Allegations surrounding FTX range from an inside job to a “backdoor” accounting hole that allegedly let large transfers go unnoticed.
Nearly a half billion dollars appears to have been stolen from collapsed crypto exchange FTX less than a day after its bankruptcy filing.
Multiple sources including FTX General Counsel Ryne Miller, the bankrupt exchange’s @FTX_Official Twitter account and top crypto intelligence firm Elliptic — as well as media outlets ranging from CNBC to the New York Times — have all reported that at least $477 million dollars “is suspected to have been stolen” in an apparent hack.
Elliptic’s Nov. 12 report said that $663 million had been “drained” from a number of FTX wallets, with the remainder believed to have been moved into cold wallets by FTX itself.
The theft, which apparently saw funds stolen simultaneously from FTX and its American counterpart FTX US — both majority-owned by former CEO and former crypto golden boy Sam Bankman-Fried — will put a deeper dent in losses suffered by investors.
FTX was already facing an $8 billion hole left by an alleged transfer of some $10 billion — allegedly including billions of dollars in customers funds — from FTX to another Bankman-Fried-owned company, trading giant Alameda Research, which had reportedly suffered severe losses.
“[W]e are in the process of removing trading and withdrawal functionality and moving as many digital assets as can be identified to a new cold wallet custodian. As widely reported, unauthorized access to certain assets has occurred […] We have been in contact with, and are coordinating with law enforcement and relevant regulators.”
Book-Keeping ‘Backdoor’
The already jaw-dropping story took yet another turn on Nov. 11, when Reuters reported that a spreadsheet Bankman-Fried allegedly showed to FTX legal and regulatory executives — many of whom promptly resigned — had a multi-billion dollar hole. Part of this hole was $10 billion that FTX loaned to Alameda Research, as well as between $1 billion and $2 billion that “were not accounted for among Alameda's assets” and that Reuters’ “sources said they don't know what became of it.”
Worse, Reuters said that FTX’s legal and finance teams allegedly “learned that Bankman-Fried implemented what the two people described as a ‘backdoor’ in FTX's book-keeping system, which was built using bespoke software.”
Reuters added:
“They said the ‘backdoor’ allowed Bankman-Fried to execute commands that could alter the company's financial records without alerting other people, including external auditors. This set-up meant that the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX.”
Reuters said that Bankman-Fried texted a denial that such a software backdoor existed.
The next day, the Financial Times reported that FTX had only $900 million in liquid assets and $8.9 billion in debt. The overwhelming majority of Alameda Research’s assets were in the FTT tokens issued by the exchange, which collapsed in price after a CoinDesk story revealed the details of its balance sheet. That led to a run of FTX that left it unable to process withdrawals.
This situation also led to broader crypto industry woes: a collapse in the price of Bitcoin and investigations by the Justice Department and Securities and Exchange Commission (SEC). Comments by politicians that suggest the regulatory regime Congress and the Biden Administration are in the process of developing will not be the lighter-handed one crypto insiders are hoping to see pass into law. Bankman-Fried was a major force in industry lobbying in that cause.
Anger Grows
As revelations and accusations grow, condemnation of Bankman-Fried is growing.
An early example came from Jesse Powell, who recently stepped down as head of U.S. crypto exchange Kraken. Saying “I’m really trying to control my rage” in a Nov. 10 Twitter thread, Powell called the FTX implosion “a massive setback” that the crypto industry will be working years to undo.
He added:
“Our good, trusting nature makes us easy targets for con artists. Some even tell us straight up that they're here for profits, not crypto, and we praise them for their honesty. Yet we're surprised when they turn out to be who they said they are […] This is about recklessness, greed, self-interest, hubris, sociopathic behavior that causes a person to risk all the hard-won progress this industry has earned over a decade, for their own personal gain. While already being rich AF.”
Interestingly, shortly after the hack, Kraken Chief Security Officer Nick Percoco tweeted “[w]e know the identity of the user” in response to another tweet by blockchain consulting firm IBC Group’s founder and CEO, Mario Nawfal.
Nawfal in turn quoted cybersecurity firm Hacken’s CEO Dyma Budorin, who tweeted that the hacker stole “more than $450M from FTX hot wallets” yet “he makes a mistake by withdrawing $TRX from Kraken personal account to pay for commissions.”
Budorin added that in his opinion, that “means the hacker is very likely an inexperienced insider.”
Musk Smells a Rat
Another earlier FTX skeptic was Tesla CEO and Twitter owner Elon Musk, who said in a Twitter Space event that he turned down a large investment offer from Bankman-Fried following a half-hour conversation.
Musk said “my bullshit meter was redlining,” following that call. “It was like, this dude is bullshit – that was my impression,” CoinDesk reported.
Musk added:
“Then I was like, man, everyone including major investment banks — everyone was talking about him like he’s walking on water and has a zillion dollars. And that [was] not my impression…that dude is just — there’s something wrong, and he does not have capital, and he will not come through. That was my prediction.”
Musk also tweeted a rather crude meme that showed Bankman-Fried’s face pasted under a PornHub banner that advertised a fake video title: “Man F***s 5 Million People At Once.”
