This article from The Wall Street Journal suggests that what happened was more like “taking funds from customers with full knowledge” than like a mistake:
In a video meeting with Alameda employees late Wednesday Hong Kong time, Alameda CEO Caroline Ellison said that she, Mr. Bankman-Fried and two other FTX executives, Nishad Singh and Gary Wang, were aware of the decision to send customer funds to Alameda, according to people familiar with the video.
(See also this article by The New York Times, which describes the same video meeting.[1])
There are other signs of fraud. For example:
Reuters reports that FTX had a “backdoor” which “allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting other people, including external auditors,” according to their sources.
On November 10, the official FTX account on Twitter announced that FTX was ordered to facilitate Bahamian withdrawals by Bahamian regulators. Days later, the Securities Commission of the Bahamas claimed that that was a lie. As Scott Alexander put it, “this might have been a ruse to let insiders withdraw first without provoking suspicion.”
FTX’s legal and compliance team resigned very early in this. As Matt Levine pointed out in one of his articles about the debacle (https://archive.ph/OER98), this probably means that they were not aware of what was going on.
Prior to this, FTX and Alameda insisted that they were at “arm’s length” and that Alameda did not get preferential treatment at FTX. However, according to The New York Times’s sources, Alameda CEO Caroline Ellison “had been sitting within view of computers displaying [FTX]’s trading data,” despite Alameda being supposed to operate in a different office. Moreover, Mr. Bankman-Fried was also involved in Alameda, according to the NYT, “contributing to the decision-making on big trades.”
Meanwhile, at a meeting with Alameda employees on Wednesday, Ms. Ellison explained what had caused the collapse, according to a person familiar with the matter. Her voice shaking, she apologized, saying she had let the group down. Over recent months, she said, Alameda had taken out loans and used the money to make venture capital investments, among other expenditures.
Around the time the crypto market crashed this spring, Ms. Ellison explained, lenders moved to recall those loans, the person familiar with the meeting said. But the funds that Alameda had spent were no longer easily available, so the company used FTX customer funds to make the payments. Besides her and Mr. Bankman-Fried, she said, two other people knew about the arrangement: Mr. Singh and Mr. Wang.
I’m leaning toward this explanation too. But these SBF tweets are probably meant to suggest something like the following:
Alameda used the standard spot margin lending that anyone can use to borrow the $10b from users who explicitly opted into this feature.
Alameda’s collateral dropped in value and people withdrew from FTX.
The liquidation engine couldn’t close the enormous position in time, and the backstop liquidity providers couldn’t handle it either.
FTX, for the first time, had to do a clawback – something that they try hard to avoid but reserve the right to do.
All in all that seems unlikely to me. There’s this talk of a backdoor to hide transactions from accounting and auditors, and the spot margin approach would’ve generated interest payments to countless users, which would’ve been hard to hide. (But maybe that’s telephone game, and the backdoor is simply the invite-only backstop liquidity provider program or whatever. Seems unlikely though.)
But, at least without some complex backdoor, such an enormous increase in demand for lending would’ve increased the interest rates, and the total size that is lent out is also public.
Here’s an aggregation of the total size in USD and the size-weighed average of the interest rates across some 16 major coins over time. (Pulled from my private copy of the data.)
The interst rate is a bit spikey, but nothing major, and the total size hovers around $4–5 billion. And additional $10 billion would be obvious as an enormous step up by ~ 3x. Plus, when I lent out USD, I was typically immediately matched with borrowers, indicating that the lending is the bottleneck for USD stablecoins. So it might not even have been possible to borrow $10 billion. That doesn’t hold for BTC and ETH though, where there were (I think) more lenders than borrowers.
I’ve cut off the last few days when people started withdrawing because the interst went up a lot. (I would’ve had to use log scale to keep the usual fluctuations in the interest rates visible.)
This article from The Wall Street Journal suggests that what happened was more like “taking funds from customers with full knowledge” than like a mistake:
(See also this article by The New York Times, which describes the same video meeting.[1])
There are other signs of fraud. For example:
Reuters reports that FTX had a “backdoor” which “allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting other people, including external auditors,” according to their sources.
On November 10, the official FTX account on Twitter announced that FTX was ordered to facilitate Bahamian withdrawals by Bahamian regulators. Days later, the Securities Commission of the Bahamas claimed that that was a lie. As Scott Alexander put it, “this might have been a ruse to let insiders withdraw first without provoking suspicion.”
FTX’s legal and compliance team resigned very early in this. As Matt Levine pointed out in one of his articles about the debacle (https://archive.ph/OER98), this probably means that they were not aware of what was going on.
Prior to this, FTX and Alameda insisted that they were at “arm’s length” and that Alameda did not get preferential treatment at FTX. However, according to The New York Times’s sources, Alameda CEO Caroline Ellison “had been sitting within view of computers displaying [FTX]’s trading data,” despite Alameda being supposed to operate in a different office. Moreover, Mr. Bankman-Fried was also involved in Alameda, according to the NYT, “contributing to the decision-making on big trades.”
Key section:
I’m leaning toward this explanation too. But these SBF tweets are probably meant to suggest something like the following:
Alameda used the standard spot margin lending that anyone can use to borrow the $10b from users who explicitly opted into this feature.
Alameda’s collateral dropped in value and people withdrew from FTX.
The liquidation engine couldn’t close the enormous position in time, and the backstop liquidity providers couldn’t handle it either.
FTX, for the first time, had to do a clawback – something that they try hard to avoid but reserve the right to do.
All in all that seems unlikely to me. There’s this talk of a backdoor to hide transactions from accounting and auditors, and the spot margin approach would’ve generated interest payments to countless users, which would’ve been hard to hide. (But maybe that’s telephone game, and the backdoor is simply the invite-only backstop liquidity provider program or whatever. Seems unlikely though.)
But, at least without some complex backdoor, such an enormous increase in demand for lending would’ve increased the interest rates, and the total size that is lent out is also public.
Here’s an aggregation of the total size in USD and the size-weighed average of the interest rates across some 16 major coins over time. (Pulled from my private copy of the data.)
The interst rate is a bit spikey, but nothing major, and the total size hovers around $4–5 billion. And additional $10 billion would be obvious as an enormous step up by ~ 3x. Plus, when I lent out USD, I was typically immediately matched with borrowers, indicating that the lending is the bottleneck for USD stablecoins. So it might not even have been possible to borrow $10 billion. That doesn’t hold for BTC and ETH though, where there were (I think) more lenders than borrowers.
I’ve cut off the last few days when people started withdrawing because the interst went up a lot. (I would’ve had to use log scale to keep the usual fluctuations in the interest rates visible.)