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Sources familiar with the matter explained the blurred lines in the functioning of FTX and Alameda Research and how the employees were kept in the dark over the misuse of customers’ funds.
Fresh developments have come to the surface after crypto exchange FTX filed for bankruptcy last week. Alameda Research, the sister trading firm of the crypto exchange FTX, was reportedly suing customers’ funds on FTX.
A source familiar with the matter said that Alameda Research managed to do this by operating under the radar of employees, investors, and auditors involved in the process. The source also added that Alameda used billions of FTX users without their knowledge.
Both FTX and Alameda Research operated under the same person – Sam Bankman-Fried. This raises serious doubts about whether SBF was aware of these highly risky fund transfers. The source also added that Alameda drastically underestimated the funds FTX needed if someone decided to cash out.
Regulators usually demand trading platforms to have enough money to match customers’ deposits. Additionally, the exchange should also have the same cushion, if not more, in the case that a user borrows money to make a trade.
The source said that FTX failed to keep the desired amount. Also, FTX’s biggest customer was its own sister concern hedge fund Alameda Research. The fund partially managed to cover up liquidations. However, instead of holding any money, the fund borrowed billions from users to conduct their trading activity. As per the CNBC report, FTX didn’t disclose these activities to its customers.
Violating Securities Laws
As per US securities law, mixing customers’ funds with other counterparties and trading them without their consent is illegal. Besides if true, it would also violate FTX’s terms of service.
Sam Bankman-Fried has declined to comment on the allegations of misappropriate use of customers’ funds. However, he did acknowledge that his bankruptcy filings came as a result of issues with a leveraged trading position. “A margin position took a huge hit,” Bankman-Fried told CNBC.
For creating these leveraged trades, Alameda was using FTX’s native token FTT as collateral. Using an in-house cryptocurrency as collateral for offering loans was a major gamble on part of Alameda. Last week, the price of FTX tokens (FTT) collapsed by more than 75% in a single day thereby making the collateral insufficient to cover the trade.
It took less than a week for a $32 billion company to collapse into ashes. Last Friday, FTX filed for Chapter 11 bankruptcy and has terminated deposits and withdrawals since then. Within 24 hours of declaring bankruptcy, FTX also suffered a $477 million hack and has thus decided to move its assets offline.
Former FTX employees told CNBC that the financial information provided to them regarding the company was inaccurate. Three sources familiar with the matter said that they were blindsided by the company’s actions and a very small cohort knew about the misuse of customer deposits.
“We’re just shocked and devastated. I feel like I’m in a movie that’s playing out in real time. No one saw this coming. We could not believe how we were being betrayed,” one of the FTX employees said.