Alameda Research was allowed to exceed normal borrowing limits on the FTX exchange since its early days, Sam Bankman-Fried has said, in a concession that illustrates how the former billionaire’s trading shop enjoyed preferential treatment over customers years before the 2022 crypto crisis.
In an interview with the Financial Times, the 30-year-old described the outsized role Alameda played in launching the exchange in 2019 and how it had access to exceptionally high levels of loans from FTX from the start.
Bankman-Fried said that “when FTX was first started”[ads1]; Alameda had “pretty big restrictions” on his borrowings from the exchange, but he “absolutely” wished he had held the trading firm to the same standards as other clients.
Asked if Alameda had continued to have larger limits than other clients, he said, “I think that might be true.” He did not specify how much larger Alameda’s boundaries were than other clients’.
FTX and Alameda publicly portrayed themselves as distinct entities to avoid the perception of conflicts of interest between the exchange, which processed billions of dollars of customer deals a month before the collapse, and Bankman-Fried’s proprietary trading firm.
Bankman-Fried’s comments shed light on prolonged special treatment for Alameda. The close ties between the firms and the large amount of Alameda loans from FTX played a key role in the spectacular collapse of the exchange, once one of the largest crypto venues and valued at $32 billion by investors including Sequoia and BlackRock.
Bankman-Fried, formerly one of the most respected figures in the digital asset industry, has apologized for mistakes that left 1 million creditors facing heavy losses on funds they entrusted to FTX, but has denied intentionally misappropriating clients’ assets.
Bankman-Fried said the origin of the large loan limits for Alameda came as a result of the trading shop’s early role as a main provider of liquidity on FTX before it attracted other financial groups.
FTX, like other major offshore trading venues, handled large volumes of derivatives that allowed traders to magnify their bets using borrowed funds – but professional firms are usually needed to keep the market running smoothly.
“If you flip back to 2019 when FTX first started, at that time Alameda was 45 percent of the volume or something on the platform,” Bankman-Fried said. “It was basically a situation where if Alameda’s account ran out of capacity to take on new positions, it would lead to risk issues for the platform because we didn’t have enough liquidity providers. I think it had pretty big limits because of that.”
By this year, he said, Alameda accounted for about 2 percent of trading volume and was no longer the main liquidity provider on the exchange. Bankman-Fried said he regrets not auditing the trading firm’s treatment to ensure it was subject to the same limits on borrowing as other similar firms operating on the exchange.
FTX lent to traders so they could bet big on crypto with only a small initial outlay, known as trading on margin. FTX’s large exposure to Alameda was a key reason why weakness in the trading company’s balance sheet caused a financial crisis that engulfed both companies.
Bankman-Fried estimated Alameda’s liabilities to FTX at about $10 billion when both companies filed for bankruptcy in November.
“From a volume, from a revenue, from a liquidity standpoint, the exchange was actually independent of Alameda. That obviously didn’t turn out to be true in terms of positions or balances at the venue,” Bankman-Fried said.
John Ray, the veteran insolvency practitioner running FTX in bankruptcy, has criticized his former management for not keeping Alameda and FTX separate. In court documents, he pointed to a “secret exemption for Alameda from certain aspects of FTX.com’s auto-liquidation protocol”.
Automatic liquidation, or closing, of souring positions was a central principle in FTX’s risk management procedures and a central part of the proposals to change parts of US financial regulation. When a typical customer’s trade began to go under water, FTX’s liquidation mechanism was intended to begin draining the account’s margin to protect the venue from a single trade causing a loss to the exchange.
However, Bankman-Fried said there “may have been a liquidation delay” for Alameda and possibly other major traders. He said he was “not sure” whether Alameda was subject to the same liquidation protocol as other traders on the exchange and that the processing of the trading firm’s account was “in flux”.
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