[Thread] A look at a report from FTX debtors on the company's control failures, like awful recordkeeping, lying about using cold wallets, and sloppy key storage

The new team in charge of the FTX bankruptcy have released their first interim report on the failures of control at FTX and related businesses. It's 43 pages long, let's go through it 🧵 https://www.courtlistener.com/ ...

@molly0xfff 2023-04-10 Molly White

Context & Ripple Effects

FTX’s bankruptcy began with a difficult corporate unwind: early filings brought in new directors amid regulator outreach and an estimate of more than a million creditors, while reporting highlighted the challenge of disentangling its complex structure. The interim report adds operational detail to that backdrop, identifying how basic internal controls failed before and during the collapse.

The findings reinforce issues already raised in John Ray’s congressional account of customer-asset commingling and the multibillion-dollar claims of FTX’s largest unsecured creditors. They matter because records, custody representations, and access controls shape what the estate can verify as it administers creditor claims.

First-order effects

The bankruptcy team gains a documented account of deficient records, misleading cold-wallet representations, and weak key handling to support its reconstruction of FTX’s assets and operations.
Creditors and the court receive more detail on why verification and asset tracing are difficult, alongside the previously reported loss of assets from accounts during the bankruptcy process.

Second-order effects

Gaps in records and key controls can increase the evidentiary and administrative burden of the bankruptcy, complicating decisions over claims, recoveries, and potential accountability.
The report gives regulators, counterparties, and customers a concrete basis to scrutinize whether crypto platforms’ custody and governance claims are backed by auditable operating controls.

Third-order effects

If comparable failures continue to surface across crypto intermediaries, trust will increasingly depend on demonstrable segregation, recordkeeping, and custody governance rather than platform assurances alone.
The episode supports a longer-term split between firms able to substantiate financial-control practices and those whose opaque internal operations raise the cost of oversight, recovery, and market participation.

The trend: FTX is a stark example of the crypto legitimacy gap: operational controls and verifiable custody practices are becoming central to whether intermediaries can earn institutional and customer trust.

Discussion

@molly0xfff Molly White on x
Debtors give multiple examples of irresponsible key storage. Keys to >$100M stored in unencrypted plaintext, for example, or in tools unsuitable for the job. Keys were often accessible by many employees with no auditing. Keys were poorly labeled, with names like “use this”. https…
@jconorgrogan Conor on x
Chart of the balance of Alameda Wallets (Jan '18- June '20) The blue dot is when Nishad Singh altered the codebase to enable Alameda to withdraw unlimited amounts of crypto from FTX https://twitter.com/...
@molly0xfff Molly White on x
Application secrets that could've transferred billions of dollars' worth of crypto assets from hot wallets or third party exchanges were stored in widely accessible source code repositories. https://twitter.com/...
@molly0xfff Molly White on x
“[FTX] kept virtually all crypto assets in hot wallets... [FTX] undoubtedly recognized how a prudent crypto exchange should operate, because when asked by third parties to describe the extent to which it used cold storage, it lied.” https://twitter.com/...
@molly0xfff Molly White on x
“The FTX Group lacked independent or experienced finance, accounting, human resources, information security, or cybersecurity personnel or leadership, and lacked any internal audit function whatsoever. Board oversight, moreover, was also effectively non-existent.” https://twitter…
@molly0xfff Molly White on x
FTX stored private keys to its crypto wallets in AWS 🫠 https://twitter.com/...
@bitfinexed @bitfinexed on x
There's a reason why Sam Bankman-Fried was Tethers largest customer. He's the same exact kind of fraud as Tether. Tether is also a hedge fund, secretly. Their own bankers said so. https://twitter.com/...
@ben11kehoe Ben Kehoe on x
To paraphrase @matt_levine's view of FTX's balance sheet, FTX's security architecture was also full of the howling of ghosts and the shrieking of tortured souls https://twitter.com/...
@wublockchain Wu Blockchain on x
FTX creditors released the first report, mainly describing the reasons for the failure of FTX, including: SBF has the final say in all major decisions; core personnel have no risk management and operation experience shortly after graduating from university;
@nash076 @nash076 on x
I would say FTX is indistinguishable from an organized crime entity except I'm willing to bet the mob has better accounting practices.
@molly0xfff Molly White on x
FTX generally didn't use multisigs. When they did, they stored all of the keys together in one place, thus defeating the purpose. https://twitter.com/...
@molly0xfff Molly White on x
An employee was “instructed that this information was not to be shared with regulators unless it was specifically requested. Another FTX Group employee responded that if the question was being posed by ‘non-regulators,’ then ‘we say 10% in hot wallet, and 90% in cold wallet’” htt…
@molly0xfff Molly White on x
FTX “failed by any measure” to perform basic cybersecurity practices including “creation and collection of logs that record and reflect activity within the computing environment, and systems to alert designated personnel to suspicious activity.”
@brettharrison88 Brett Harrison on x
Not sure how this is “new,” as I've written and spoken publicly about the circumstances of my resignation from FTX US a number of times since January.
@molly0xfff Molly White on x
“Approximately 80,000 transactions were simply left as unprocessed accounting entries in catch-all QuickBooks accounts titled ‘Ask My Accountant.’” https://twitter.com/...
@idrawcharts @idrawcharts on x
this is actually wild lmao even FTX didn't know how much money you (or they) had
@molly0xfff Molly White on x
“Due to the lack of such controls, the FTX Group did not learn of the November 2022 Breach until the Debtors' restructuring advisor alerted employees after observing, via Twitter and other public sources, that suspicious transfers appeared to have occurred” https://twitter.com/..…
@0xg00gly @0xg00gly on x
Some good news https://twitter.com/...
@blackamazon @blackamazon on x
I ... i ... I WORKED IN COMMS AND MODERATION AND STRATEGY MY MIRO BOARDS ARE BETTER PROTECTED https://twitter.com/...
@zhusu @zhusu on x
While the fall of alameda/ftx is being cast as a uniquely damning biz failure, reality is many exchanges today practice all the same behaviors When @therealleslamb0 described to me the idea of @OPNX_Official, an exchange that refuses to compete w clients, i had to learn more
@molly0xfff Molly White on x
“Over a dozen people had direct or indirect access to the FTX.com and FTX.US central omnibus wallets, which held billions of dollars in crypto assets”
@antonhand @antonhand on x
If you'd like to have an aneurysm, this is a fantastic read of a thread. https://twitter.com/...
@wawin @wawin on x
jesus christ what a clownshow ftx was https://twitter.com/...
@alvinfoo Alvin Foo on x
“Hubris, incompetence, and greed” led to the implosion of crypto exchange FTX. #FTX lacked basic accounting and financial controls and was under the command of a small group of individuals who “stifled dissent.” https://www.businessinsider.com/ ...
@wublockchain Wu Blockchain on x
July 31, 2019 Singh changed the code base to allow Alameda to withdraw unlimited amounts of crypto assets from FTX; and a week later modified it to exempt Alameda from automatic liquidation; the FTX group kept almost all crypto assets in hot wallets (SBF lied about using cold... …
@molly0xfff Molly White on x
Some new context on the sudden resignation of @BrettHarrison88 in Sept. 2022: he “resigned following a protracted disagreement”, after which his bonus was drastically reduced. https://twitter.com/...
@molly0xfff Molly White on x
Sam Bankman-Fried: “Alameda is unauditable... we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history. We sometimes find $50m of assets lying around that we lost track of; such is life” https://twitter.com/...
@aftxcreditor @aftxcreditor on x
FTX has filed a response to the UCC, arguing they have already provided a roadmap including timeframes. They plan to share this roadmap with the court on April 12th. https://twitter.com/...
@0xabad1dea @0xabad1dea on x
little a disaster tourism, as a treat https://twitter.com/...
@tradermayne Mayne on x
1) What. https://twitter.com/...
@molly0xfff Molly White on x
Nishad Singh was supposed to be in charge of cybersecurity, but wouldn't even provide the IT person with ID information of the corporate devices he was using. https://twitter.com/...
@moo9000 @moo9000 on x
In Japan, the crypto regulation is good because it is an industry self-regulatory body. This is why FTX Japan was saved.
@defiyst @defiyst on x
Don't recall seeing any public info before on FTX's opsec? Looks like FTX/Alameda was punting with users funds all via hot wallets. https://twitter.com/...
@molly0xfff Molly White on x
FTX didn't enforce use of multi-factor authentication for Google Workspace or 1Password, which the debtors note is ironic given tweets like this: https://twitter.com/...
@cryptonator1337 @cryptonator1337 on x
‘In fact, neither of these assertions about cold storage use was true.’ https://twitter.com/...
@mayhem4markets @mayhem4markets on x
Wow, FTX was horribly mismanaged in every way possible. A total security nightmare. If they didn't go down the way they did they would have been hacked badly... https://twitter.com/...
@molly0xfff Molly White on x
The debtors reiterate the stunning lack of recordkeeping and controls at FTX: “Normally... there are readily identifiable records, data sources, and processes that can be used to identify and safeguard assets of the estate. Not so with the FTX Group.”
@tmnxeq @tmnxeq on x
A couple of privileges that FTX secretly granted to Alameda in July 2019...interesting timing 🧐 https://twitter.com/...
@molly0xfff Molly White on x
Unsurprisingly given their lack of attention to cybersecurity, FTX didn't use any endpoint protection and failed to patch their software — in one case running software nearly 4 years out of date. https://twitter.com/...
@coinbureau @coinbureau on x
FTX debtors just released a report on the failings of the exchange and boy, is it a shocker. It's actually a miracle that they didn't suffer severe numerous severe hacks before the collapse 🤯 https://twitter.com/...
@drivenbyboredom Nate Igor Smith on x
This is absolutely bonkers. https://twitter.com/...
@lopp Jameson Lopp on x
Even had FTX been a legitimate business operation, they would have eventually lost everyone's money with these security practices. https://twitter.com/...
@bradmichelson Brad Michelson on x
The more I read about this the more shocked I am. I still can't believe a company operating at this scale ran this way. https://twitter.com/...

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