At least $ 1 billion in client funds have vanished since the collapse of the cryptocurrency exchange FTX, according to two people familiar with the matter.
Exchange founder Sam Bankman-Fried secretly transferred $ 10 billion of client funds from FTX to Bankman-Fried trading firm Alameda Research, people told Reuters.
Much of that total has since disappeared, they said. One source estimated the missing amount at around $ 1.7 billion. The other claimed that the gap was between $ 1 billion and $ 2 billion.
Although FTX is known to have transferred client funds to Alameda, missing funds are being reported here for the first time.
The financial hole was revealed in the records Bankman-Fried shared with other senior executives on Sunday, according to the two sources. The logs provided an updated account of the situation at the time, they said. Both sources have held senior positions at FTX until this week and said they have been briefed on the company’s finances by senior staff.
On Friday, the Bahamas-based FTX filed for bankruptcy after a rush of customer withdrawals earlier this week. A bailout deal with rival exchange Binance has failed, accelerating the higher-profile collapse of cryptocurrencies in recent years.
In text messages to Reuters, Bankman-Fried said he “disagrees with the characterization” of the $ 10 billion transfer.
“We haven’t moved in secretly,” he said. “We had a confusing internal labeling and we misinterpreted it,” she added, without elaborating.
When 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 he was “putting together” what happened at FTX. “I was shocked to see things unravel as they did earlier this week,” he wrote. “I’ll write a more complete post on the play soon.”
At the heart of FTX’s problems were losses in Alameda that most FTX executives were unaware of, Reuters previously reported.
Customer withdrawals increased last Sunday after Changpeng Zhao, CEO of the giant cryptocurrency exchange Binance, said Binance would sell its entire stake in FTX’s digital token, worth at least $ 580 million, “due to recent revelations “. Four days earlier, CoinDesk reported that much of Alameda’s $ 14.6 billion assets were held in the token.
That Sunday, Bankman-Fried held a meeting with several executives in the Bahamian capital, Nassau, to calculate how much external funding it needed to cover the FTX deficit, two people familiar with FTX finances said.
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 that FTX had moved about $ 10 billion in client funds from FTX to Alameda, the two people said. The spreadsheets showed how much money FTX had loaned to Alameda and what it was for, they said.
Documents showed that between $ 1 billion and $ 2 billion of these funds were not accounted for in Alameda’s assets, the sources said. The spreadsheets did not indicate where this money was moved and the sources said they did not know what happened.
In a later review, FTX’s legal and financial teams also learned that Bankman-Fried implemented what the two people described as a “backdoor” into FTX’s accounting system, which was built using bespoke software.
They said the “backdoor” allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting other people, including external auditors. This setup meant that the $ 10 billion transfer of funds to Alameda didn’t trigger FTX’s internal compliance or accounting red flags, they said.
In his text message to Reuters, Bankman-Fried denied having implemented a “backdoor”.
The US Securities and Exchange Commission is investigating FTX.com’s handling of client funds, as well as its cryptocurrency lending activities, a source familiar with the investigation told Reuters. The Department of Justice and the Commodity Futures Trading Commission are also investigating, the source said.
The FTX failure marked an extraordinary turnaround for Bankman-Fried. The 30-year-old founded FTX in 2019 and has led it to become one of the largest cryptocurrency exchanges, amassing a personal fortune estimated at nearly $ 17 billion. FTX was valued at $ 32 billion in January, with investors including SoftBank and BlackRock.
The crisis has sent reverberations in the world of cryptocurrencies, with the price of the major currencies plummeting. And the FTX crash is making comparisons to previous big business crashes.
On Friday, FTX said it had handed over control of the company to John J. Ray III, the restructuring specialist who handled the liquidation of Enron Corp, one of the largest bankruptcies in history.