The FTX Bankruptcy — Customer Funds Lost by Trusting an Exchange
What if the exchange you entrusted your money to secretly spent that money elsewhere? That is exactly what happened at FTX in 2022.
A Collapse in a Matter of Days
FTX was once the world's second-largest crypto exchange. But in November 2022, reports that Alameda Research, an affiliate of the founder, held an excessive amount of the coin FTX issued (FTT) shook confidence.
When rival exchange Binance said it would sell the FTT it held, a massive withdrawal event unfolded, and FTX, its liquidity frozen, filed for bankruptcy protection (Chapter 11) on November 11. The founder stepped down as CEO.
Where Did Customer Funds Go
Investigations revealed that FTX had diverted funds entrusted by customers to its affiliate Alameda Research and used them for risky investments and personal purposes. The missing customer funds are estimated at more than $10 billion.
Founder Sam Bankman-Fried was found guilty in 2023 of fraud and other charges for misappropriating customer funds. It was an event that broke the basic premise that 'money entrusted to an exchange is being kept safely segregated.'
This piece is meant to explain not the value of a particular asset but 'the risk of the exchange or intermediary itself (counterparty risk).'
The Lesson — 'Where You Entrust It' Over the Asset Itself
The heart of the FTX episode was not the price of the coins but whether the exchange holding them could be trusted. No matter how good an asset is, if the place you entrusted it to collapses, you can lose the asset itself. This is called 'counterparty risk.'
Unlike traditional finance with dense regulation and depositor protection, crypto exchanges were then loosely supervised. The lesson for investors is that where and how you store your assets is as important as what you invest in.
よくある質問
Q. What is counterparty risk?
It is the risk that the party you trade with or entrust assets to (an exchange, broker, issuer, and so on) fails to keep its promise or goes bankrupt. As with FTX, if an exchange does not properly manage customer assets, you may not get the asset itself back regardless of whether the coin you bought rises or falls.
Q. So how is it safe to store assets?
Generally, it is basic to use institutions with strong regulation and asset segregation, and not to pile all your assets in one place. That said, this article does not recommend any particular method or product; it is important to understand that each storage method has its own pros, cons, and risks.
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