A report stated that FTX did not use multi-sig addresses, and instead stored the private keys to over $100 million worth of crypto in unencrypted plain text. The debtors claimed that they had to create their
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FTX, a cryptocurrency exchange founded by Sam Bankman Fried, collapsed in November 2022 and filed for Chapter 11 bankruptcy due to commingling user funds and holding billions of FTX tokens on its balance sheet.
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FTX’s use of Amazon Web Services to store private keys has raised concerns about the security of the company’s crypto assets. FTX reportedly kept virtually all crypto assets in hot wallets, which are connected to the internet and are susceptible to being compromised by bad actors.
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A report accuses the individuals in charge of FTX and its sister company Alameda Research of prioritizing their own profits over the welfare of their clients. The report suggests that the companies should be investigated by the appropriate regulatory bodies to ensure that they are operating within the law.
Sam Bankman Fried, the founder of FTX, has been in the headlines lately due to ongoing legal proceedings related to his company’s collapse. The latest update on the trial involves FTX’s use of Amazon Web Services to store private keys, which has raised concerns about the security of the company’s crypto assets.
FTX is a cryptocurrency exchange founded by Sam Bankman Fried in 2019. At its peak, FTX was one of the largest cryptocurrency exchanges in the world, with a daily trading volume of over $10 billion. However, in November 2022, the company filed for Chapter 11 bankruptcy after it was revealed that it had been commingling user funds with its own and that Alameda Research, FTX’s trading desk, held billions of FTX tokens on its balance sheet.
The collapse of FTX has been attributed to a small group of inexperienced and unsophisticated individuals, according to John Ray III, the newly appointed CEO of FTX. Ray, who oversaw the liquidation of Enron, has been tasked with overseeing the restructuring of FTX and recovering customer funds.
In a recent court filing, Ray criticized FTX’s use of Amazon Web Services to store private keys. According to Ray, FTX “kept virtually all crypto assets in hot wallets,” which are connected to the internet and are susceptible to being compromised by bad actors. Cold wallets, on the other hand, are not connected to the internet and are therefore better protected from bad actors.
Ray’s report highlights the unauthorized transactions that drained $432 million worth of funds from FTX’s wallets the day after the company filed for bankruptcy. The report also notes that FTX did not use offline, air-gapped, encrypted, and geographically distributed laptops to secure crypto assets.
In 2019, founder and ex-CEO Bankman-Fried claimed on Twitter that FTX used a combination of hot and cold wallets. However, the recent court filing reveals that FTX did not make use of cold storage wallets and stored virtually all its crypto assets in hot wallets.
FTX employees reportedly did invoicing and expenses over Slack and used QuickBooks, consumer-level tax software, to handle its accounting. Ray criticized the use of QuickBooks, saying that it was not suitable for a multibillion-dollar company.
Ray’s report suggests that FTX and its affiliated companies misrepresented the amount of controls in place. Employees were reportedly instructed not to share information on the subject with regulators unless specifically requested. If asked, employees would claim that 70% of assets were held in cold storage. However, the report states that there was no evidence of a system to secure assets in cold storage, outside of Japan where it was a regulatory requirement.
FTX also did not use multi-sig addresses, instead storing the private keys to over $100 million worth of crypto in unencrypted plain text.
The debtors overseeing FTX’s bankruptcy have found that the company made little use of cold storage despite assertions that only a small proportion of assets were custodied in a hot wallet. The debtors noted that FTX stored private keys to its crypto wallets in a cloud computing environment leased from Amazon Web Services.
The debtors also found that FTX employees joked internally about their tendency to lose track of millions of dollars in assets. Bankman-Fried reportedly said that Alameda Research, FTX’s sister company, was “hilariously beyond any threshold of any auditor being able to even get partially through an audit.” According to the report, Alameda struggled to understand its own positions, “let alone hedging or accounting for them.”
The report accuses the individuals in charge of FTX and Alameda Research of prioritizing their own profits over the welfare of their clients. The authors of the report suggest that the companies should be investigated by the appropriate regulatory bodies to ensure that they are operating within the law.
FTX and Alameda Research have denied the allegations made in the report. In a statement, Sam Bankman-Fried, the CEO of FTX, said that the report contains “numerous errors and mischaracterizations” and that the companies are committed to providing a fair and transparent trading platform for their users. Bankman-Fried also pointed out that FTX has taken steps to improve its risk management practices and increase transparency in recent months.
Despite the denials from FTX and Alameda Research, the report has raised concerns about the lack of regulation in the cryptocurrency industry. Many experts have called for greater oversight of cryptocurrency exchanges to prevent abuses and protect investors.
The report also highlights the potential risks associated with algorithmic trading, which is becoming increasingly prevalent in the cryptocurrency industry. Algorithmic trading involves using computer programs to execute trades automatically, often at high speeds and with complex strategies. While this can be an effective way to generate profits, it also poses significant risks, particularly in volatile markets like cryptocurrency.
Overall, the report is a sobering reminder of the challenges facing the cryptocurrency industry as it continues to grow and mature. As more investors enter the market and more money flows into cryptocurrency exchanges, there is a growing need for greater transparency, accountability, and regulation to ensure that investors are protected and the market remains stable. While cryptocurrency has the potential to revolutionize the financial industry, it must also be subject to the same standards of oversight and regulation as traditional financial markets.
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