Explosive testimony emerged on October 6 as Gary Wang, the former Chief Technology Officer (CTO) of crypto exchange FTX, accused the exchange of utilizing hidden Python code to deceive users about the true value of its insurance fund, known as the “Backstop Fund.”
Gary Wang Allegations of Fabricated Insurance Fund
In a damning revelation, Wang disclosed that FTX’s claim of having a $100 million insurance fund in 2021 was allegedly a fabrication. According to Wang’s testimony, the insurance fund never actually contained any of the exchange’s FTX tokens (FTT), as publicly stated.
Instead, they purportedly calculated the figure presented to the public by multiplying the daily trading volume of the FTX Token by a seemingly arbitrary number close to 7,500.
During the prosecution’s examination, they presented various public statements, including tweets and other sources, citing the value of the insurance fund and asked Wang if the stated amount was accurate. In response, Wang provided a succinct answer, saying, “No.”
Wang further elaborated, stating,
“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.”
Challenges with the FTX Insurance Fund
FTX designed its insurance fund with the intent to shield users from losses in the event of substantial and unexpected market swings. The exchange frequently touted the value of this fund on its website and through social media channels. However, according to Wang’s testimony, the actual amount within the fund often fell short of covering substantial losses.
Moreover, Wang cited a specific incident from 2021 when a trader exploited a bug in FTX’s margin system, resulting in massive losses totaling hundreds of millions of dollars for the exchange.
Allegations of Concealment
In a startling twist, Wang alleged that when Sam Bankman-Fried, the CEO of FTX, realized that the insurance fund was nearly depleted, he instructed Wang to have Alameda Research “take on” the loss.
They purportedly made this move in an attempt to obscure the loss because Alameda’s balance sheets were considered more private compared to FTX’s.
Further Revelations In FTX Case
Beyond the insurance fund controversy, Wang also claimed that Bankman-Fried instructed him and Nishad Singh to implement an “allow_negative” balance feature in FTX’s code. This feature allegedly granted Alameda Research near-unlimited liquidity for trading on the crypto exchange.
Furthermore, on the previous day, Wang, who has already pleaded guilty to multiple charges, including wire fraud, commodities fraud, and securities fraud, acknowledged his involvement with Sam Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX Director of Engineering Nishad Singh.