FTX Staff Expose Alameda Backdoor Scandal Pre-Collapse

Key Points:

• FTX staff find a $65 billion Alameda backdoor months before crypto exchange collapse.
• Backdoor allowed Alameda to maintain negative balance, a privilege other users lacked.
• Revelations become central in FTX CEO’s ongoing criminal trial.

LedgerX stumbled upon a significant Alameda backdoor scandal within FTX’s affiliated trading firm, Alameda Research.

This discovery occurred several months before the dramatic collapse of the crypto exchange in November 2022, as reported by the Wall Street Journal, citing insider sources.

FTX Unearths Alameda’s $65B Backdoor Scandal

The Alameda backdoor scandal, previously buried in FTX’s systems, granted Alameda Research the ability to maintain a negative balance of up to a staggering $65 billion using customer funds—a privilege not extended to other FTX users. Ordinary users would automatically face liquidation if their balances fell into the red.

Upon uncovering this alarming issue, the employees promptly informed their division head, who subsequently discussed it with Nishad Singh, a prominent figure within FTX and an associate of former CEO Sam Bankman-Fried. Regrettably, the problem was never resolved, and, shockingly, the team member who raised concerns faced termination, according to the WSJ.

The situation further intensified as Sam Bankman-Fried’s criminal trial, related to alleged fraud at FTX, commenced in a New York federal court. The Alameda backdoor scandal became a focal point in the prosecution’s case against him.

Alameda Backdoor Revelation at Heart of FTX CEO’s Trial

The contentious Alameda backdoor scandal was initially found during a routine examination of FTX’s international platform code for compliance with stringent U.S. regulations. Jim Outen, an employee from LedgerX, highlighted the issue in a message to his superior in May 2022. LedgerX’s Chief Risk Officer, Julie Schoening, acknowledged the concerns and escalated them to Zach Dexter, head of LedgerX, who discussed the matter with FTX’s Director of Engineering, Nishad Singh.

Despite attempts to rectify the situation, the Alameda backdoor scandal loophole remained open. By August 2022, Julie Schoening had been terminated, allegedly due to “inappropriate messages” sent to colleagues. Some sources suggest these messages may have been doctored or taken out of context, while others believe her dismissal was related to her persistent identification of FTX’s risk management issues.

Schoening’s lawyer threatened legal action over her dismissal, leading to a reported $5 million settlement agreement that was pending at the time of the exchange’s collapse.

This revelation adds a new layer of complexity to the FTX scandal, as whistleblowers who threatened to expose alleged fraudulent behavior were occasionally compensated by the exchange. As the legal proceedings unfold, Sam Bankman-Fried faces multiple fraud charges that could result in a lengthy prison sentence, while Nishad Singh, who has already pleaded guilty to fraud, is expected to be a crucial prosecution witness, potentially linking him to the creation of the Alameda backdoor.

DISCLAIMER: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.