FTX, 2022

Not a market accident: customer assets that were supposed to sit in custody were spent, and a run revealed there was nothing behind the balances.

What happened

  • 2019–21 — FTX grows into one of the largest crypto exchanges, alongside the affiliated trading firm Alameda Research.
  • 2 November 2022 — a press report shows that much of Alameda's balance sheet consists of FTT, a token issued by FTX itself, rather than independent assets.
  • 6–8 November 2022 — customers withdraw en masse. The exchange cannot meet redemptions; a rescue letter of intent from a competitor is signed and then withdrawn within a day.
  • 11 November 2022 — FTX files for bankruptcy. Court filings later describe customer assets used to fund affiliated trading and other spending, with a shortfall in the billions.

The mechanism

  • An exchange balance is an IOU. Depositing coins on a venue means holding a claim against the venue, not the asset itself — a distinction invisible in the app and decisive in bankruptcy (see custody).
  • Commingling removed the protection that segregation is supposed to provide. In regulated brokerage, client assets sit apart precisely so that the firm's failure is not the client's.
  • Self-issued collateral is circular: valuing a balance sheet with a token you print, whose price depends on your solvency, means the assets evaporate exactly when they are needed.
  • The run mechanics were ordinary. Any institution funded by instantly withdrawable liabilities and holding illiquid assets fails this way; the technology changed nothing.

What it teaches

  • Custody is the first question in this asset class, not an operational footnote. "Not your keys, not your coins" is a legal statement.
  • Segregation and audits are the boring features that matter. Proof-of-reserves attestations became standard afterwards because their absence was the story.
  • Yield with no named source is the source. If nobody can explain who pays it and why, you are funding it.
  • Never keep more on a venue than you can watch become an unsecured claim — a rule that generalises far beyond crypto.