Former Chief Technology Officer (CTO) of crypto exchange FTX, Gary Wang, has made damning allegations, stating that FTX used concealed Python code to misrepresent the value of its insurance fund. This fund is designed to safeguard users from losses during significant liquidation events.
Fabricated Insurance Fund
In his testimony on October 6, Wang revealed that FTX’s claimed $100 million insurance fund in 2021 never actually contained any FTX tokens (FTT), as publicly asserted. Instead, the figure presented to the public was artificially calculated by multiplying the daily trading volume of the FTX Token by a random number close to 7,500.
— FTX (@FTX_Official) February 14, 2021
When questioned about the accuracy of this amount during the trial, Wang responded with a simple “No.” He further explained that there were no FTT tokens in the insurance fund, only a USD figure, and the reported number did not match the data in the database.
Insufficient Fund for Covering Losses
Despite being touted on FTX’s website and social media as a protective measure against significant market movements, Wang testified that the actual value of the insurance fund often fell short of covering substantial losses. He cited an incident in 2021 when a trader exploited a margin system bug, resulting in a loss of hundreds of millions of dollars for FTX.
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
Attempt to Conceal Losses
Wang claimed that when FTX’s founder, Sam Bankman-Fried, realized the insurance fund was nearly depleted, Wang was instructed to have Alameda Research absorb the loss. This was allegedly an effort to conceal the loss, as Alameda’s balance sheets were considered more private than FTX’s.
In addition to the fraudulent insurance fund allegations, Wang stated that Bankman-Fried urged him and Nishad Singh to implement an “allow_negative” balance feature in FTX’s code. This feature allowed Alameda Research to trade with nearly unlimited liquidity on the exchange.
Wang has already pleaded guilty to wire fraud, commodities fraud, and securities fraud, along with Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX director of engineering Nishad Singh. These revelations shed light on the challenges of transparency and security within the crypto industry.