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At least $1 billion. of missing client funds at failed cryptocurrency firm FTX: Sources

In this photo illustration, Binance and FTX apps are seen on a phone on November 10 in Atlanta, Georgia.  Getty Images bank
In this photo illustration, Binance and FTX apps are seen on a phone on November 10 in Atlanta, Georgia. Getty Images bank


At least $1 billion in customer funds have disappeared since the collapse of 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’s trading firm Alameda Research, they told Reuters.

Much of that total has since disappeared, they said. One source puts the missing amount at around $1.7 billion. The other said the gap was between $1 billion and $2 billion.

While FTX is known to have moved client funds to Alameda, the missing funds are being reported here for the first time.

The financial hole was revealed in documents Bankman-Fried shared with other top executives on Sunday, according to the two sources. The records provided an up-to-date account of the situation at the time, they said. Both sources held senior positions at FTX up until this week and said they were briefed on the company’s finances by senior staff.

The Bahamas-based FTX filed for bankruptcy on Friday after a spate of customer withdrawals earlier this week. A bailout deal with rival exchange Binance collapsed, plunging the cryptocurrency’s highest profile

In text messages to Reuters, Bankman-Fried said he “disagreeed with the characterization” of the $10 billion transfer.

“We didn’t move secretly,” she said. “We had confusing internal labeling and 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 the pieces together” of what had happened at FTX. “Shocked to see things unravel as they did earlier this week,” he wrote. “I will be writing a more comprehensive post on drama after drama soon.”

At the heart of FTX’s problems were leaks at Alameda that most FTX executives were unaware of, Reuters reported earlier.

Customer withdrawals surged on Sunday after Changpeng Zhao, CEO of cryptocurrency giant 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, news agency CoinDesk reported that a large portion of Alameda’s $14.6 billion in 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 financing it needed to cover FTX’s shortfall, the two people with knowledge of FTX’s finances said.

FTX CEO Sam Bankman-Fried poses for a photo, at an unspecified location, in this undated handout image obtained by Reuters on July 5.  Reuters-Yonhap
FTX CEO Sam Bankman-Fried poses for a photo, at an unspecified location, in this undated handout image obtained by Reuters on July 5. Reuters-Yonhap


Bankman-Fried confirmed to Reuters that the meeting had taken place.

Bankman-Fried showed several spreadsheets to the heads of the firm’s regulatory and legal teams that revealed that FTX had moved about $10 billion of client funds from FTX to Alameda, the two people said. The spreadsheets showed how much money FTX lent Alameda and what it was used for, they said.

The 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 didn’t indicate where this money was transferred to, and sources said they didn’t know what happened to it.

In a subsequent review, FTX’s legal and finance 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 outside auditors. This setup meant that the transfer of the $10 billion funds to Alameda did not trigger FTX’s internal compliance or accounting red flags, they said.

In his text message to Reuters, Bankman-Fried denied implementing a “backdoor”.

The U.S. 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 on Wednesday. The Justice Department and the Commodity Futures Trading Commission are also investigating, the source said.

FTX’s bankruptcy marked an incredible reversal for Bankman-Fried. The 30-year-old created FTX in 2019 and has grown into one of the largest cryptocurrency exchanges, amassing a personal fortune estimated at nearly $17 billion. FTX was valued in January at $32 billion, with investors including SoftBank and BlackRock.

The crisis has had repercussions in the world of cryptocurrencies, with the collapse of the price of the main coins. And the collapse of FTX is drawing comparisons to previous major corporate collapses.

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. (Reuters)


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