FTX Insurance Fund was Faked using Python Code
FTX's insurance fund, praised at $100M, was allegedly fabricated, lacking FTT tokens. Testimony reveals misleading practices and inadequate coverage for losses.
FTX's insurance fund was designed as a safety net, intended to protect user losses during significant liquidation events. Such funds are crucial for maintaining user trust, especially during volatile market conditions. Gary Wang, FTX's co-founder and former chief technology officer, delivered a testimony on Oct. 6, claiming that the publicly praised $100 million insurance fund in 2021 was, in fact, fabricated.
Contrary to public claims, the fund never held any of the exchange's FTX tokens (FTT). Instead, the displayed figure was allegedly derived by multiplying the daily trading volume of the FTX Token by an arbitrary number close to 7,500.
“For one, there is no FTT in the insurance fund. It’s just the USD number. And, two, the number listed here does not match what was in the database.”
Evidence presented during the trial showcased the alleged Python code used to generate the value of the "Backstop Fund" or public insurance fund. This code, according to the prosecution, simply multiplied the daily trading volume by a random number, painting a misleading picture of the fund's true value.
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
Wang's testimony suggested that the actual amount within the insurance fund was often inadequate to cover significant losses. A notable instance from 2021 highlighted a trader exploiting a bug in FTX's margin system, resulting in a loss of hundreds of millions of dollars for the exchange. Upon realizing the depletion of the insurance fund, Wang claimed he was instructed by Sam Bankman-Fried, FTX's founder, to shift the loss to Alameda, a move presumably aimed at concealing the loss due to Alameda's more private financial records.
Beyond the insurance fund controversy, Wang's testimony unveiled other questionable practices. Wang alleged that Bankman-Fried directed the implementation of an "allow_negative" balance feature in FTX's code. This feature purportedly allowed Alameda Research to trade with near-unlimited liquidity on the exchange.
On October 5th, Wang, who has previously entered guilty pleas for all charges filed against him, acknowledged his involvement in wire fraud, commodities fraud, and securities fraud alongside Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX director of engineering Nishad Singh.