Former FTX CTO reveals FTX’s insurance fund fraud

In a shocking revelation, former FTX Chief Technology Officer Gary Wang has accused the cryptocurrency exchange FTX of using concealed Python code to distort the reported value of its insurance fund, known as the “Backstop Fund.” This fund is intended to safeguard users against substantial losses during significant liquidation events.

During his testimony on October 6, Wang disclosed that FTX’s claim of having a $100 million insurance fund in 2021 was false and did not actually contain any FTX tokens (FTT), as had been asserted. Instead, the publicly displayed figure was allegedly derived by multiplying the daily trading volume of the FTX token by a random number, close to 7,500.

When confronted with evidence, including tweets and public statements about the fund’s value, Wang unequivocally stated that the reported amount was inaccurate, saying, “No.” He clarified that there were no FTT tokens in the insurance fund, only a USD value, and the figure did not align with the data in the database.

An exhibit presented during the October 6 trial purportedly showed the hidden code responsible for generating the reported size of the “Backstop Fund” or public insurance fund. FTX had regularly touted the value of this fund on its website and social media as a safeguard against rapid market fluctuations. However, Wang’s testimony suggested that the fund often fell short of covering significant losses.

Wang provided an example from 2021 when a trader exploited a vulnerability in FTX’s margin system, resulting in a massive loss of hundreds of millions of dollars for the exchange. When Sam Bankman-Fried, FTX’s founder, realized that the insurance fund was nearly depleted, Wang claimed he was instructed to shift the losses to Alameda Research in an attempt to conceal them. Alameda’s balance sheets were believed to be more private compared to FTX’s.

Furthermore, Wang alleged that Bankman-Fried directed him and Nishad Singh to implement an “allow_negative” balance feature in FTX’s code, granting Alameda Research nearly unlimited liquidity for trading on the crypto exchange.

In a prior development, Wang, who has already admitted guilt for all charges against him, including wire fraud, commodities fraud, and securities fraud, implicated himself, Sam Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX director of engineering Nishad Singh in these fraudulent activities.

The accusations by Wang raise significant concerns about transparency and integrity within the cryptocurrency industry and highlight the importance of regulatory oversight in ensuring trust and credibility in digital asset markets.