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FTX Security Practices Scrutinized: Potential Losses Exceed $1 Billion, Reports Suggest

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Oct 11, 2023 at 10:39 am

In November 2022, FTX fell victim to a hack, resulting in the theft of nearly $400 million worth of various tokens. However, a recent report by Wired suggests that the situation could have been far more catastrophic.

The report highlights FTX's lax security practices and the opaque nature of its business operations. It suggests that these factors could have potentially led to losses in the billions of dollars during the hack. As the exchange was being drained of funds, executives hurriedly shifted over $1 billion worth of assets to different storage devices, ultimately safeguarding the majority of the funds. This implies that a significant portion of the exchange's total balance was in jeopardy of being stolen.

On November 11, 2022, accounts linked to FTX and FTX.US were emptied shortly after the company filed for bankruptcy and founder Sam Bankman-Fried stepped down from his leadership role.

John J. Ray III, the CEO and Chief Restructuring Officer of the FTX Debtors overseeing the bankruptcy proceedings, later reported that $323 million in various tokens were taken from its international exchange, along with $90 million from its U.S. platform.

According to an April filing, a substantial portion of the funds held on FTX were stored in hot wallets. These wallets are directly connected to public computers with internet access, creating a potential vulnerability.

While the identity of the attackers remains unknown, it is believed that they gained access to the private keys of FTX's wallets, which act as passwords providing access to the wallet. They then proceeded to siphon off the funds.

Following the bankruptcy, only a few team members knew the exact number of wallets owned by FTX or the locations of their private keys, as per Wired.

The team watched in real-time as accounts were being drained. It wasn't until Gary Wang, an FTX co-founder facing allegations of fraud alongside Bankman-Fried, gained access to some wallets and initiated fund transfers that the draining of FTX funds halted.

Wang successfully transferred around $500 million to Kumanan Ramanathan, an adviser to FTX from legal consultancy Alvarez Marsall, to a wallet on Ramanathan’s Ledger Nano, a hardware wallet. This action effectively put a stop to the fund drainage.

The following day, Wang and Bankman-Friend moved another $500 million to wallets provided by crypto custodian BitGo. These steps ultimately played a crucial role in saving over $1 billion that could have otherwise been lost.

Meanwhile, the entirety of the stolen funds has been on the move over the past week, adding another layer of mystery to the ongoing saga surrounding the collapse of the exchange last year.

Read more: Bitcoin's Bold Trajectory: Hayes' Insights

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