FTX allowed trading affiliate Alameda to borrow unlimited funds

FTX allowed affiliated trading firm Alameda Research to borrow funds from the cryptocurrency exchange “without any effective limits”, according to its court-appointed chief executive, highlighting the depth of ties between the digital asset groups that failed last month.

John Ray III provided new details on FTX and Alameda in written testimony published before a congressional hearing scheduled for Tuesday into the crypto exchange’s collapse. Ray was appointed to replace FTX founder Sam Bankman-Fried, who is also scheduled to testify before the US House financial services committee.

The opaque relationship between Bahamas-based FTX and Alameda lies at the centre of the corporate disaster that led to the demise of an exchange once valued at $32bn, legal probes and potential losses for millions of creditors including retail investors.

Bankman-Fried, who started FTX and Alameda, had long said the two groups operated independently. Since their collapse he has said he never tried to commit fraud but has admitted to mistakes and management failures.

Ray, who was appointed by a judge to manage the FTX bankruptcy, said that customer assets from FTX’s international exchange commingled with assets from the Alameda trading platform. “Second, Alameda used client funds to engage in margin trading which exposed customer funds to massive losses,” his testimony said.

He added FTX’s US arm, which had been set up as an entity separate from the international exchange, “was not operated independently”. This made it necessary to place both entities into US bankruptcy in order to prevent a “‘run on the bank’ at FTX US”, Ray said.

The FTX group of businesses ultimately collapsed because of “the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals”, Ray said.

The executives “failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets”, he added.

Ray, who oversaw the bankruptcy of Enron, listed several “unacceptable management practices”. These included access by senior executives access to systems that stored customer assets, “without security controls to prevent them from redirecting those assets”.

He added that private keys accessing hundreds of millions of dollars in crypto assets were used without controls or encryption, and there was a “lack of complete documentation” for nearly 500 investments made with FTX funds.

Ray added FTX “went on a spending binge in late 2021 through 2022”, during which about $5bn was spent on investments which now “may be worth only a fraction of what was paid for them”.

FTX insiders received loans and payments of more than $1bn from the company, he noted.

“We are, in many respects, starting from near-zero in terms of the corporate infrastructure and record keeping that one would expect to find in a multibillion-dollar international business,” Ray said.