Former FTX executive explains how the exchange’s terms of service destroys SBF’s defense

Former FTX CEO Sam Bankman-Fried may attempt to overwhelm the jury with intricate details regarding the operation of his exchange’s margin systems, but a former senior employee at the exchange doubts that the facts will support the former billionaire’s defense.

Zane Tackett, whose crypto career has encompassed FTX, trading firm B2C2, and exchange operator Bitfinex, joined The Scoop this week to discuss Bankman-Fried’s ongoing criminal trial, which began on Tuesday. The co-founder of the now-bankrupt FTX and Alameda Research has entered a plea of not guilty to several charges, including securities fraud and conspiracy to launder money. At the core of the case lies the question of whether Bankman-Fried unlawfully accessed customer funds or if severe mismanagement led to a financial collapse.

Tackett explained, “Sam’s going to essentially act as if he lacks understanding, but he’ll also try to overwhelm people with technicalities. I believe he’ll argue that it was simply a spot margin borrow — FTX clearly allowed for spot margin borrows. Then, he’ll delve into the intricacies of how this process worked and how Alameda could borrow because they had substantial collateral, throwing out big numbers like ‘we had $100 billion in collateral.’ He may also admit that our margining systems weren’t as robust as they should have been.”

In interviews following the exchange’s November 2022 collapse, Bankman-Fried stated that he did not “improperly” access customer deposits. Instead, he explained that the affiliated hedge fund had ample collateral on the exchange, allowing them to borrow, and a breakdown in the margin systems led to the collapse. However, media reports have suggested the existence of backdoors through which SBF and Alameda could effectively borrow an unlimited amount of funds. The Wall Street Journal even reported that some US-based employees of FTX discovered these backdoors months before the collapse.

The argument doesn’t make sense

Tackett argued that Bankman-Fried’s claim that the issue was related to spot margin borrows doesn’t make sense, considering that the exchange had a haircut system in place to prevent any single asset from posing a significant risk. He stated, “FTX was designed to mitigate the risk posed by large positions in a single asset. FTX doesn’t consider locked assets as collateral; your own systems treat them as having zero collateral value.”

He continued, “Moreover, the collateral contribution and requirements were designed in such a way that the larger a position is in a particular asset, the higher the collateral contribution haircut or the greater collateral requirement. If we calculate for the entire supply of FTT at $40 and Serum at around $1, you get $2.5 to $3 billion of collateral, even though the face value is $40.”

“You created these systems knowing there’s inherent risk in accepting face value for any coin in any size. You established a haircut system. However, when you borrowed assets, you didn’t apply the same margining system that you required everyone else to adhere to,” Tackett concluded. “It’s evident that he knew what he was doing.”

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