The days of trial are coming to an end for FTX, and so are the revelations. Testimony from Gary Wang, the exchange’s co-founder, has shed light on yet another fraud committed by its management teams. They allegedly falsified the exchange’s guarantee fund, in order to artificially inflate the amounts involved. How did they do it?
The FTX guarantee fund had been falsified
In 2021, a successful FTX boasted of its $100 million “guarantee fund”. The latter, allegedly made up of FTT, the platform’s native token, as well as USDT, was intended to protect customers in the event of massive withdrawals. This was to ensure that every user could withdraw funds, and not destabilize the platform :
The 5.25 million FTT we put in our insurance fund in 2019 now makes the fund worth over 100 million USDhttps://t.co/tMYgJOAdqI pic.twitter.com/vQDkmkufD2
– FTX (@FTX_Official) February 14, 2021
In fact, this guarantee fund was apparently not used when the exchange platform collapsed in 2022. At the time, it had blocked withdrawals early on. During Sam Bankman-Fried’s trial, we learned the reason: the guarantee fund had allegedly been fabricated, and in fact contained no FTT.
An amount that was artificially generated
It was Gary Wang, co-founder of the exchange platform, who dropped the bombshell. Questioned late last week about FTX’s guarantee fund, he claimed it was falsified:
There is no FTX in the guarantee fund. It’s just the number of USDT. And the amount listed here doesn’t match what was in the database. “
When asked if the figure shared by FTX was therefore wrong, Gary Wang answers a simple “Yes”. He goes on to explain how this false amount was generated every day:
“[The code] takes FTX’s total trading volume over the last 24 hours. Then […] it takes that number, multiplies it by a random number around 7500, and divides the result by a billion. This gives an amount that is added […] to the site. “
The code used – in Python – thus made it possible to falsify the fund guaranteeing FTX’s existence. What this means is that FTX often didn’t have the necessary funds to protect customers. While at the same time, the teams were deliberately promoting this guarantee, in order to justify the platform’s “reliability”.
Alameda to FTX’s rescue
This has also sometimes got the platform into trouble. Gary Wang claims that in 2021, a trader managed to exploit a bug in the platform’s margin trading, siphoning off several hundred million dollars. The guarantee fund was then exhausted. Faced with this problem, Sam Bankman-Fried reportedly asked Alameda Research, FTX’s sister company, to discreetly cover the losses.
This shows once again that, beyond the mismanagement of the platform, the teams seem to have deliberately misled investors, and tried to hide the often murky links between FTX and Alameda Research.
The trial resumes this week, and we should learn more about how the platform works. For his part, Gary Wang has pleaded guilty to various types of fraud, and has named his acolytes of the time: Sam Bankman-Fried of course, but also Caroline Ellison, the CEO of Alameda Research, and FTX’s former chief engineer, Nishad Singh.
