that the meeting took place.

Bankman-Fried showed several spreadsheets to the heads of the company’s regulatory and legal teams that revealed FTX had moved about $10 billion in customer money from FTX to Alameda, the two people said. The spreadsheets show how much FTX loaned Alameda and what it was used for, they said.

The documents showed that between $1 billion and $2 billion of these funds were not counted among Alameda’s assets, sources said. The spreadsheets did not show where the money was transferred, and the sources said they did not know what happened to it.

In a subsequent investigation, FTX’s legal and financial teams also discovered that Bankman-Fried used what two people described as a “back door” into FTX’s bookkeeping system, which was built using bespoke software.

They said the “back door” allowed Bankman-Fried to issue orders that could alter the company’s financial records without alerting other people, including outside auditors. This setup meant that the transfer of $10 billion to Alameda did not trigger internal compliance or FTX red flags, they said.

In an email to Reuters, Bankman-Fried denied using a “back door”.

The US Securities and Exchange Commission is investigating FTX.com’s handling of customer funds, as well as its crypto lending operations, a source with knowledge of the investigation told Reuters on Wednesday. The Department of Justice and the Commodity Futures Trading Commission are also investigating, the source said.

The FTX bankruptcy marked a dramatic Bankman-Fried reversal. The 30-year-old had founded FTX in 2019 and led it to become one of the largest crypto exchanges, amassing a personal fortune estimated at around $17 billion (roughly Rs. 1,36,900 crore). FTX was valued in January at $32 billion (roughly Rs. 2,57,600 crore), with investors including SoftBank and BlackRock.

The crisis sent the crypto world into a tailspin, with the price of major coins plummeting. And FTX’s collapse draws comparisons to previous major business downturns.

On Friday, FTX said it had transferred control of the company to John J Ray III, the restructuring expert who handled the liquidation of Enron – one of the biggest bankruptcies in history.

© Thomson Reuters 2022

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