Alameda Research has been allowed to exceed normal lending limits on the FTX exchange since its early days, Sam Bankman-Fried has said, in a concession that shows how the former billionaire’s trading shop enjoyed preferential treatment over clients years ago. the crypto crisis 2022.
In an interview with the Financial Times, the 30-year-old described the outstanding role Alameda played in the launch of the exchange in 2019 and how he had access to extremely high levels of loans from FTX from the start.
Bankman-Fried said that “when FTX was first started” Alameda had “fairly large limits” on borrowing from the exchange but “absolutely” wanted the trading firm to be subject to the same standards as clients another.
Asked if Alameda still had more limitations than other clients, he said: “I think that might be true.” He did not specify how much larger Alameda’s limits were than those of other clients.
FTX and Alameda publicly represented themselves as separate entities to avoid the perception of conflicts of interest between the exchange, which processed client deals worth billions of dollars a month before it collapsed, and proprietary trading firm Bankman-Fried.
Bankman-Fried’s comments shed light on longstanding special treatment for Alameda. The close ties between the firms and the large amount of loans Alameda made from FTX played a key role in the spectacular collapse of the exchange, once one of the largest crypto centers and valued at $32bn by investors including Sequoia and BlackRock .
Formerly one of the most respected figures in the digital asset industry, Bankman-Fried apologized for mistakes that left up to 1mn creditors facing huge losses on funds they had entrusted to FTX, but denied mis- intentionally use client assets.
Bankman-Fried said the origin of the large loan limits for Alameda was a result of the trading shop’s early role as a primary liquidity provider to FTX before it attracted other financial groups.
FTX, like other major offshore trading centres, dealt in a large number of derivatives which allowed traders to increase their bets using borrowed funds – but professional firms were usually required to execute the market effectively. ready
“If you scroll back to 2019 when FTX first started, at that point Alameda was 45 percent of the volume or something on the platform,” Bankman-Fried said. “It was basically a case of the Alameda account going out of its ability to take new positions which would leave risk issues for the platform because we didn’t have enough liquidity providers. I think he had quite a few limitations 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 going back on the trading firm’s treatment to ensure it was subject to the same limits on lending as other similar firms operating on the exchange.
FTX lent to traders so they could make big bets on crypto with only a small initial outlay, known as trading on margin. FTX’s large exposure to Alameda was a key cause of a financial crisis that left both companies with a weakened balance sheet of the trading firm.
Bankman-Fried has estimated that Alameda’s liabilities to FTX will be around $10bn by the time the two companies file for bankruptcy in November.
“From a size, from revenue, from a liquidity point of view, the exchange was effectively independent of Alameda. Obviously that was not true in terms of positions or balances on the center,” Bankman-Fried said.
John Ray, the veteran insolvency practitioner running FTX in bankruptcy, criticized his previous leadership for failing to keep Alameda and FTX separate. In court filings, he noted Alameda’s “confidential immunity from certain aspects of FTX.com’s auto-liquidation protocol.”
The automatic liquidation, or closure, of vessel positions was a key tenet of FTX’s risk management procedures and a central part of its proposals to change parts of US financial regulation. When normal client trading started to sink, FTX’s liquidation mechanism was meant to start draining the account’s margin to protect the center from individual trades that caused a loss for the exchange.
Bankman-Fried, however, said there could be a “liquidation delay” for Alameda and possibly other large traders. He said he was not “confident” about whether Alameda was subject to the same liquidation protocol as other traders on the exchange, and that the handling of the trading firm’s account was “in flux”.