- I think that what a lot of people are struggling with here
is that, you know, you were an MIT physics major.
- Yep.
- You are, by all accounts, a very smart guy.
How is it possible that you overlooked this
more than $5 billion problem?
- I ask myself a lot how I made a series of mistakes
that seem, they don't just seem dumb,
they seem like the type of mistakes I could see myself
having ridiculed someone else for having maked,
the kind of mistakes that I would've considered myself
to have been above.
(tense music)
- As we've learned about what happened
over the past few weeks,
we've learned that there were some issues involving
where customer funds were put for FTX
and some accounting issues.
Can you walk us through what the problem was on that side?
- Right, you rewind to 2019, 2020.
FTX didn't have bank accounts, and that was because as
a global crypto exchange at the time,
almost none of them were able to get,
you know, global banking.
Some customers still wanted to onboard
fiat currencies though.
You know, FTX was maintaining cryptocurrency wallets
but not banking accounts, and so some of them
would wire money to Alameda and then asked
to be credited on their FTX account.
(tense music)
- How much of this customer money was wired
to the Alameda bank accounts?
- I don't have the numbers in front of me
but my estimation is, I think more than half.
- More than half.
- More than half of Alameda's total position
came via that method.
- So how many billions of dollars are we talking about,
at least ballpark?
- I think north of five.
- And so this was actually US dollars that people,
customers transferred to Alameda bank accounts.
- Yeah.
- And they were credited for it on FTX.
- Yeah, that's right.
- So more than $5 billion were transferred
into these Alameda bank accounts.
- Yep.
- It was then credited so that customers saw
that they had that balance
on their screens. - [Sam] Yep.
- What actually happened to the dollars
sitting in those bank accounts?
- One phrasing of it one could use would be to say
that Alameda effectively sent those dollars
from its FTX account to the user,
but that's a ledger transfer of course.
Outside of that, the answer is they were wired to Alameda.
I can only speculate about what happened after that.
- So you don't know what happened to those $5 billion?
- They were, I mean, they were wired to Alameda.
I wasn't running Alameda, but I can now go back
and take a guess at what, you know,
where they were ultimately spent or used or something,
but dollars are fungible with each other, and so it's not
like this $1 bill over here that you can trace through
from start to finish.
What you get is more just omnibus pots
of assets of various forms.
(tense music)
- Was there double counting going on?
- There was not double counting from FTX financials.
FTX financials were correctly, effectively debiting
this amount from total customer balances on FTX.
- So let's say Bob wires $100 to one of
these Alameda bank accounts.
Bob checks his FTX screen.
FTX has credited his account.
- [Sam] That's right.
- That says he's got $100.
- Yep.
- But behind the scenes, Alameda goes
and does something with that money.
- Yeah, Alameda has negative one, was it $100 that?
- $100, yeah.
- Yeah, yeah.
You know, Alameda then should have negative $100 on FTX,
right, because effectively, or at least that would be
one way to mechanic this, right, would be Bob sends
to Alameda over here off of FTX through wire transfer,
then on FTX, Alameda sends to Bob,
but the whole key there is you need to keep track
of that negative Alameda piece, of the fact
that Alameda is crediting other people.
Thus, that should be debiting from the funds
that they have on FTX.
- So this problem developed in which $5 billion,
more than $5 billion of user funds was sent to Alameda
and it was not properly seen in the systems.
It made Alameda's position seem larger.
- Less larger than it was.
- You only became aware at the beginning of November.
- I don't remember the exact date,
but it is somewhere around there, yeah.
I was surprised at what happened
when you added those numbers together.
I don't know exactly when that notion became so large,
that wire transfer piece.
I think it was surprisingly recently,
given that it was, because this was
a sort of legacy system, right?
We transitioned away from this system over time,
but I think that some people just kept wiring
to Alameda anyway, even after we had built out
our own payment networks and removed any traces
of that old pathway, and so I think it was maybe
surprisingly recently that a lot of that happened as well.
- Was Alameda using this money that came in to that account
as part of its collateral on FTX?
- I don't, not to my knowledge, but I'm not sure.
- But that is possible that that was how it was being used.
- I don't know what they, you know, what they did
with which pieces of assets and given that dollars
are fungible with each other at the end of the day,
I'm not sure it's even well defined to talk about
whether it was those dollars or other dollars
that were sent somewhere.
- But if a dollar went in.
- Yep.
- To one of those Alameda bank accounts.
- Yep.
- Then it would've become part of the customer's
margin position and part of Alameda's margin position.
- It would've, if it had gone to an Alameda bank account
then it would become part of the customer's collateral
on FTX, right, and it would've increased
Alameda's margin position on FTX effectively.
(tense music)
- I wanted to ask about FTX terms of use.
- Yep.
- They say that you control the digital assets
held in your account.
They can't be loaned out, except there's also another part
of the terms of use that talk about margin trading.
- Yep.
- In which there is actually language that says,
your money could be loaned out.
- Right.
- And it could disappear if somebody's trading goes bad.
- Right.
- On FTX, did you have to opt in to do margin trading?
- So for the peer-to-peer borrow lending
order book, you did, yes.
- How many people and how much money was actually in that?
- I don't know exactly off the top of my head.
I think it was, I wanna say,
eight or $10 billion at the peak.
I don't know what it is today.
- Were you sweeping people into margin trading
and allowing their collateral to be loaned out?
- I honestly, off the top of my head, I don't know exactly
what procedures we used to determine whether an account was,
you know, doing margin trading or,
I do remember, you know, a way that people could have opted
into it, but I don't know off the top of my head.
- Was there a violation of the terms of use?
- I don't know of a violation of the terms of use.
I don't know every line of the terms of use.
I can't confidently say there wasn't,
but I don't know of one.
(tense music)
- In some of the court filings, the new head of FTX
has said that there was a secret exemption for Alameda
from the normal auto-liquidation protocols,
which some people have called a backdoor.
- Right.
- Is, can you tell us about this secret exemption?
- I don't know exactly what was being referred to there.
I have, that has not been communicated to me
beyond the public statements, nor was I
consulted or asked on that.
So I can only speculate about what
was being referred to there.
My guess is that that may have been referring
to wires sent to Alameda, I'm not sure.
I, it may, I, yeah, I can't speculate on exactly what,
what he was referring to there.
- But could Alameda be auto-liquidated
like any other customer?
- I don't, again have access to all this right now.
I believe that there was a system in place that I think
Alameda and some other accounts were using
which did have some liquidation policies,
but which were specific for larger positions.
I actually don't know the details of that.
These were things that I think like, account managers
and legal were working out together over the last year
and I was not deeply involved in that process.
I do think that the larger accounts did have some amount
of you know, extra margin capacity in some cases.
- So Alameda could take on riskier trades
than other FTX customers?
- I'm not sure, but I think there may have been cases
where at least they could take on larger positions.
- How is it that as a 90% owner of the firm
and founder of the firm who was close with the leadership,
you didn't know what was going on?
- The thing is, I was busy.
I was, you know, FTX was a full-time job.
It was more than a full-time job and I didn't have
enough brain cycles left to understand everything
going on at Alameda if I wanted to.
I also didn't want to because I was concerned
about conflicts of interest and I felt like it would be
inappropriate for me to be, you know, looped into,
you know, certainly to details of what was going on there.
It caused me to not dig in very much, to not try to engage
very much on what Alameda was doing.
It was a huge oversight, obviously, but, you know,
the honest answer is, I mean, obviously I should have been.
- Sam, what you've described sounds
at a minimum like gross negligence.
Obviously there are a lot of people there
who think that you committed outright fraud.
Do you expect to go to prison?
- I'm not focusing on that right now.
I don't think I, you know,
tried to commit fraud anywhere here.
I was trying to do the best I could.
Obviously that wasn't nearly as good as I thought it was,
but honestly it's not what I'm focusing on right now.
I don't, this is about the customers at the end of the day.
Like that's, there's one of me.
There are millions of them, and I don't think it's right
for me to be focusing on what happens to me here.
I think I should be focusing
on what can be done for customers.