The aftermath of FTX's bankruptcy continues to impact the cryptocurrency market. As related lawsuits deepen and more information is disclosed, some unknown insider details are slowly coming to light.
Written by: Jordan, PANews
The aftermath of FTX's bankruptcy continues to impact the cryptocurrency market. As related lawsuits deepen and more information is disclosed, some unknown insider details are slowly coming to light.
According to FTX creditor Louis Origny, a lawsuit against 'smart, greedy, organized' criminal Nawaaz Mohammad Meerun has drawn community attention. This person's methods are extremely crazy and even unbelievable, but FTX's various 'shenanigans' are equally perplexing.
This article will deeply analyze this incident, which may provide some warnings to the crypto market.
Massively accumulating low liquidity tokens, driving up prices, and then using them as collateral to borrow large amounts of money from FTX.
According to court documents from the U.S. Bankruptcy Court in Delaware, Meerun is a citizen of Mauritius and a 'veteran' of market manipulation. He primarily focuses on tokens with low liquidity for market manipulation. Additionally, he has been involved in various money laundering operations and Ponzi schemes over the past decade, with connections to organized crime networks in Poland, Romania, Ukraine, and Islamist extremist networks.
Starting from January 2021, Meerun accumulated a large number of BTMX positions (BTMX is a platform token linked to the BitMax exchange), purchasing about half of the BTMX token supply, resulting in the token price skyrocketing by 10,000% within three months.
Subsequently, Meerun exploited FTX's leverage features and margin trading loopholes to borrow tens of millions of dollars from FTX using BTMX as collateral. At this time, BitMax discovered the problem and contacted FTX to issue a warning; however, it is perplexing that FTX did nothing! It is reported that Ryan Salame, the co-CEO of FTX Digital Markets at the time, had received alerts about suspicious activities but ignored them. When the scale of the loophole was eventually discovered to be at least $400 million, Ryan Salame simply commented, 'Oh, I didn't realize the account had become so crazy.'
It is reported that from August to December 2021, Meerun used new accounts and aliases to repeatedly exploit low liquidity tokens BAO, TOMO, and SXP, executing the above operations. Before FTX realized the issue, he had already scammed nearly $200 million through coordinated market manipulation. It was only when Meerun attempted to manipulate another token called KNC that he was discovered.
According to court documents, Meerun was well aware that once market manipulation stopped, the BTMX price would plummet, meaning he would be required to return all 'borrowed' assets. However, Meerun clearly had no intention of complying with FTX's rules and, over time, he withdrew a large amount of stablecoins and other tokens. It was only at this point that FTX discovered the loophole was enormous, so they locked Meerun's account. Yet, perplexingly, FTX 'forgot' to stop Meerun's withdrawal function, allowing him to easily transfer over $450 million obtained from market manipulation!
According to the information disclosed in the court documents, FTX did not want the outside world to discover such a huge loophole on its platform, so it adopted the old trick of 'robbing Peter to pay Paul' to cover up the fact, shifting the losses to its sister company Alameda Research.
Using short-selling strategies to 'force' Alameda Research to invest massive amounts of funds to close positions.
The court documents also indicate that because Meerun's actions on FTX were not addressed promptly, he gained a lot of time to be 'allowed' to operate more tokens on the FTX platform. It is said that he shorted a worthless underground bird dung coin, Mobile Coin (MOB), on FTX, and FTX similarly did not take any action against Meerun, merely asking him to provide more collateral.
In addition to Meerun holding a large number of short positions in MOB, Alameda Research also held many short positions. To offset these short positions, Alameda Research began purchasing large amounts of MOB tokens from the market. During Alameda's weeks-long buying spree, the price of MOB skyrocketed by 750%, forcing Alameda to bear the high costs of the price surge. Shortly after Alameda slowed its buying spree, the MOB token ultimately collapsed. By the time the BTMX/MOB incident settled in August 2021, Alameda personnel estimated that Meerun's actions had caused losses of up to $1 billion for Alameda.
However, Meerun does not acknowledge FTX's accusations of market manipulation against him, claiming that FTX's statements are baseless and lack evidence. He stated, 'I have always operated within the boundaries set by the FTX exchange, have not received any benefits regarding my FTX account, and the facts prove that the amount deposited in the FTX account far exceeds the final withdrawal amount, which means that trading on FTX is actually a loss for me. I have no connections to any organized crime networks, nor to any extremist or terrorist networks, and I have never provided them with funding.'
Of course, Meerun's statements cannot be fully trusted, but they should not be dismissed either. According to the court documents, he was involved in a governance attack on the lending platform Compound Finance under the alias 'Humpy the Whale' using COMP tokens. By accumulating a large number of COMP tokens, he attempted to transfer over $20 million in assets from other protocol users, ultimately reaching a 'peace treaty' with Compound to stop attacking the protocol in exchange for additional rewards.
What lessons can be learned from this incident?
Meerun's market manipulation techniques can be summarized in three ways:
Initially accumulating a large amount of low liquidity tokens, leading to an increase in the related token prices, and then using these tokens as collateral to borrow funds from cryptocurrency exchanges and cashing out;
Establishing a large number of short positions to force Alameda Research to take over and invest massive amounts of funds to close positions;
Coordinated buying of multiple low liquidity tokens, repeating the market manipulation technique of 'driving up prices and then using them as collateral to borrow large amounts from FTX.'
As the details of the Meerun lawsuit are disclosed, it undoubtedly serves as a profound warning for the cryptocurrency industry, while also providing valuable lessons.
For exchanges, it is necessary to continuously improve KYC procedures, strictly enforce 'Know Your Customer' and 'Anti-Money Laundering' regulations, comprehensively verify user identities, and prevent criminals from using the platform for illegal activities. Furthermore, it is essential to strengthen the supervision of internal personnel, establish sound internal control mechanisms, conduct regular training for employees, and prevent internal personnel's 'inaction' from allowing criminals to take advantage. At the same time, exchanges must establish a robust risk assessment system, regularly assess business risks, identify potential risks, and take appropriate measures, especially strengthening monitoring of cross-account and margin trading, with a focus on low liquidity assets.
For investors, it is important to be cautious of unusual price fluctuations of low liquidity tokens, keep an eye on large on-chain transfer activities from whale accounts of sensitive tokens, and prioritize choosing trading platforms that operate in regulated jurisdictions and have obtained relevant regulatory agency certification.
