Secret software allowed FTX use customer funds

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According to a Reuters investigation, FTX’s chief engineer, Nishad Singh, made a secret change to the cryptocurrency exchange’s software in mid-2020.

Singh modified the code to exclude Alameda Research, a hedge fund owned by FTX founder Sam Bankman-Fried, from a trading platform feature that would have automatically sold off Alameda’s assets if it was losing too much borrowed money.

The engineer, Nishad Singh, stressed in a note explaining the change that FTX should never sell Alameda’s positions. The exemption allowed Alameda to continue borrowing funds from FTX regardless of the value of the collateral used to secure those loans.

The Securities and Exchange Commission took notice of the code change and charged Bankman-Fried with fraud on Tuesday. According to the SEC, the change gave Alameda a “virtually unlimited line of credit.” Furthermore, the billions of dollars secretly lent to Alameda over the next two years did not come from FTX’s own reserves, but rather from deposits made by other FTX customers, according to the SEC.

In addition, the Commodity Futures Trading Commission (CFTC) of the United States has filed a lawsuit against Sam Bankman-Fried, FTX, and Alameda Research, alleging violations of the Commodity Exchange Act and demanding a jury trial. The Commodity Futures Trading Commission stated in its own suit that Alameda had special access to FTX’s trading backend. It could execute trades faster than other customers and was exempt from auto-liquidation, both of which were “unfair advantages,” according to the lawsuit. It could also borrow as much money as it wanted.

Sam Bankman-Fried was later arrested in the Bahamas after the Bahamas received formal notification from the U.S. of criminal charges filed against him. A Bahamian judge has now denied him bail in connection with the FTX and Alameda frauds, claiming violations of the Commodity Exchange Act and demanding a jury trial.

The sources for this piece include an article in Reuters.

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