FTX’s Fake Insurance Fund & How SBF Fooled the Crypto Market

FTX’s Fake Insurance Fund & How SBF Fooled the Crypto Market

Key Insights

  • According to recent reports, FTX lied about how much money was in its insurance fund.
  • It turns out that the firm's insurance fund was barely enough to cover losses in the first place
  • FTX gave Alameda Research special privileges, such as allowing it to trade with negative balances on the exchange
  • The FTX collapse could lead to more government regulation of the cryptocurrency industry.

Nearly a year after FTX crashed (in November 2022), details of the scandal continue to come to light and shock investors.

Do you remember what happened last year with SBF and Alameda research?

The SBF scandal was one of the most damaging events in the history of crypto. On November 11, 2022, FTX filed for bankruptcy after it was revealed that the exchange had severely mishandled customer funds.

Before long, there was a liquidity hole worth billions of dollars (estimated to be about $8 billion), and thousands of customers found themselves unable to withdraw their funds.

But that was a long time ago.

Now, however, there are reports that the situation was much deeper than anyone realizes.

FTX's Insurance Fund Was a Lie

In a stunning revelation, former FTX CTO Gary Wang has just testified that F-TX actually manipulated a lot more than we realized.

Wang says that FTX used hidden Python code to severely inflate the value of its insurance fund.

If you don't know what this means, the insurance fund was designed to protect user losses during huge liquidation events.

FTX insurance fund worth over 100 million | Source: <a href='https://x.com/FTX_Official/status/1360858165802197003?s=20' target='_blank' rel='noreferrer noopener'><u>FTX/Twitter</u></a>
FTX insurance fund worth over 100 million | Source: FTX/Twitter

According to Wang, the insurance fund figure was cleverly manipulated by multiplying the daily trading volume of the FTX Token (FTT) by a random number close to 7,500.

This means that the amount shown to the public via the tweet above was completely made up, and bore no relation to the actual value of the fund.

This is especially interesting because FTX's insurance fund was the exchange's key selling point to investors and customers.

The Roots Run Deep

According to Wang's testimony, the insurance fund initially, was barely enough to cover user losses.

For example, in 2021, a trader found an issue with FTX's margin system.

This customer exploited the vulnerability and used it to take a particularly large position in MobileCoin.

At the end of the day, F-TX lost hundreds of millions of dollars before putting a lid on things. Wang says that when Bankman-Fried realized what had happened, he ordered Alameda to hide the loss using Alameda's "private" banking sheets.

The Python code FTX used to fake its figures
The Python code FTX used to fake its figures

Wang also claimed that Bankman-Fried instructed him and another engineer, Nishad Singh, to add a feature in F-TX's code that allowed Alameda Research to trade with negative balances on the exchange.

Because of this new feature, Alameda now had unlimited liquidity for trading.

Wang has already pleaded guilty to all charges against him, which include wire fraud, commodities fraud and securities fraud.

He has also admitted to conspiring with Bankman-Fried, former Alameda Research CEO Caroline Ellison and former F-TX director of engineering Nishad Singh.

All In All

The collapse dealt a damaging blow to investor trust in crypto exchanges and the crypto industry as a whole.

Regulators have now increased pressure on crypto exchanges, with the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) currently investigating Binance, Coinbase, Ripple and several others.

Overall, while increased regulation could help to make the crypto industry more safe and reliable for investors, it is bound to take a lot of pain on both sides to get there.

Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.

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