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From Code to Court: Role of Source Code in Detecting the FTX Fraud

By Kaushik Mitra, Principal Consultant, UnitedLex

In the current digital world, where financial transactions are enveloped in layers of code, the integrity of the underlying code of financial platforms is often taken for granted. However, beneath the sleek User Interface (UI) of these platforms, lies a vast ocean of code that operates like the constitution of the platform, expected to uniformly govern every transaction, every trade, and every financial operation carried out on the platforms. The recent, high-profile case brought against FTX and Sam Bankman-Fried highlights that source code review can play a critical role in evidence detection in litigations in many diverse domains.

FTX Exchange, once the third largest crypto exchange, found itself in deep trouble as a dark secret embedded deep within its code eventually manifested in late 2022. The founder and former CEO, Sam Bankman-Fried, is now facing criminal charges for alleged siphoning of funds from the platform via sinister manipulation of the FTX’s source code. This covert software modification, favoring Alameda Research (an investment firm also owned by Bankman-Fried), led to a chain of events that eventually caused FTX to collapse in a matter of few days. This blog highlights how the detection of this fraud was significantly driven by analysis of its source code.

Software Modification to Disable Auto-Liquidation Feature: FTX’s chief engineer, under the directive of Sam Bankman-Fried, allegedly altered the source code of the platform to uniquely exempt Alameda Research from an auto-liquidation feature that applies to all other customers in the platform. This auto-liquidation feature was designed to automatically sell off assets if borrowed money losses exceed a certain threshold.

Code Alteration to Facilitate Unlimited Borrowing: The alleged illegal code modifications allowed Alameda Research to borrow funds without having the requisite collateral to back it up, effectively granting them an unrestricted line of credit.

Intentional Misrepresentation and Redirection of Funds: In another devious scheme, FTX’s customers ended up depositing over $8 billion into bank accounts that are secretly controlled by Alameda. Here, the code is alleged to be manipulated specifically to reflect these customer deposits in an internal account on FTX and not of Alameda, concealing the involved risks and liabilities.

Role of Code Comments: The chief engineer of FTX documented the software modifications with ‘code comments’, including one comment “extra careful not to liquidate” Alameda’s positions. Such comments provided an unambiguous understanding of the intention behind the code modifications.
All the modifications detected in the source code served as critical technical evidence of the fraudulent activities practiced on the FTX platform. It showed how the software was manipulated from the backend to siphon funds from FTX to Alameda Research, providing concrete evidence for the SEC and other regulatory bodies to level charges against Bankman-Fried and FTX. Although the option of source code review is usually considered in IP litigations. However, the FTX ordeal showcases the power of source code review and how it can play a vital role in evidence detection in litigations across a vast breadth of domains.

For more insights on source code review in action or more information on UnitedLex litigation solutions and how we can help leverage source code to develop formidable evidence, visit the webpage, Expert Source Code & Patent Litigation Solutions by UnitedLex.

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