(Danny Nelson/CoinDesk)
Despite the focus on FTX following its catastrophic collapse, it's remarkable how little we know about how the crypto exchange and its in-house trading firm Alameda Research actually operated. New CEO John Jay Ray III has called Sam Bankman-Fried's crypto trading empire the "greatest failure of corporate controls" he's seen.
Wednesday, Coffeezilla, a YouTuber with a rising star who has made a career of shining a light on sketchy projects in and out of crypto, pressed Bankman-Fried for information related to how different customer accounts were treated at the exchange. It turns out, there wasn't much differentiation – at the very least during the final days the exchange was in business, Bankman-Fried admitted.
"At the time, we wanted to treat customers equally," SBF said during a Twitter Spaces event. "That effectively meant that there was, you know, if you want to put it this way, like fungibility created" between the exchange's spot and derivatives business lines. For Coffeezilla, this looks like a smoking gun that fraud was committed.
At the very least, this is a contradiction of what Bankman-Fried had said just minutes before when first asked about the exchange's terms of service (ToS). "I do think we're treating them differently," Bankman-Fried said, referring to customer assets used for "margin versus staking versus spot versus futures collateral." All of those services come with different levels of risk, different promises made to customers and different responsibilities for the exchange.
According to FTX's ToS, everyday users just looking to buy or store their cryptocurrencies on the centralized exchange could trust they were doing just that, buying and storing cryptographically unique digital assets. But now, thanks to skillful questioning by Coffeezilla, we know there were instead "omnibus" wallets and that spot and derivatives traders were essentially assuming the same level of risk.
We can also assume this was a longstanding practice at FTX. Bankman-Fried noted that during the "run on the exchange" (pardon the language), when people were attempting to get their assets off before withdrawals were shut down, FTX allowed "generalized withdrawals" from these omnibus wallets. But he also deflected, saying what, you wanted us to code up an entirely new process during a liquidity crisis?
–D.K.
