In a shocking revelation, former FTX Chief Technology Officer Gary Wang testified on October 6 that the cryptocurrency exchange FTX had used hidden Python code to falsely represent the value of its insurance fund, which was designed to protect users from losses during large liquidation events.
Wang’s testimony exposed that FTX’s claimed $100 million insurance fund in 2021 was entirely fabricated and did not contain any of the exchange’s FTX tokens (FTT), as publicly stated. Instead, the reported figure was calculated by multiplying the daily trading volume of the FTX Token by a random number close to 7,500.
When confronted with this information during the trial, Wang unequivocally confirmed that the amount was inaccurate, 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.”
FTX’s insurance fund, which was prominently displayed on its website and social media, was intended to provide a safety net for users in the event of significant and sudden market fluctuations. However, according to Wang’s testimony, the fund often fell short of covering substantial losses.
In 2021, for instance, a trader exploited a bug in FTX’s margin system, resulting in massive losses amounting to hundreds of millions of dollars for the exchange. When it became apparent that the insurance fund was nearly depleted, Wang claimed that he was instructed by FTX CEO Sam Bankman-Fried to shift the losses to Alameda Research, an affiliated entity, in an attempt to conceal the losses due to Alameda’s more private balance sheets.
In addition to exposing the alleged fraudulent nature of FTX’s insurance fund, Wang also asserted that Bankman-Fried directed him and Nishad Singh to implement an “allow_negative” balance feature in FTX’s code. This feature allowed Alameda Research to trade with virtually unlimited liquidity on the exchange.
Gary Wang, who had already pleaded guilty to wire fraud, commodities fraud, and securities fraud, shared that these illegal activities were committed in collaboration with Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX Director of Engineering Nishad Singh.
This testimony casts a dark shadow over FTX and raises serious questions about the integrity and transparency of cryptocurrency exchanges, further underscoring the need for robust regulation and oversight within the crypto industry.
