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Understanding the bankruptcy of FTX and Alameda

I have been in the crypto industry for 10 years, running a crypto exchange & market-maker, and it’s fascinating to have an insider insight into the inner workings of FTX and Alameda Research that led to the spectacular collapse.

The Independent Board of Directors appointed by the Debtors in the bankruptcy case released a report on the "Control Failures" that led to the collapse of the world’s 2nd largest crypto exchange.

The report is 43 pages long and I read it in detail so you don’t have to 😀 and here is what you need to know about what led to the fiasco of FTX and Alameda Research.

Crypto exchange FTX and market-maker Alameda Research were the same company. They shared numerous data records, messaging tools, and critical pieces of tech infrastructure. The most shocking is that FTX & Alameda frequently commingled clients' deposits, and the market-maker (ab)used those funds for dubious purposes.

Even though FTX was at the time of the collapse a crypto empire, the Management was limited to Sam Bankman-Fried, Nishad Singh, and Gary Wang, with SBF having the final voice in all significant decisions.

When the President of FTX.US disagreed over the lack of a “decision-making process, formal management structure & key hires”, his bonus was drastically reduced & he was told to apologize to SBF, which he refused to do. Similarly, a lawyer from FTX Group was fired when he expressed concerns about Alameda’s lack of controls, capable leadership, and risk management.

At its peak, the FTX Group operated in 250 jurisdictions, with tens of billions of dollars of assets under management, 26 million transactions per day, and millions of users, all while relying on a small firm to perform almost all of its accounting.

SBF himself described Alameda as “unauditable”, and any major auditor would not be able to conduct an audit. Since FTX & Alameda did not keep a transaction history, the team would sometime “find $50m of assets lying around that we lost track of”. SBF concludes with: “Such is life”.

FTX had thousands of accounts on other crypto exchanges, but no info about the purpose or passwords to access them. These accounts had names & emails with no obvious links to FTX Group or were opened using pseudonymous emails for shell companies, or in the names of people with no connection to FTX.

Alameda had extraordinary privileges on FTX, with practically unlimited credit-line ($65 billion) and an auto-liquidation feature turned off for their trading account.

FTX had little IT security in place, most of the cryptos were in hot wallets (contrary to what SBF said publicly), and private keys to cryptos were on an unsecured cloud without multi-signature/MPC controls.

The report focused on the lack of risk management & controls related to FTX managing clients' deposits, but I am interested to read about the “special treatment” Alameda had as a market-maker on the exchange. More to come soon!

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