After crypto exchange FTX failed to pay back customers in November and plunged into bankruptcy, details began to emerge about the reasons for its collapse. Its associated trading firm, Alameda Research, had borrowed billions of dollars in customer funds for its own purposes, meaning FTX users couldn’t be made whole when they attempted withdrawals.
On Friday, FTX cofounder Gary Wang took the stand in the criminal trial of Sam Bankman-Fried, whom he first met at a high school math camp. After admitting on Thursday that he had committed fraud while at the helm of the crypto empire, Wang detailed the extent of the alleged crimes on Friday, under direct examination by Department of Justice prosecutor Nicolas Roos.
According to Wang, Alameda was granted special privileges—what some have deemed “god mode”—that allowed it to operate differently from other traders on the crypto exchange. Wang detailed how, soon after FTX launched, he and engineering chief Nishad Singh implemented code that allowed Alameda to rack up a negative balance—a privilege no other traders had—and incur trading losses on the exchange.
The advantages did not stop there. Later, under Bankman-Fried’s direction, Wang allowed Alameda to have a $65 billion line of credit on FTX, meaning it could withdraw nearly unlimited amounts of capital from the platform. Only a few dozen other traders on the platform had a line of credit of $1 million or more, let alone $1 billion, and none of them could withdraw funds from the platform.
Wang testified that the privileges were introduced because Alameda acted as the first—and primary—market maker on FTX, meaning it sat in the middle of other users’ trades. In order to ensure that Alameda could continue to operate in the role, it needed to not operate under the same limits as other customers. In other words, other traders would have positions liquidated—or closed—if they lacked sufficient collateral. Alameda didn’t have the collateral, but it still needed to execute trades to keep the exchange humming along.
Alameda and FTX had a closer relationship than most market makers and exchanges. They both were founded by Bankman-Fried and Wang, and Bankman-Fried implemented the strategy for both, according to Wang. While Bankman-Fried initially intended for Alameda’s borrowing to come from trading revenue generated by FTX, Wang said the trading firm dipped into FTX customer coffers by late 2019 or early 2020, with trading revenue no longer able to cover Alameda’s losses. That debt reached billions of dollars by mid-2022. Wang stated that customer funds went to everything from trading losses to venture investments and real estate purchases.
While Bankman-Fried publicly stated that Alameda had the same rules as any other trader on FTX, its special privileges and ballooning debt to FTX eventually sank the entire operation, according to Wang. He pointed to a tweet from July 31, 2019, in which Bankman-Fried wrote that Alameda functioned as a liquidity provider on FTX, with its account operating “just like everyone else’s.”
That wasn’t true. In fact, as prosecutors showed in an exhibit of FTX’s code database on GitHub, the tweet was sent on the same day that Wang authorized the implementation allowing Alameda to have unlimited negative balances on FTX.
Alameda is a liquidity provider on FTX but their account is just like everyone else’s. Alameda’s incentive is just for FTX to do as well as possible; by far the dominant factor is helping to make the trading experience as good as possible.
— SBF (@SBF_FTX) July 31, 2019
‘It might be time for Alameda Research to shut down’
According to Wang, FTX’s inner circle of Bankman-Fried, Wang, Singh, and Alameda CEO Caroline Ellison were aware of the grave problem facing the two entities by summer 2022. They completed an audit of Alameda, revealing that it owed billions of dollars to FTX.
Everything came to a head in September 2022, following a Bloomberg article that detailed the unusual relationship between FTX and Alameda. In a Signal chat with Wang and Singh, Bankman-Fried argued that they should consider closing Alameda, mostly because its close relationship with FTX could generate bad press.
“It might be time for Alameda Research to shut down,” Bankman-Fried wrote, arguing that they should explore transferring its market-making role to another trading firm, Modulo. He had invested hundreds of millions of dollars into Modulo—and dated one of its founders—but it still did not have the same intertwined relationship as Alameda. He told Singh and Wang that Modulo had better “leadership and culture” than Alameda, which was run by another former girlfriend, Ellison.
Testifying on Friday, Wang said that he calculated how much Alameda owed to customers due to its special privileges: $14 billion. He realized Alameda couldn’t shut down, because it didn’t have the liquid assets to shut down.
‘FTX was not fine’
Two months later, after trade publication CoinDesk published a leaked balance sheet from Alameda, customers began taking out deposits from FTX in droves. Unable to satisfy them all, the house of cards tumbled.
Wang testified that Bankman-Fried continued to lie to the public, saying that Bankman-Fried tweeted from the official FTX account on Nov. 7 that stablecoin withdrawals were paused because banks were closed. In reality, the reason for the pause was that FTX had run out of stablecoins to pay back customers. In a separate tweet from his own account—since deleted—Bankman-Fried wrote that FTX and its assets were fine. Roos asked whether that was true, and Wang said it wasn’t.
“FTX was not fine,” he said. “And assets were not fine.”
Wang flew back to the U.S. and began cooperating with prosecutors just over a week later. The next month, he entered a guilty plea to wire, securities, and commodities fraud, with a possible prison sentence of up to 50 years.
In exchange for his testimony, prosecutors said they would write to a judge recommending a reduced sentence. Roos asked Wang what he was hoping for.
“Ideally,” he responded, “no prison time.”
This story was originally featured on Fortune.com