FTX’s purported “Backstop Fund” value was allegedly misrepresented, as stated by the former Chief Technology Officer of the cryptocurrency exchange. Testimony from FTX co-founder Gary Wang suggests that this exchange employed concealed Python code to distort the true value of its insurance fund—a fund designed to safeguard users from significant liquidation-related losses.
During his damaging testimony on October 6, Gary Wang, the former Chief Technology Officer of FTX, asserted that the $100 million insurance fund claimed by this exchange in 2021 was, in fact, fabricated and did not contain any of the tokens (FTT) as it was purported to. Instead, the publicized figure was generated by multiplying the daily trading volume of this exchange’s Token by a random number close to 7,500.
When the prosecution presented the mentioned tweet, along with other public declarations regarding its worth, and inquired whether this sum was correct, Wang responded with a concise “No.”
“For one, there is no FTT in the insurance fund. It’s just the USD number. And, two, the number listed here does not match what was in the database.”
During the trial on October 6, an exhibit displayed what is alleged to be the code responsible for determining the size of the “Backstop Fund” or public insurance fund at this exchange. Their insurance fund was intended to safeguard users from substantial losses in the event of sudden, significant market fluctuations, and its value was frequently promoted on the exchange’s website and social media.
However, according to Wang’s testimony, the funds contained within the insurance fund often fell short of covering these losses. As an example, in 2021, a trader exploited a vulnerability in this exchange’s margin system to assume a disproportionately large position in MobileCoin, leading to losses amounting to hundreds of millions of dollars for FTX, as stated by Wang. When Bankman-Fried became aware that the insurance fund was nearly depleted, Wang claimed he was instructed to transfer the loss to Alameda in an attempt to conceal it, as Alameda’s financial records were believed to be more private than this exchange.
FTX Fraudulent Nature
In addition to exposing the purportedly fraudulent nature of their insurance fund, Wang asserted that Bankman-Fried encouraged him and Nishad Singh to incorporate an “allow_negative” balance feature into FTX’s code, enabling Alameda Research to trade with almost unrestricted liquidity on the cryptocurrency exchange. On October 5, Wang, who had already pleaded guilty to all charges against him, admitted to engaging in wire fraud, commodities fraud, and securities fraud alongside Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX Director of Engineering Nishad Singh.