Sam Bankman-Fried's trading firm was able to quietly use customer funds from his exchange FTX without sounding alarm bells, sources say.
When asked about the blurred lines between his companies in August, Bankman-Fried denied any conflict of interest and said FTX was a "neutral piece of market infrastructure."
But every time an asset was borrowed, FTX subtracted the borrowed assets from what it needed to keep in its wallets to match customer deposits, a source says. In a typical situation, an exchange's wallets need to match what customers deposit. But because of this practice, assets were not backed one-to-one and the company was underestimating the amount they owed customers.
The source explained that Alameda could post the FTT tokens it held as collateral and borrow customer funds. Even if FTX created more FTT tokens, it would not drive down the coin's value because these coins never made it onto the open market. As a result, these tokens held their market value, allowing Alameda to borrow against them – essentially receiving free money to trade with.
Outside auditors likely missed this discrepancy because customer assets are an off balance sheet item, and therefore, would not be reported on FTX's financial statements, the source said.that the majority of Alameda's balance sheet consisted of FTT tokens, shaking the confidence of consumers and investors. Changpeng Zhao , the CEO of one of its largest rivals, Binance, publicly threatened to sell his FTT tokens on the open market, crashing the price of FTT.
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