FTX's Secret Backdoor: How Billions In Customer Funds Were Allegedly Stolen

Insiders from the cryptocurrency exchange FTX FTT/USD revealed that prior to its downfall, certain U.S.-based staff members identified a concealed mechanism.

This mechanism, allegedly linked to Alameda Research, permitted the unauthorized withdrawal of billions in customer funds.

Despite these findings being reported to higher-ups within the company, no corrective action was taken, The Wall Street Journal reported.

This revelation comes ahead of the much-anticipated Benzinga's Future of Digital Assets conference scheduled for Nov. 14, where industry experts will discuss the future trajectory of digital currencies and the challenges they face.

The concealed mechanism, often referred to as the "backdoor," is now a focal point in the ongoing trial against FTX's former head, Sam Bankman-Fried, who faces charges of fraud in a New York federal court.

Prosecutors argued Bankman-Fried misappropriated FTX customer funds by secretly embedding "special features" in the platform's code.

This allowed Alameda Research, the crypto trading firm, unprecedented access to FTX's reserves, effectively using the exchange as a vast discretionary fund.

Interestingly, while regular users on FTX had safeguards preventing their balances from going negative, Alameda was exempt from such restrictions.

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This discrepancy was first noticed in the spring of 2022 by a team from LedgerX, a U.S. crypto-derivatives exchange acquired by FTX the previous year.

Julie Schoening, the chief risk officer of LedgerX, and her team discovered several concerning practices within FTX's risk management protocols.

Despite raising these concerns to FTX's leadership, no substantial action was taken.

By August 2022, Schoening was dismissed from her position, following allegations of inappropriate communication with colleagues.

Some insiders suggest that the real reason behind her termination was her persistent efforts to highlight FTX's risk management flaws.

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