Key Points:
- Deceptive Fund Calculation: Gary Wang exposes how FTX manipulated the insurance fund’s value with hidden Python code.
- Inadequate Coverage: The fund often fell short of protecting users, as revealed by Wang’s testimony.
- Allegations of Fraud: Wang’s admission of wire, commodities, and securities fraud alongside FTX’s leadership.
Former FTX Chief Technology Officer, Gary Wang, testified that FTX used covert Python code to manipulate the reported value of its insurance fund, referred to as the “Backstop Fund.” This fund is intended to safeguard users from losses during significant liquidation events within the cryptocurrency exchange.
In a damning revelation on October 6th, Gary Wang, co-founder of FTX, disclosed that the purported $100 million insurance fund in 2021 was, in fact, fabricated and did not contain any of the FTX tokens (FTT) as it had claimed. Instead, the publicly displayed figure was derived by multiplying the daily trading volume of the FTX Token by an arbitrary number close to 7,500.
The 5.25 million FTT we put in our insurance fund in 2019 now makes the fund worth over 100 million USDhttps://t.co/tMYgJOAdqI pic.twitter.com/vQDkmkufD2
— FTX (@FTX_Official) February 14, 2021
When confronted with this information by the prosecution, Wang succinctly responded with a single word: “No.” He further clarified that the insurance fund solely represented a USD amount and did not include any FTT tokens. Moreover, the figure did not align with the data stored in the company’s database.
An exhibit presented during the October 6th trial illustrated the alleged code responsible for generating the reported size of the “Backstop Fund” or public insurance fund.
From yesterday’s exhibits in US v. Sam Bankman-Fried:
The prosecution shows that the “insurance fund” that FTX bragged about was fake, and just calculated by multiplying daily trading volume by a random number around 7500 pic.twitter.com/EDiVPOHODP
— Molly White (@molly0xFFF) October 7, 2023
FTX had consistently promoted its insurance fund as a means to shield users from sudden, significant market fluctuations through its website and social media channels. Nevertheless, according to Wang’s testimony, the actual funds within the insurance fund were often insufficient to cover such losses.
For instance, in 2021, a trader managed to exploit a vulnerability in FTX’s margin system, resulting in substantial losses, amounting to hundreds of millions of dollars for FTX, as per Wang’s account.
Upon realizing that the insurance fund was nearly depleted, Wang claimed that he was instructed by Bankman-Fried to shift the losses onto Alameda to conceal them. This strategy was allegedly employed because Alameda’s financial records were more private than those of FTX.
In addition to exposing the alleged fraudulent nature of FTX’s insurance fund, Wang asserted that he and Nishad Singh were directed by Bankman-Fried to implement an “allow_negative” balance feature within FTX’s code. This feature allowed Alameda Research to trade on the crypto exchange with nearly unlimited liquidity.
On October 5th, Wang, who had already pleaded guilty to all charges brought against him, acknowledged committing wire fraud, commodities fraud, and securities fraud alongside Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX director of engineering Nishad Singh.
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