Since practically the beginning of FTX’s operations in 2019, according to Gary Wang, Alameda Research has been utilizing the in-house FTT token as collateral for loans of FTX client funds.
The eventual amount of $65 billion allocated to Alameda’s line of credit at FTX practically gave them unrestricted access to all consumer cash on the exchange. On Tuesday, when the trial continues, Caroline Ellison is scheduled to give testimony.
At the end of the first week of Sam Bankman-Fried’s trial, FTX co-founder and CTO Gary Wang dropped a bombshell by testifying that the crypto exchange had given Alameda Research preferential access to borrow client cash as early as late 2019 (soon after the exchange’s creation).
Prosecutors from the Department of Justice emphasized the role that Alameda Research’s privileged access to FTX played in the theft of $8 billion in client deposits. Most notably, this excluded the ability to liquidate on-margin transactions and the ability for many of Alameda’s FTX accounts to run negative balances.
According to Wang’s testimony, Alameda was given preferential treatment compared to other FTX clients, including rival market-makers. Later, on July 31, 2019, Sam Bankman-Fried posted on X (previously Twitter) and contrasted this by saying that Alameda’s “account is just like anyone else’s.”
Particular events at FTX directly contradicted the tenor of the post. Wang established and activated Alameda’s unique rights on the same day, July 31, 2019, only a few months after FTX’s first debut, in what was essentially Sam Bankman-Fried’s original sin.
In the FTX code, Alameda had access to a special function called “Allow Negative.” It accomplished exactly what its name implies: it allowed certain clients’ balances to go below zero. According to Wang’s testimony, the functionality was only enabled for Alameda Research accounts and remained that way until the two companies went bankrupt.
The “Allow Negative” feature in FTX’s code was essentially a backdoor via which Alameda Research stole $8 billion from the exchange’s customers.
According to Wang, Bankman-Fried first requested this capability so that Alameda could fulfill its role as a market maker by redeeming stablecoins and funding certain activities using the FTT token developed by FTX. Later, during its cross-examination of Wang, the defense would be careful to portray these as justifications for Alameda’s exclusive right to spend client funds as it sees fit.
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