In an October 6 deposition, Gary Wang, the former Chief Technology Officer (CTO) of cryptocurrency exchange FTX, made significant revelations about the exchange's practices regarding its insurance fund. FTX had claimed to possess a $100 million insurance fund for 2021, which was intended to protect users in the event of mass liquidations. However, according to Wang's testimony, this fund was not genuine, and it did not include any FTX tokens (FTT), as publicly stated.
Wang disclosed that the numbers presented to the public were not based on the actual assets held in the insurance fund. Instead, they were calculated by multiplying the daily trading volume of FTX tokens by a random number, approximately 7,500. When questioned by prosecutors, Wang categorically stated that these numbers were inaccurate.
During the trial, Wang provided evidence, including code allegedly used to determine the size of the "reserve fund" or public insurance fund. FTX's insurance fund is meant to safeguard users against losses during sudden and substantial market movements. This fund's value is regularly featured on the exchange's website and social media. However, Wang's testimony cast doubt on its effectiveness, suggesting that it often fell short of covering significant losses.
One illustrative example from 2021 involved a trader exploiting a vulnerability in FTX's margin system and taking a large position in MobileCoin. This led to FTX incurring losses amounting to hundreds of millions of dollars. When FTX's CEO, Sam Bankman-Fried, realized that the insurance fund was nearly depleted, Wang claimed that he was instructed to let Alameda Research "bear" the loss, allegedly to obscure these losses as Alameda's balance sheet was considered more confidential than FTX's.
Apart from revealing issues with FTX's insurance fund, Wang also asserted that Bankman-Fried encouraged him and Nishad Singh to implement an "allow negative" balance feature in FTX's code. This feature enabled Alameda Research to engage in trading on FTX with virtually unlimited liquidity on various cryptocurrency exchanges.
It's important to note that on October 5, Wang pleaded guilty to all charges against him, acknowledging his involvement in wire fraud, commodities fraud, and securities fraud alongside Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX engineering director Nishad Singh.
