Sam Bankman-Fried's trading shop has received special treatment on FTX for years

Alameda Research has been allowed to exceed normal borrowing limits on the FTX exchange since its inception, Sam Bankman-Fried said in a concession that shows how the former billionaire's trading business enjoyed preferential treatment over customers years before the 2022 crypto crisis.

In an interview with the Financial Times, the 30-year-old described the outsized role Alameda played in the exchange's launch in 2019 and how it had access to exceptionally large borrowings from FTX from the start.

Bankman-Fried said that “when FTX first launched,” Alameda had “pretty big limits” on borrowing from the exchange, but he “absolutely” wishes he had held the trading firm to the same standards as other customers.

Asked whether Alameda continued to have larger limits than other customers, he said: "I think that could be true." He did not say how much larger Alameda's limits were than those of other customers.

FTX and Alameda publicly portrayed themselves as separate entities to avoid the appearance of conflicts of interest between the exchange, which processed billions of dollars' worth of customer trades a month before its collapse, and Bankman-Fried's proprietary trading firm.

Bankman-Fried's comments shed light on Alameda's longstanding special treatment. The close ties between the firms and large borrowings by Alameda from FTX played a key role in the spectacular collapse of the exchange, once one of the largest crypto exchanges and valued at $32 billion by investors including Sequoia and BlackRock.

Bankman-Fried, previously one of the most respected figures in the digital assets industry, has apologized for mistakes that left 1 million creditors facing large losses on funds they entrusted to FTX, but has denied intentionally misusing customers' assets.

Bankman-Fried said the origins of Alameda's large lending limits were the result of the trading business's early role as a primary provider of liquidity to FTX before it attracted other financial groups.

FTX, like other large offshore trading venues, handled large volumes of derivatives, allowing traders to grow their bets using borrowed funds - but professional firms are typically required for the market to function smoothly.

“If you go back to 2019 when FTX first launched, Alameda had 45 percent of the volume or something like that on the platform at that point,” Bankman-Fried said. "It was basically a situation where if Alameda's account ran out of capacity to take new positions, that would create risk issues for the platform because we didn't have enough liquidity providers. I think it had pretty big limits because of that."

This year, he said, Alameda accounted for about 2 percent of trading volume and was no longer the primary liquidity provider on the exchange. Bankman-Fried said he regretted not re-examining the trading firm's treatment to ensure it was subject to the same credit restrictions as other similar companies operating on the exchange.

FTX gave traders the ability to place large bets on crypto with just a small initial outlay, known as trading on margin. FTX's large exposure to Alameda was a key reason why weakness in the trading firm's balance sheet caused a financial crisis that engulfed both companies.

Bankman-Fried estimated Alameda's liabilities to FTX at around $10 billion when both companies filed for bankruptcy in November.

"From a volume, revenue and liquidity standpoint, the exchange was effectively independent of Alameda. Obviously that didn't come true in terms of positions or balances at the venue," Bankman-Fried said.

John Ray, the veteran bankruptcy trustee who led FTX into bankruptcy, has criticized his previous leadership for failing to keep Alameda and FTX separate. In court filings, he pointed to a “secret exemption by Alameda from certain aspects of FTX.com’s auto-liquidation protocol.”

Automatic liquidation or closure of sourcing positions has been a key tenet of FTX's risk management practices and a centerpiece of its proposals to change parts of U.S. financial regulation. When a typical customer's trades began to go underwater, FTX's liquidation mechanism was supposed to start consuming the account's margin to protect the trading venue from a single trade causing a loss for the exchange.

However, Bankman-Fried said there “may have been a liquidation delay” for Alameda and possibly other large retailers. He said he was "not sure" whether Alameda was subject to the same liquidation protocol as other traders on the exchange and that the treatment of the trading firm's account was "in flux."