News - That's how closely FTX and Alameda were intertwined

By Mike Hesp

That's how closely FTX and Alameda were intertwined

The trial of Sam Bankman-Fried reveals shocking details about the relationship between FTX and Alameda. A reconstruction.

A bank account in the wrong name, an unlimited credit limit and errors in code: The lawsuit against Sam Bankman-Fried (SBF) is uncovering more and more details. The testimonies of people close to the former crypto tycoon, such as Gary Wang or Adam Yedidia, provide deep insight into how intertwined FTX and its trading arm, Alameda Research, really were. A reconstruction.

Northern dimension: a false bank account for FTX

When Sam Bankman-Fried and Gary Wang founded FTX in 2019, they had a problem. The crypto sector is considered a high-risk industry, regulation is scarce and companies in the sector struggle to get banking partners. However, this partnership is eminent for the fledgling crypto exchange. It would make deposits and withdrawals of customer funds much easier.

So Wang and SBF decide to take a detour. They use their hedge fund, Alameda Research, and open a bank account at Silvergate Capital, a California-based crypto-friendly bank. According to the court testimony of Wang they chose the name "Research" to make a better impression on the bank and to divert attention from their crypto activities.

However, the account is not registered at Alameda, but at "North Dimension," a subsidiary of the company. So SBF's hedge fund has access to the account. When customers deposited money at FTX, they used the account that Alameda deposited at Silvergate. The transaction did not go to FTX, but directly to the crypto hedge fund's disguised account.

A debt mountain of $65 billion

Officially, Alameda and FTX always claimed to be independent companies. Unofficially, however, they were closely intertwined. So closely that the trading firm was granted "special privileges." One of these privileges was apparently an unlimited credit limit FTX granted to Alameda Research. Management did not publicly disclose this fact.

SBF allegedly instructed its co-founder and CTO, Gary Wang, on several occasions to raise the threshold for Alameda. First it was a "few million," later a billion. Eventually there was a US$65 billion loan. The volume increased because Alameda repeatedly could not perform important functions as a market maker on its own and borrowed more money from FTX.

No other "customer" had that kind of volume. There were "maybe a dozen that had a limit of a million dollars." testified Wang later in the process.

FTX typically liquidates accounts of customers with negative balances. Alameda was "immune" from this. According to Wang, SBF had instructed him to ensure that Alameda would "never be liquidated."

After a crisis meeting in June 2022, SBF allegedly ordered Alameda's CEO Caroline Ellision to pay off lenders. According to Wang, the hedge fund used client money from FTX to do so.

Error in code causes $8 billion hole

According to the testimony of Adam Yedidia, a former employee and longtime friend of SBF, FTX kept an internal balance sheet that tracked the volume of customer deposits and withdrawals from Alameda - "Fiat at FTX," as it was called. Once the company received money, the internal balance sheet recorded it as FTX's receivables from Alameda. A team of employees initially kept track of the money movements manually.

However, as FTX's success grew, this manual process became increasingly cumbersome. So SBF commissioned Yedidia to program an automated mechanism for deposits and withdrawals. When Yedidia implemented the tool, he made a capital mistake.

While the algorithm correctly recorded incoming payments, outgoing payments to customers were not removed from the balance sheet. When the error was discovered, there were discrepancies of nearly $500 million. When the error was corrected by Yedidia six months later, there was a gaping hole of eight billion dollars. Eight billion dollars that Alameda owed FTX's customers.

Yedidia understood Alameda's inability to pay the debt and left FTX shortly before it collapsed in November 2022, leaving him in the courtroom said: "FTX cheated its customers!".

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