FTX’s bankruptcy attorney and new CEO, John Ray, spoke to the House Financial Services Committee on Friday to break down some of the internal details of the exchange’s fallout.
Ray said that FTX customers’ assets were used by Alameda Research for margin trading, confirming a long-held suspicion about the two companies that former boss Sam Bankman-Fried (SBF) has been hesitant to admit.
Confirming the Fraud
During his preliminary remarks, Ray said that while his investigation was still at an early stage, certain critical facts had already been made clear.
“First, customer assets at FTX.com were comingled with assets from the Alameda trading platform,” he said. “That much is clear.”
“Second, Alameda used client funds to engage in margin trading, which exposed customer funds to massive losses,” he added. As a market maker, Alameda had deployed funds to “various third-party exchanges” that were “inherently unsafe”, and subject to limited market protections within those jurisdictions.
When asked about governance ties between both FTX and Alameda, Ray said there was virtually “no separateness” between the entities, nor internal risk management controls. The entire FTX Group, consisting of over 130 companies including FTX.com, FTX US, and Alameda, were “owned and controlled by Sam Bankman-Fried.”
While there was a “public distinction” between both FTX and FTX US, Ray said that crypto assets for both firms were housed in the AWS system. Still, these were independent of Alameda’s assets – giving possible credence to Bankman-Fried’s prior assertions that FTX US is still solvent.
When responding to the former billionaire’s claims about not making decisions around Alameda’s governance, Ray’s statements were much more skeptical.
“I will note that he owned 90% of Alameda. There’s no distinction whatsoever. The owners of the company could have free reign across all siloes.”
Contributing to FTX’s financial trouble was a so-called “spending binge” throughout both 2021 and 2022, during which $5 billion were spent on businesses and investments. The company’s profligate spending on various sponsorships, a stadium, and other promotional deals has been subject to much criticism from rival exchange leaders, including Binance’s Changpeng Zhao and Kraken’s Jesse Powell.
Sam Bankman-Fried has avoided directly answering whether client assets were used for margin trading at Alameda Research, claiming that he “did not know” there was any improper use of customer funds.
However, he has stated in previous interviews that customer assets were treated with “fungibility” during the bank run against his exchange in early November. That means customers holding digital assets on the exchange, which had guaranteed safety under his exchange’s terms of service, were treated equally to assets used for futures and margin trading.
Bankman-Fried was supposed to appear at the congressional hearing alongside John Ray, but was arrested by Bahamian regulators on Monday. In his prepared remarks, he confirmed that FTX lacked a risk management team.
Featured Image Courtesy of Bloomberg.
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