FTX Employees Discover Backdoor in Alameda Research
A group of FTX U.S.-based employees found a backdoor for its affiliated trading firm Alameda Research months before the collapse of the crypto exchange in November 2022. The backdoor allowed Alameda to have a negative balance of up to $65 billion using customer funds, while other FTX users would be automatically liquidated if they fell into the red. The employees alerted their division boss and discussed it with former FTX CEO Sam Bankman Fried’s lieutenant, but the issue was never resolved. Instead, the team member who raised the concern was fired.
The LedgerX Team’s Code Discovery
The employees were from LedgerX, a U.S. crypto-derivatives exchange acquired by FTX’s U.S. arm in 2021. They discovered the backdoor while examining FTX’s international platform code for compliance with stricter U.S. regulations in spring 2022. The discovery was reported to LedgerX’s head, who discussed it with FTX’s Director of Engineering. However, LedgerX stated that its employees were not aware of any code enabling Alameda to take FTX customer assets.
Backdoor Left Open and Schoening Fired
FTX believed the problem had been fixed after some code was removed, but the backdoor remained open. By August 2022, LedgerX’s Chief Risk Officer had been fired allegedly for sending “inappropriate messages.” Some sources claim the messages were manipulated or taken out of context, suggesting that she irritated her bosses by identifying risk management issues. A settlement between Schoening and FTX worth $5 million failed to complete before the exchange collapsed.
Hot Take: Bankman-Fried’s Trial and Key Witnesses
The backdoor discovery plays a significant role in the criminal trial of Sam Bankman-Fried, the former CEO of FTX. Bankman-Fried faces multiple fraud charges and could serve decades in prison. Nishad Singh, a key member of Bankman-Fried’s inner circle, has already pleaded guilty to fraud and is expected to be a key witness against him. Whistleblowers who threatened to expose alleged fraudulent behavior were allegedly paid off by FTX. The outcome of the trial will have significant implications for the future of FTX and its reputation in the crypto industry.
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