A core issue in the FTX collapse was FTX didn’t have its own bank account in the early days, so customers sent funds to related party Alameda, which should have been handed on to FTX. But instead, there was just an inter-company ledger entry. The figure for these transfers was said by former CEO Sam Bankman-Fried to be between $5 billion and $8 billion in various statements.
“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients. The public is owed a full accounting of the financial activities that may have led to the loss of billions in customer assets, and any role that Silvergate may have played in these losses,” wrote Senators Warren (Democrat), Marshall (Republican) and Kennedy (Republican).
The Senators also note that 90% of the bank’s deposits came from crypto firms as of the end of September. Both FTX and bankrupt BlockFi were clients.
Silvergate was requested to provide a “full accounting” of its relationship between FTX and Alameda by December 19. The bank’s stock price is down 6.7% today, and 56% since FTX stopped withdrawals.
This topic is a core issue in the ability to prove whether FTX’s senior management behavior was criminal fraud or simply negligent, as Bankman-Fried is attempting to portray in his media tour.
Earlier today, we outlined a crucial unanswered question. The fact that the money was transferred to Alameda is only one half of the story. What has not been sufficiently answered is what happened after the inter-company ledger entries were made.
When clients who made these transfers to Silvergate subsequently placed FTX orders to buy cryptocurrencies such as Bitcoin and Ether, how did FTX buy the crypto without the money?
These cryptocurrencies showed up on the clients’ FTX accounts. So were these cryptocurrencies ever bought on the client’s behalf?
Hypothetically, if the accounting system was designed to make it appear as though the crypto was acquired when none was bought, that could be prima facie evidence of criminal fraud.