At least, it seems SBF lied or misled about Alameda having privileged access, because Alameda could borrow and go badly into the negative without posting adequate collateral and without liquidation, and this was something only Alameda was allowed to do, and was intentional by design. This seems like fraud, but doing this wouldn’t imply Alameda would borrow customers’ funds without consent and violate FTX’s terms of service, which seems like the bigger problem at the centre of the case.
Also, it seems their insurance fund numbers were fake and overinflated.
I haven’t followed the case that closely and there’s a good chance I’m missing something, but it’s not obvious to me that they intended to allow Alameda to borrow customer funds that weren’t explicitly and consensually offered for borrowing on FTX (according to FTX’s own terms of service). However, I’m not sure what happened to allow Alameda to borrow such funds.
By design, only assets explicitly and consensually in a pool for lending (or identical assets with at most the same total per asset, e.g. separately USD, Bitcoin, etc.) should be up for being borrowed. You shouldn’t let customers borrow more than is being consensually offered by customers.[1] That would violate FTX’s terms of service. It also seems like an obvious thing to code.
But they didn’t ensure this, so what could have happened? Some possibilities:
They just assumed the amounts consensually available for lending would always match or exceed the amounts being borrowed without actually checking or ensuring this by design, separately by asset type (USD, Bitcoin, etc..). As long as more was never borrowed, they would not violate their terms of service. That’s a bad design, but plausibly not fraud. But then they allowed Alameda to borrow more, and Alameda borrowed so much it dipped into customer funds without consent. They could have done this without knowing it, so again plausibly not fraud. Or, maybe they did do it knowingly, so it would be fraud. But I’m not sure the evidence presented supports intent beyond a reasonable doubt.
They assumed they had enough net assets to cover customer assets, even if they had to sell different assets from what customers thought they held. Or, they might have assumed they’d be able to cover whatever users would want to withdraw at a time, even if it meant not actually holding at least the same assets in the same or greater amounts, e.g. the same amount of USD or more, the same amount of Bitcoin or more, and so on. In either case, if they didn’t care that they would not actually hold the same assets separately in the same or greater respective amounts (e.g. separately enough USD, enough Bitcoin, etc.) than what the customers retained rights to, this would be against FTX’s terms of service, and it would seem they never really intended to honor their own terms of service, which looks like fraud.
Which assets are actually borrowed and lent don’t need to match exactly. If A wants to lend Bitcoin and B wants to borrow USD, FTX could take A’s Bitcoin, sell it for USD and then lend the USD to B. That would be risky in case the Bitcoin price increased, but A and B could assume this risk or FTX could use an insurance fund or otherwise disperse the risk across funds opted into lending/borrowing, depending on the terms of service. This needn’t dip into other customer funds without consent. I don’t know if FTX did this.
At least, it seems SBF lied or misled about Alameda having privileged access, because Alameda could borrow and go badly into the negative without posting adequate collateral and without liquidation, and this was something only Alameda was allowed to do, and was intentional by design.
I touched on this in my post and added a little more detail in the final paragraph of my reply to Nathan, but to expand further:
As far as I can tell, when SBF denied that Alameda had privileged access, the context was addressing concerns about potential front running. In the famous 2019 tweet, well, you can read the thread and judge the context for yourself. The prosecution also quoted an email where SBF claims the context was front running[1] and they implied that SBF told Zeke Faux that “Alameda played by the same rules as other traders” or words to that effect but, again, SBF claims the context was front running.[2]
Alameda was allowed to go negative without auto-liquidation in direct response to an event that nearly erroneously liquidated Alameda, which means that the losses were nearly passed on to other customers. It was in everyone’s interest for backstop liquidity providers to be granted special privileges and SBF was confident that he would not shoot himself in the foot by allowing a backstop liquidity provider that he owned to intentionally abuse such freedoms.
SBF claims that he did not specify exactly how he wanted to avoid such an event, he just directed Gary and Nishad to code something (like an alert or a delay[3]) that would prevent such a disaster from ever occurring. Gary wouldn’t/couldn’t say whether it was himself or SBF who chose the $65b figure.[4]
Also, it seems their insurance fund numbers were fake and overinflated.
It’s plausible to me that this case is similar to that of the exemption from posting collateral. SBF knew that he would contribute his own funds in an emergency—as indeed he did—but perhaps he didn’t expect anyone to believe that and so decided to use a more believable fluctuating “randomish number around 7,500” instead.
In fact I think there’s been a few times when the effective altruists have treated their personal funds as available to support Alameda or FTX if needed, while practically everyone else (having never encountered the strange incentives of a committed effective altruist before) has thought that’s bull. The sacrifices SBF made to try to make customers whole inclines me to think it was rational for him to at least treat his own money as at the disposal of Alameda/FTX as needed.
I haven’t followed the case that closely...I’m not sure what happened to allow Alameda to borrow such funds...It also seems like an obvious thing to code.
But they didn’t ensure this, so what could have happened?
I went down a bit of a rabbit hole with this trial and read all or nearly all of the transcripts at least once. My understanding is that the $8b fiat@ liability that I discuss in 1. was a genuine error and the remainder, which I discuss in 3., was indeed within the bounds of the margin lending program. To expand on the $8b fiat@ liability:
FTX initially used Alameda as one of several payment processors to accept customer fiat funds until they were able to get their own bank account. None of the witnesses seem to find this in itself objectionable.
For some reason, Caroline treated this as on loan to Alameda to do with as she pleased and assumed that someone at FTX was tracking the liability. SBF on the other hand, assumed these funds were either being held by Alameda and readily accessible by FTX or were being immediately transferred to FTX. In the trial SBF claimed to have thought that if Alameda had been spending the deposits, they would have at least kept track of these liabilities on their main FTX account (known as “info@”) where they tracked the rest of their liabilities to FTX.
SBF was not heavily involved in the process of setting up Alameda as a payment processor in this way and even claims that staff asked him to stop asking too many questions about it because it was distracting. SBF, Caroline, Gary and Nishad all learnt in June 2022 that Alameda probably somehow had an additional $8b liability to FTX (after initially thinking it was $16b), but it wasn’t until September/October that they got to the bottom of why and SBF finally understood what had happened.
“Q. And I want to direct your attention to the email at the bottom from Rob Creamer at genevatrading.com. And do you see where he wrote, “One issue that was brought up to me individually is the role of Alameda in the ecosystem and how conflicts of interest are managed.” Do you see that? A. Yup. Q. Does this email anywhere mention front running? A. No. He had mentioned it to me in person.”
“Q. Now do you remember telling Zeke Faux in early 2022 that Alameda played by the same rules as other traders? A. Not in that wording, no. Q. So you don’t recall that. A. No. Q. Do you recall telling him that in other wording? A. I recall saying that Alameda wasn’t front running other customers, that its trading access was like other customers.”
“Q. Okay. But the goal of doing this was simply to get to a point where it wouldn’t——it wouldn’t impact the trading activity, right? A. It would not impact Alameda placing orders on the exchange for market making. Q. In its role as a market maker, right? A. Yes. Q. And you don’t recall who picked the 65 billion number, do you? A. It was——I mean, it was one of the two of us.”
At least, it seems SBF lied or misled about Alameda having privileged access, because Alameda could borrow and go badly into the negative without posting adequate collateral and without liquidation, and this was something only Alameda was allowed to do, and was intentional by design. This seems like fraud, but doing this wouldn’t imply Alameda would borrow customers’ funds without consent and violate FTX’s terms of service, which seems like the bigger problem at the centre of the case.
Also, it seems their insurance fund numbers were fake and overinflated.
https://www.citationneeded.news/the-fraud-was-in-the-code/
I haven’t followed the case that closely and there’s a good chance I’m missing something, but it’s not obvious to me that they intended to allow Alameda to borrow customer funds that weren’t explicitly and consensually offered for borrowing on FTX (according to FTX’s own terms of service). However, I’m not sure what happened to allow Alameda to borrow such funds.
By design, only assets explicitly and consensually in a pool for lending (or identical assets with at most the same total per asset, e.g. separately USD, Bitcoin, etc.) should be up for being borrowed. You shouldn’t let customers borrow more than is being consensually offered by customers.[1] That would violate FTX’s terms of service. It also seems like an obvious thing to code.
But they didn’t ensure this, so what could have happened? Some possibilities:
They just assumed the amounts consensually available for lending would always match or exceed the amounts being borrowed without actually checking or ensuring this by design, separately by asset type (USD, Bitcoin, etc..). As long as more was never borrowed, they would not violate their terms of service. That’s a bad design, but plausibly not fraud. But then they allowed Alameda to borrow more, and Alameda borrowed so much it dipped into customer funds without consent. They could have done this without knowing it, so again plausibly not fraud. Or, maybe they did do it knowingly, so it would be fraud. But I’m not sure the evidence presented supports intent beyond a reasonable doubt.
They assumed they had enough net assets to cover customer assets, even if they had to sell different assets from what customers thought they held. Or, they might have assumed they’d be able to cover whatever users would want to withdraw at a time, even if it meant not actually holding at least the same assets in the same or greater amounts, e.g. the same amount of USD or more, the same amount of Bitcoin or more, and so on. In either case, if they didn’t care that they would not actually hold the same assets separately in the same or greater respective amounts (e.g. separately enough USD, enough Bitcoin, etc.) than what the customers retained rights to, this would be against FTX’s terms of service, and it would seem they never really intended to honor their own terms of service, which looks like fraud.
Which assets are actually borrowed and lent don’t need to match exactly. If A wants to lend Bitcoin and B wants to borrow USD, FTX could take A’s Bitcoin, sell it for USD and then lend the USD to B. That would be risky in case the Bitcoin price increased, but A and B could assume this risk or FTX could use an insurance fund or otherwise disperse the risk across funds opted into lending/borrowing, depending on the terms of service. This needn’t dip into other customer funds without consent. I don’t know if FTX did this.
I touched on this in my post and added a little more detail in the final paragraph of my reply to Nathan, but to expand further:
As far as I can tell, when SBF denied that Alameda had privileged access, the context was addressing concerns about potential front running. In the famous 2019 tweet, well, you can read the thread and judge the context for yourself. The prosecution also quoted an email where SBF claims the context was front running[1] and they implied that SBF told Zeke Faux that “Alameda played by the same rules as other traders” or words to that effect but, again, SBF claims the context was front running.[2]
Alameda was allowed to go negative without auto-liquidation in direct response to an event that nearly erroneously liquidated Alameda, which means that the losses were nearly passed on to other customers. It was in everyone’s interest for backstop liquidity providers to be granted special privileges and SBF was confident that he would not shoot himself in the foot by allowing a backstop liquidity provider that he owned to intentionally abuse such freedoms.
SBF claims that he did not specify exactly how he wanted to avoid such an event, he just directed Gary and Nishad to code something (like an alert or a delay[3]) that would prevent such a disaster from ever occurring. Gary wouldn’t/couldn’t say whether it was himself or SBF who chose the $65b figure.[4]
It’s plausible to me that this case is similar to that of the exemption from posting collateral. SBF knew that he would contribute his own funds in an emergency—as indeed he did—but perhaps he didn’t expect anyone to believe that and so decided to use a more believable fluctuating “randomish number around 7,500” instead.
In fact I think there’s been a few times when the effective altruists have treated their personal funds as available to support Alameda or FTX if needed, while practically everyone else (having never encountered the strange incentives of a committed effective altruist before) has thought that’s bull. The sacrifices SBF made to try to make customers whole inclines me to think it was rational for him to at least treat his own money as at the disposal of Alameda/FTX as needed.
I went down a bit of a rabbit hole with this trial and read all or nearly all of the transcripts at least once. My understanding is that the $8b fiat@ liability that I discuss in 1. was a genuine error and the remainder, which I discuss in 3., was indeed within the bounds of the margin lending program. To expand on the $8b fiat@ liability:
FTX initially used Alameda as one of several payment processors to accept customer fiat funds until they were able to get their own bank account. None of the witnesses seem to find this in itself objectionable.
For some reason, Caroline treated this as on loan to Alameda to do with as she pleased and assumed that someone at FTX was tracking the liability. SBF on the other hand, assumed these funds were either being held by Alameda and readily accessible by FTX or were being immediately transferred to FTX. In the trial SBF claimed to have thought that if Alameda had been spending the deposits, they would have at least kept track of these liabilities on their main FTX account (known as “info@”) where they tracked the rest of their liabilities to FTX.
SBF was not heavily involved in the process of setting up Alameda as a payment processor in this way and even claims that staff asked him to stop asking too many questions about it because it was distracting. SBF, Caroline, Gary and Nishad all learnt in June 2022 that Alameda probably somehow had an additional $8b liability to FTX (after initially thinking it was $16b), but it wasn’t until September/October that they got to the bottom of why and SBF finally understood what had happened.
“Q. And I want to direct your attention to the email at the bottom from Rob Creamer at genevatrading.com. And do you see where he wrote, “One issue that was brought up to me individually is the role of Alameda in the ecosystem and how conflicts of interest are managed.” Do you see that? A. Yup. Q. Does this email anywhere mention front running? A. No. He had mentioned it to me in person.”
“Q. Now do you remember telling Zeke Faux in early 2022 that Alameda played by the same rules as other traders? A. Not in that wording, no. Q. So you don’t recall that. A. No. Q. Do you recall telling him that in other wording? A. I recall saying that Alameda wasn’t front running other customers, that its trading access was like other customers.”
Bloomberg: “[SBF] says he told Wang and Singh ‘maybe it would be an alert or a delay.’”
“Q. Okay. But the goal of doing this was simply to get to a point where it wouldn’t——it wouldn’t impact the trading activity, right? A. It would not impact Alameda placing orders on the exchange for market making. Q. In its role as a market maker, right? A. Yes. Q. And you don’t recall who picked the 65 billion number, do you? A. It was——I mean, it was one of the two of us.”