Follow-up question: Does FTX store user assets in cold wallets?

FTX has generally withstood the test of the withdrawal run on November 7. Although many users need 2-3 hours to withdraw their coins, there are not many cases where it takes more than 12 to 24 hours. FTT crashed on the 8th, and FTX may face more tests in the future.

After surviving the wave of withdrawals, SBF also published a summary: Competitors tried to hit us with false rumors. FTX is sufficient to cover all customer assets. We do not use customer assets for investment (even government bonds). It is strictly regulated, even if it slows us down. We have GAAP audits and more than $1 billion in cash.

FTX's official explanation for the slow withdrawal is: there may be occasional congestion on the chain (such as the BTC network), which is mainly limited by the node throughput limit. FTX is speeding up the process. Stablecoin withdrawals are being processed one after another. Because banks are closed on weekends, the redemption speed of USD/stablecoins is slightly slower. When banks open on Monday, the working day, wire transfers will resume smoothly.

However, it is worth noting that FTX’s summary explanation did not include the previous explanation: withdrawals are slow because we are refilling our hot wallets.

The question is, where does FTX fill its hot wallet?

Generally speaking, exchanges will store most of their users' assets in their own or custodian's cold wallets. When there is an urgent need to withdraw money, the exchange will quickly withdraw money from the cold wallet to the hot wallet.

There are two cases: When Huobi cleared out Chinese users, 22,000 BTC were transferred from cold wallets to hot wallets within one hour to meet the withdrawal needs of users in panic. In addition, after the Shanxi incident, from November 2 to November 11, a total of 18,652 bitcoins flowed from Huobi to Binance. Huobi's cold wallet reduced nearly 60,000 bitcoins.

Transferring from a cold wallet to a hot wallet requires a certain amount of time and procedures. Of course, although FTX's withdrawal speed was a bit slow at one point, there was no obvious problem of a large number of withdrawals being unable to be made for more than 12 hours. However, judging from the on-chain data, we have some doubts about whether FTX stores most of its users' assets in cold wallets:

According to 0xScope statistics, the USDT/USDC balance of FTX's three addresses dropped by 95% in 7 days, and ETH dropped by 50%. On the other hand, Alameda has been replenishing the amount for FTX. In addition, addresses from Binance and KuCoin have also been replenishing funds for FTX.

Read more:

https://twitter.com/ScopeProtocol/status/1589560798476894210?s=19

In addition, data from Paidun shows that in the past 24 hours, large transfers to FTX include: $177 million in US dollars have been transferred from Circle to FTX ($122 million) and Alameda Research 1 ($55 million); approximately $66.8 million worth of cryptocurrency has been transferred from address 0xb84c...d6f to FTX:0x2fa and FTX:0xC09, including approximately 4,900 ETH (approximately $7.7 million) and 59 million USDC; Alameda Research transferred $11.67 million in USDT and USDC to FTX; $37 million in USDC was transferred from Circle to FTX; 68.3 million stablecoins (BUSD, USDT, USDC) were transferred from Alameda Research to FTX; in addition, market makers such as JUMP also transferred stablecoins to FTX, etc.

After reading this, we will feel very confused. If the user's assets are 100% of the reserve, why not from a cold wallet or a single custodian, but from Alameda and other exchanges? Of course, since this data comes from the chain, it is only a small part of the matter, and we cannot know the data off the chain.

After our research, we concluded that: FTX's user funds are not stored in large cold wallets, but are widely distributed in various exchanges, market maker wallets and banks (Circle related), whether it is U or ETH. What is the reason for doing so? Especially since SBF emphasizes not using customer assets for any investment (including government bonds), there is no reason not to put them in cold wallets. The reasons behind this may require more explanations and responses from SBF and FTX.

Binance founder Changpeng Zhao also "lost no time" to disclose that there are 8 billion US dollars of Ethereum in Binance cold wallets 1 and 2. "These are not our money. They are user assets. We are just custodians." It seems to imply that FTX does not store all user assets in cold wallets.

Gate said that it has completed the third 100% margin audit in cooperation with the US auditing firm Armanino LLP. "If the total amount of tokens held and effectively controlled by the exchange stored on the blockchain is greater than or equal to the total number of tokens held by all platform users, it means that the platform provides 100% margin for the tokens." Gate's move is undoubtedly a very good example.

As of press time, FTX has not responded to Wu’s question about how FTX stores user assets. In addition, FTX has not responded to the financial transactions between FTX and Alameda.