For the FTX case study, what was the "backdoor" used for?

The FTX collapse involved fraudulent fund mismanagement, where FTX executives created a

"backdoor" to allow Alameda Research (FTX’s sister trading firm) to borrow client funds without their

consent.

Step 1: The "Backdoor" in FTX

The backdoor was a hidden code in FTX’s system, allegedly created by Sam Bankman-Fried, which

allowed Alameda to access customer deposits without triggering alerts to auditors or compliance

teams.

Alameda used these funds for risky trading strategies and investments, leading to the eventual

collapse of FTX when a liquidity crunch exposed the missing funds.

Step 2: Why the Other Options Are Incorrect

Option A ("allowed a stablecoin to be removed from the ledger and added to the balance sheet")

Incorrect because FTX’s fraud involved misuse of customer funds, not just a stablecoin

misclassification.

Option C ("allowed currency traders to smooth profits and conceal losses for over two years")

Incorrect because this sounds more like LIBOR-rigging scandals, whereas FTX misappropriated client

funds.

Option D ("allowed a rapid pace of acquisitions but poor integration of acquired companies")

Incorrect because FTX's collapse was due to financial fraud, not poor acquisition strategy.

PRMIA Risk Reference Used:

PRMIA Financial Crime Risk Management – Discusses insider risk and fraudulent misappropriation of

funds.

FTX Collapse Reports – SEC, CFTC, and DOJ filings confirm that Alameda had unauthorized access to

client funds.

Final Conclusion:

FTX’s backdoor enabled Alameda to take $65 billion in client funds without permission, making

Option B the correct answer.