Author: Tom Mitchelhill, Cointelegraph; Translated by: Song Xue, Golden Finance

Cryptocurrency exchange FTX used hidden Python code to misrepresent the value of its insurance fund, a fund designed to protect users from losses in the event of large liquidations, according to testimony from FTX co-founder Gary Wang.

In a shocking new testimony on Oct. 6, former FTX CTO Gary Wang stated that FTX’s so-called $100 million insurance fund for 2021 was actually a fabrication and never actually contained any of the exchange’s FTX tokens (FTT), as claimed.

Instead, the number shown to the public is calculated by multiplying the daily trading volume of FTX tokens by a random number close to 7,500.

When prosecutors released the tweets (and other public statements about its value) and asked Wang if that number was accurate, he responded with a single word: “No.”

“For one thing, there is no FTT in the insurance fund, it’s just a dollar figure. And second, the figures listed here don’t match the figures in the database.”

An exhibit at the Oct. 6 trial showed the code used to generate the size of the so-called “backup fund,” or public insurance fund.

FTX’s insurance fund is designed to protect users from losses in the event of sudden and large market movements, and its value is frequently touted on its website and on social media.

However, according to Wang’s testimony, the amount in the fund was often insufficient to cover those losses.

For example, Wang said that in 2021, a trader took advantage of a loophole in FTX's margin system to hold a large position in MobileCoin, causing FTX to lose hundreds of millions of dollars.

When Bankman-Fried realized the insurance fund was nearly depleted, Wang said he was told to let Alameda “take” the losses. This was allegedly done to hide the losses because Alameda’s balance sheet was more private than FTX’s.

In addition to revealing the allegedly fraudulent nature of FTX’s insurance fund, Wang also claimed that he and Nishad Singh, at Bankman-Fried’s instigation, implemented an “allow_negative” balance feature in FTX’s code, which allowed Alameda Research to trade with nearly unlimited liquidity.

On October 5, Wang pleaded guilty to all charges brought against him, admitting to committing wire fraud, commodities fraud, and securities fraud along with Bankman-Fried, former Alameda Research CEO Caroline Ellison, and former FTX engineering director Nishad Singh.