How a secret software change allowed FTX to use client money

Sam Bankman-Fried, who founded and ran FTX until a liquidity crisis forced the cryptocurrency exchange to file for bankruptcy, is escorted out of the Magistrates Court building after his arrest, in Nassau, Bahamas on December 13, 2022. (Reuters) (DANTE CARRER /)

In the middle of 2020, the chief engineer of FTX made a secret change to the cryptocurrency exchange software.

Modified the code to exempt Mall Researcha hedge fund owned by the founder of FTX, Sam Bankman-Friedfrom a function of the trading platform that would have automatically sold the assets of Mall if he lost too much borrowed money.

In a note explaining the change, the engineer, Nishad singhstressed that FTX should never sell the positions of Mall. “Be very careful not to liquidate“, wrote singh in the comment in the platform code, which showed that he helped write. Reuters reviewed the codebase, which had not been previously reported.

The exemption allowed Mall continue to borrow funds from FTX regardless of the value of the collateral backing those loans. This modification of the code caught the attention of the US Securities and Exchange Commissionwho on Tuesday accused Bankman-Fried of fraud. The sec said the adjustment meant that Mall had one “virtually unlimited line of credit”. Furthermore, the billions of dollars that FTX secretly lent to Mall for the next two years they did not come from its own reserves, but were deposits from other clients of FTXaccording to sec.

The sec and a spokesperson for Bankman-Fried declined to comment for this article. singh He did not respond to multiple requests for comment.

The regulator, who described the stock as “house of cards”, claimed that Bankman-Fried hid that FTX diverted funds from clients to Mall to make undeclared venture investments, luxury real estate purchases and political donations. The US Attorney’s Office and the Commodity Futures Trading Commission they also filed separate criminal and civil charges, respectively.

Sam Bankman-Fried is accused of multiple charges related to scamming clients who deposited billions of dollars in FTX his crypto exchange (Reuters)
Sam Bankman-Fried is accused of multiple charges related to scams against clients who deposited billions of dollars in FTX, his crypto market (Reuters) (DANTE CARRER /)

The complaints – together with documents of FTX previously undisclosed and seen by Reuters and three people familiar with the crypto exchange – provide new data on how Bankman-Fried he got into client funds and spent billions more than he FTX he was earning without the knowledge of investors, his clients, and most of the employees.

the police of Bahamaswhere it had its headquarters FTXstopped Bankman-Fried on Monday night, capping off the 30-year-old former billionaire’s stunning fall from grace. His company went under in November after users rushed to withdraw their deposits and investors rejected his calls for more funding. FTX filed for bankruptcy on November 11 and Bankman-Fried resigned as CEO.

Bankman-Fried He has apologized to customers, but has said that he personally does not believe he bears any criminal liability.

The self-assessment exemption written in the code of FTX allowed Mall continually increase your line of credit until “grew to tens of billions of dollars and effectively became unlimited”, according to the complaint of the sec. It was one of the two ways that Bankman-Fried diverted client funds to Mall.

The other was a mechanism by which customers of FTX deposited more than 8,000 million dollars in traditional currency in bank accounts secretly controlled by Mall. These deposits were reflected in an internal account of FTX which was not linked to Mallwhich hid his responsibility, according to the complaint.


While Bankman-Fried made grow to FTX until it became one of the largest cryptocurrency exchanges in the world, consumer protection was a central tenet of his speech in favor of the regulation of cryptocurrencies in state Joined. Bankman-Fried emphasized this issue in countless statements to clients, investors, regulators, and legislators. Automatic settlement software FTX it would protect everyone, he explained.

In testimony before Congress on May 12, he called the software FTX of “safe, proven and conservative”.

Sam Bankman-Fried at the time of his arrest in the Bahamas (Reuters)
Sam Bankman-Fried at the time of his arrest in the Bahamas (Reuters) (DANTE CARRER /)

“By quickly unwinding the most risky and under-secured positions, the risk engine prevents the buildup of credit risk that could otherwise spread beyond the platform, causing contagion,” he stated. Bankman-Fried.

He did not inform legislators of the software change to exempt Mall. In fact, he told investors that Mall received no preferential treatment from FTXaccording to the complaint of the sec.

Bankman-Fried had ordered his subordinates to update the software in mid-2020 to allow Mall maintain a negative balance in your account, according to the complaint from the sec. To any other customer account in Mall he was allowed to do so, the complaint added. This would allow Mall continue to borrow more funds from FTX without the need to provide further guarantees.

In software adjustments made in August 2020, Mall was designated as thePrimary Market Maker” either “PMM”, according to a review of Reuters from your code base. Market makers are brokers who enable the trading of an asset by being willing to buy and sell it.

To explain the change, singhthe lead engineer, inserted a comment in the code: “Alameda would be liquidating, prevented”. He included a warning: “Do not liquidate the PMM”.

Single singh, Bankman-Fried and some other top executives from FTX Y Mall They were aware of the exemption in the code, according to three former executives briefed on the matter. A digital dashboard used by staff to keep track of customer assets and liabilities of FTX was programmed so that it did not take into account that Mall had withdrawn funds from clients, according to two of the people and a screenshot from the portal that Reuters has previously reported.

The house of cards Bankman-Friedbegan to fall apart” in May 2022, according to the complaint from the sec.

As the value of crypto tokens plummeted that month, several of the lenders of Mall They demanded a refund. Given the Mall did not have the funds to meet these requests, Bankman-Fried directed to Mall to take advantage of hiscredit line” with FTX to obtain billions of dollars in funding, the complaint said.

Finally, when customers of FTX They rushed to withdraw their money in November, spooked by media reports about the company’s financial health, many finding their funds were no longer there.

(C) Reuters.-