At least $1 billion in client funds have disappeared from collapsed crypto exchange FTX, according to two people familiar with the matter.
The exchange’s founder, Sam Bankman-Fried, secretly transferred $10 billion in client funds from FTX to Bankman-Fried’s trading firm Alameda Research, the people told Reuters.
A large part of that sum has since disappeared, they said. A source put the missing amount at about $1.7 billion. The other said the gap is between $1 billion and $2 billion.
While FTX is known to have moved client funds to Alameda, this is the first time the missing funds have been reported.
The financial hole was revealed in notes Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The recordings provided an up-to-date picture of the situation at the time, it said. Both sources held senior FTX positions up until this week and said they were briefed on the company’s finances by top officials.
Bahamas-based FTX filed for bankruptcy on Friday after an onslaught of customer withdrawals earlier this week. A bailout deal with rival exchange Binance fell through, hastening crypto’s most high-profile meltdown in years.
In text messages to Reuters, Bankman-Fried said he “disagreed with the characterization” of the $10 billion transfer.
“We didn’t switch secretly,” he said. “We had confusing internal labeling and misunderstood it,” he 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 how things turned out the way they did earlier this week,” he wrote. “I’ll be writing a more complete post on play-by-play soon.”
At the heart of FTX’s troubles were losses at Alameda that most FTX executives were unaware of, Reuters previously reported.
Customer withdrawals surged last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance will sell its entire stake in FTX digital token, worth at least $580 million, “due to recent revelations.” to sell. Four days earlier, news agency CoinDesk reported that much of Alameda’s $14.6 billion in assets are held in tokens.
This Sunday, Bankman-Fried held a meeting with several executives in Nassau, the capital of the Bahamas, to calculate how much leverage he needed to cover FTX’s deficit, the two people with knowledge of FTX’s finances said .
Bankman-Fried confirmed to Reuters that the meeting took place.
Bankman-Fried showed heads of the firm’s regulatory and legal teams several spreadsheets showing that FTX had transferred approximately $10 billion in client funds from FTX to Alameda, the two people said. The tables showed how much money FTX had loaned Alameda and what it was being used for, they said.
The documents showed between $1 billion and $2 billion of those funds were not among Alameda’s assets, the sources said. The spreadsheets don’t indicate where that money went, and the sources said they didn’t know what became of it.
In a subsequent investigation, FTX’s legal and finance teams also learned that Bankman-Fried had implemented what the two people described as a “back door” into FTX’s accounting system, which was built using custom software.
They said the “back door” allowed Bankman-Fried to carry out orders that could alter the company’s financial records without alerting others, including outside auditors. That facility meant the movement of $10 billion in funds to Alameda did not raise any internal compliance or accounting flags at FTX, they said.
In his text message to Reuters, Bankman-Fried denied the implementation of a “backdoor”.
The US Securities and Exchange Commission is investigating FTX.com’s handling of customer funds and its crypto lending activities, a source with knowledge of the investigation told Reuters on Wednesday. The Justice Department and Commodity Futures Trading Commission are also investigating, the source said.
FTX’s bankruptcy marked an amazing turnaround for Bankman-Fried. The 30-year-old founded FTX in 2019 and led it to become one of the largest crypto exchanges, with an estimated personal fortune of almost $17 billion. FTX was valued at $32 billion in January, with investors including SoftBank and BlackRock.
The crisis has taken a toll on the crypto world, with the price of major coins falling sharply. And FTX’s collapse draws comparisons to previous major corporate collapses.
On Friday, FTX announced that it had surrendered control of the company to John J. Ray III, the restructuring specialist who handled Enron Corp’s liquidation — one of the largest bankruptcies in history.
