FTX
One of the world's largest crypto exchanges collapsed within days in November 2022. Customer funds hadn't been held separately. Withdrawals were frozen.
FTX was one of the best-known crypto exchanges, with prominent advertising and major investors behind it. Within a few days in November 2022, confidence collapsed, customers all tried to withdraw at once, and the exchange couldn't pay out.
The cause wasn't a price decline, it was the use of customer holdings. These hadn't been held separately, but were connected to an affiliated trading firm. Once that came to light, the money was gone.
For customers, that meant exactly the situation described in the lesson on self-custody: they didn't hold coins, they held a claim against a company. In the bankruptcy proceedings, they became creditors among many.
The lesson is uncomfortable and simple at once. It didn't matter that the platform was large, that well-known investors were involved, or that it was advertised everywhere. What mattered was the question of who holds the keys.
The event followed the structure of a classic bank run. Once doubts about coverage arise, the individually rational response is immediate withdrawal, which makes the coverage gap visible. Unlike regulated banks, there was neither deposit insurance nor a lender of last resort.
The core structural flaw was the lack of insolvency-proof separation of customer assets. At regulated investment firms, this separation is required and establishes a right to have assets carved out. Without it, only a contractual claim exists, which becomes an ordinary claim in bankruptcy proceedings.
The case accelerated regulatory development, in Europe especially the framework for markets in crypto-assets with authorization and custody requirements. For investors, the practical consequence remains the split: only hold amounts on platforms whose loss would be bearable, and self-custody larger holdings.
Summary
- Customer funds without insolvency-proof separation are a claim, not ownership.
- Size, advertising, and prominent investors aren't a safety feature.
- Only hold as much on a platform as you could afford to lose.
Did you get it?
Why did FTX collapse?
Customer holdings weren't held separately. Simultaneous withdrawals exposed the coverage gap.
What legal standing did customers have?
They held a contractual claim and became ordinary creditors in the bankruptcy proceedings.
What practical consequence follows from that?
Only hold bearable amounts on platforms, and self-custody larger holdings.
Sources and further reading
- Bankruptcy filings from the proceedings before the relevant US court starting November 2022, and contemporary reporting.
Related
- If your broker goes bankruptStage 1
- Not your keys, not your coinsStage 1
- Crypto exchange vs. brokerStage 1