Bankman-Fried’s Admission of Mistakes
Bankman-Fried, the disgraced founder of FTX, took to the stand in his landmark fraud case to testify about the events leading to this point. He stated his initial goal was to “build the best product on the market,” but ended up making numerous mistakes. He indicated that while he didn’t intentionally defraud customers, he acknowledged both small and large errors. However, he emphasized that the biggest mistake was the absence of a risk management team, which ultimately led to the downfall.
“A lot of people got hurt,” Bankman-Fried admitted.
Allegations and Defense Argument
In defense, Bankman-Fried’s legal team argued that Alameda Research, which acted as FTX’s primary market maker, only accounted for a small percentage of all orders in 2022, specifically 3%. They further highlighted FTX’s rapid growth and claimed that Alameda Research processed billions of dollars, requiring collateral. To secure a large line of credit, Bankman-Fried argued that Alameda Research was permitted to borrow from FTX’s exchange as long as they believed the risk was managed properly. They had implemented an automated risk engine, which they believed was superior to those used by other exchanges.
“By far, the biggest mistake was not having a risk management team,” Bankman-Fried concluded.
However, in 2020, they encountered an issue with the risk engine, causing a mass auto-deleveraging event. This event could have cost trillions of dollars had it not been corrected. In response, Bankman-Fried instructed the technical officer and head of engineering to develop a feature to prevent erroneous liquidation. This resulted in the creation of the “allow negative” coding and “delayed liquidation” process. Bankman-Fried, though, denied having intimate knowledge of exactly how these features worked.
FTX’s Handling of Customer Funds and Fiat Transfers
Bankman-Fried further testified that customer funds were stored together in an omnibus wallet, while FTX’s digital assets were kept separate. Additionally, he claimed that fiat transfers through the crypto exchange were processed via Alameda’s bank accounts. He made it clear that FTX did not have custody over these funds; Alameda did. The transfers were handled by a settlements team, comprising 5 to 10 individuals. However, Bankman-Fried admitted to not having a full understanding of the intricacies of the process at that time.
Bankman-Fried’s testimony will continue this afternoon as the case continues.
