FTX bankruptcy attorney and new CEO John Ray spoke with the House Financial Services Committee on Friday to break down some of the inside details of the fallout from the trade.

Ray said Alameda Research used FTX client assets for margin trading, confirming a long-standing suspicion about the two companies that former boss Sam Bankman-Fried (SBF) has been hesitant to admit.

confirming fraud

during his Preliminary remarksRay said that while his investigation was still in an early stage, certain critical facts had already been clarified.

“First, client assets on FTX.com were mixed with assets on the Alameda trading platform,” he said. “That’s clear”.

“Second, Alameda used client funds to engage in margin trading, which exposed client funds to massive losses,” he added. As a market maker, Alameda had deployed funds on “various third-party exchanges” that were “inherently unsafe” and subject to limited market protections within those jurisdictions.

When asked about the governance ties between FTX and Alameda, Ray said there was virtually “no separation” between the entities, and no internal risk management controls. The entire FTX Group, which consists of more than 130 companies including FTX.com, FTX US, and Alameda, was “owned and controlled by Sam Bankman-Fried.”

While there was a “public distinction” between FTX and FTX US, Ray said that both companies’ crypto assets were hosted on the AWS system. Still, these were separate from Alameda’s assets, lending possible credibility to the Bankman-Fried strategy. previous affirmations that FTX US remains solvent.

Responding to the former billionaire’s claims about not making decisions on the Alameda government, Ray’s statements were much more skeptical.

“I will note that he owned 90% of Alameda. There is no distinction. Company owners could have free rein in all the silos.”

Contributing to FTX’s financial woes was a so-called “spend hug” in both 2021 and 2022, during which $5 billion was spent on business and investments. The company’s profligate spending on various sponsorships, a stadium and other promotional offers has been the subject of much criticism from rival exchange leaders, including Binance’s chang peng zhao and the one from kraken jesse powell.

The Bankman-Fried claims

Sam Bankman-Fried has avoided directly answering whether client assets were used for margin trading at Alameda Research, claiming that he “did not know” that there was any misuse of client funds.

However, it has fixed in previous interviews that client assets were treated with “fungibility” during the bank run on their exchange in early November. That means that clients who held digital assets on the exchange, which were guaranteed security under their exchange’s terms of service, were treated the same as assets used for futures and margin trading.

Bankman-Fried was supposed to appear at the congressional hearing alongside John Ray, but was arrested by Bahamian regulators on Monday. In his prepared remarks, he confirmed that FTX lacked a risk management team.

Featured image courtesy of Bloomberg.

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