FTX Collapse: Secret Software Change Allowed Sam Bankman-Fried's Crypto Exchange to Use Client Funds

In mid-2020, FTX's chief engineer made a secret change to the cryptocurrency exchange's software.

He tweaked the code to exempt Alameda Research, a hedge fund owned by FTX founder Sam Bankman-Fried, from a feature on the trading platform that would have automatically sold off Alameda's assets if it was losing too much borrowed money.

In a note explaining the change, the engineer, Nishad Singh, emphasised that FTX should never sell Alameda's positions. "Be extra careful not to liquidate,” Singh wrote in the comment in the platform's code, which it showed he helped author. Reuters reviewed the code base, which has not been previously reported.

• In the SEC's Suit Against Bankman-Fried, What About the Customers?

The exemption allowed Alameda to keep borrowing funds from FTX irrespective of the value of the collateral securing those loans. That tweak in the code got the attention of the US Securities and Exchange Commission which charged Bankman-Fried with fraud on Tuesday. The SEC said the tweak meant Alameda had a “virtually unlimited line of credit.” Furthermore, the billions of dollars that FTX secretly lent to Alameda over the next two years didn't come from its own reserves, but rather were other FTX customers' deposits, the SEC said.