Now that SBF has been actually convicted I think it might be good to have a simple explanation here of what he and rest of the EA-affiliated FTX leadership did.
[Edit: Hopefully I haven't accidentally given the impression that I don't think FTX did anything wrong (this question seems to have been downvoted). I absolutely believe they did wrong and committed fraud. I'm just not sure what it is that they did]
This is one of those times where Google has proved surprisingly useless. I see that he's been convicted of several counts of fraud, but the only explanation I've managed to piece together is this:
Alameda held a load of FTT and borrowed from customer deposits held by FTX. People tried to withdraw their deposits after it came out that Alameda held so much FTT, but FTX couldn't pay out because Alameda couldn't give back the customer funds it had borrowed.
I get the impression that Alameda sneakily holding loads of FTT was very bad, but not illegal, is this right? I guess this is bad because the value of FTT is linked to the value of Alameda and vice-versa so it looks like their assets give them more security if something goes wrong than they actually do, although I only just figured that out.
As for Alameda borrowing customer deposits - I don't understand any of this. What were the rules around lending out customer deposits? What made the lending out to Alameda fraudulent? This seems like THE key thing that FTX did wrong and I just can't find a basic explanation of what the crime was.
Would greatly appreciate any clarification!
[Edit 2: could someone who is downvoting briefly mention why they are doing so? I'm a little confused as to why this got such bad reception]
I broadly agree with all of this.
A few points of (minor) potential disagreement
As far as the backdoor is concerned, it looks like the defense challenges this: "SBF had not been under the impression that Alameda did not need to secure its borrowing with on-exchange collateral: “‘You permitted Alameda to borrow without requiring that it post collateral to the exchange?’ . . . SBF: ‘That was not my understanding’” (Bloomberg). However, he did know of another customer who was not required to: “Can you name any customers that were allowed to pledge outside investments as collateral for withdrawing money on FTX apart from Alameda? . . . [SBF:] I believe that we did that with a firm called Crypto Lotus, and I believe that we considered that with Three Arrows” (BitMEX)....SBF testified that he had always been “aware of roughly the amount . . . that it was borrowing” via its FTX credit line, which was “millions in 2019 . . . and then by 2022, my understanding was that it was around $2 billion on average of borrowing through the info@ account”, clarifying that Alameda’s balance on FTX was still “Overall positive, but negative in some assets.” Singh similarly testified that, prior to June 2022, he “thought Alameda had positive balances on FTX, that it was borrowing lots in some places but that overall they had more money than they didn't.” He emphasized the internal transparency of Alameda’s borrowing via the margin lending program — in contrast to the popular narrative of a secret “backdoor” known only to an “inner circle”, Singh reported that “Alameda's main accounts balance, is a front-and-center number in all of Alameda's trading systems. It's the sort of thing from my time at Alameda I couldn't imagine being missed or ignored by anyone there”." (from here)
This realization seems to have been spread over several months. In June 2022, they realized AR owed FTX $8B more than they thought it had, but they didn't yet understand why. The FT reported, "However, not all elements of the prosecution narrative line up neatly. Singh said he left the crucial June meeting still thinking things were OK and did not realise customer funds were being raided until September”. SBF claims that he didn't piece everything together until September/October. It's not clear even at that point if they thought of what they had done as illegal, or if they thought that continuing to work on raising liquidity for AR to rectify the mistake rather than announcing to the world that AR had accidentally invested $8B that they hadn't intended to, was illegal, or if they'd even decided how to proceed before the run on FTX in early November.
I don't think either the CFTC or the team handling the bankruptcy have offered any evidence that this was the case and SBF continues to maintain that AR had sufficient assets to meet its liability. The fact that customers are probably going to be made whole with much (I think billions?) to spare, is always attributed to SBF having made some "lucky" investments that are now doing very well, but to my knowledge, no one has presented any evidence to support this as the sole explanation.
Is it a lie if you yourself believe it? Regardless, I personally haven't yet come across any statements that seem to be claiming anything other than "FTX itself doesn't invest customer deposits" or "AR is not front running other customers on FTX."
Expanding on some of your points
Yes, as far as I'm aware, no one testified that SBF told his team to create a "backdoor" or to "stop Alameda getting liquidated." SBF and the people who created the "backdoor" only testified that SBF asked them to make sure Alameda wasn't erroneously liquidated (as it almost was once, which would have been disastrous not only for Alameda, but for FTX and FTX customers in general, because before FTX was successful enough to attract other backstop liquidity providers, it was very reliant on Alameda as a backstop liquidity provider.) SBF wasn't a coder himself, but he suggested something like "an alert or a delay," so that engineers could check if the triggered liquidation was erroneous i.e. triggered as a result of Alameda's role as a backstop liquidity provider, or valid i.e. triggered as a result of Alameda's role as a customer. Gary and Nishad chose to implement SBF's instruction by turning off auto-liquidation for Alameda's account.
For what it's worth, SBF appears to have always taken responsibility and expressed great remorse for the mistakes he made regarding poor risk management, even if he does continue to deny criminal activity.