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What is a backdoor? FTX founder SBF accused of implementing book-keeping system that allowed him to move exchange funds without trace

By Peter Henn

Edited by Charlie Mellor

12:53, 14 November 2022

A computer keyboard with the word backdoor and a ladder where the return key should be
Just what exactly is a backdoor? – Photo: Shutterstock

Following the collapse of the once-mighty FTX crypto exchange with it filing for Chapter 11 bankruptcy, it has been alleged that the platform’s founder, former billionaire Sam Bankman-Fried, had been operating something called a backdoor to transfer money between accounts.

But what is a backdoor?

Rules and regulations

In the worlds of accounting and business, there are certain rules and regulations that people must comply with.

One such key rule that needs to be applied across the world of finance is that money should be accounted for, which means that people cannot just transfer money from one business to another without telling people that is what is happening.

FTX, SBF, ADD and backdoors?

According to the Reuters news agency, Bankman-Fried managed to have $10bn worth of customer funds moved from FTX to his trading company Alameda Research without informing anyone. 

The entrepreneur known in crypto circles as SBF denied the claims, telling Reuters: “We didn’t secretly transfer. We had confusing internal labeling and misread it.” In addition, he denied implementing a “backdoor” to Reuters.

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However, with the claims reported by Reuters, Mario Nafwal, the founder of crypto company IBC Group Mario Nafwal, later tweeted that SBF had worked with colleagues to create a backdoor, a computer program that effectively allowed for money to be “secretly” transferred from FTX to Alameda.

Former employee blows whistle on computer code trapdoor

And his allegations appear to have been backed up by someone claiming to be a former FTX employee calling themselves Yung Dot, who said that it was “due to the elx trapdoor SBF put in”, which “allowed allowed Sam to use elx to send fraudulent logger messages through the negative flux back to auditors if they ever queried”.

In a series of tweets, Dot and the team he was working with earlier this year created a program called an augmented deficit decoder (ADD) “to obfuscate and protect the codebase”. But the same program was used to disguise what he described as “wrongdoing by executives”. 

Dot said: “My team were ‘laid off’ because we were not a good fit – to speak candidly we were fired after bringing up the fact that these messages were obfuscating transactions used to prop up $FTT.

“Our ADD that we had spent four years working on was now being used fraudulently with very little regard for our wishes. Now we are left with this – lots of questions.”

Despite being contacted by Capital.com, neither Sam Bankman-Fried or FTX responded immediately to our request for a comment about Yung Dot’s claims.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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