FTX credibility crisis: Exposed Backstop Fund manipulation by ex-CTO Gary Wang
The once-respected cryptocurrency exchange, FTX, finds itself at the center of a credibility crisis following shocking revelations made by its former Chief Technology Officer. Gary Wang, co-founder of FTX, exposed a deeply unsettling truth about the exchange's "Backstop Fund," a supposed safety net designed to protect users from significant losses during market liquidation events.
FTX's "Backstop Fund" revealed: Fabricated $100 million insurance, no FTT tokens
On October 6th, Gary Wang dropped a bombshell, revealing that the purported $100 million insurance fund in 2021 was a fabrication. Even more concerning was the revelation that the fund did not actually hold the FTX tokens (FTT) it claimed to. Instead of a genuine valuation, the public was presented with a figure calculated by multiplying the daily trading volume of the FTX Token by an arbitrary number close to 7,500.
When questioned about this discrepancy, Wang's response was clear and unequivocal: "No."
Wang went on to explain, "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 6th, evidence was presented, demonstrating the alleged code used to determine the size of the so-called "Backstop Fund" or public insurance fund. FTX had consistently promoted the value of this fund on its website and social media, assuring users of protection in the face of volatile market swings. Wang's testimony, however, revealed a starkly different reality, where the fund's actual resources often fell short of covering potential losses.
One notable incident from 2021 exemplified this deficiency when a trader exploited a vulnerability in FTX's margin system to assume a disproportionately large position in MobileCoin. This exploit resulted in losses amounting to hundreds of millions of dollars for FTX.
As the realization that the insurance fund was nearly depleted dawned upon FTX, Wang alleged that he was instructed by Sam Bankman-Fried, FTX's founder, to shift the burden onto Alameda, ostensibly to conceal the loss. Alameda's balance sheets were considered more private than FTX's, making it a convenient choice for absorbing the financial hit.
In addition to exposing the allegedly fraudulent nature of FTX's insurance fund, Wang contended that he and Nishad Singh had been directed by Bankman-Fried to implement an "allow_negative" balance feature in FTX's code. This feature effectively provided Alameda Research with near-unlimited liquidity for trading on the crypto exchange.
On October 5th, 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.
Cryptocurrency credibility at stake: FTX's trust eroded by insurance fund revelation
FTX's reputation and the broader trust in cryptocurrency exchanges have taken a significant blow due to these revelations. This scandal highlights the importance of transparency and accountability in the crypto industry and underscores the need for regulatory oversight to prevent such incidents in the future.