1. What happened
By November 2022, FTX was the #3 exchange globally, valued at $32B, with celebrity endorsements, stadium naming rights and US regulators' cautious nod. On 2 November, CoinDesk published a leaked balance sheet of Alameda Research (the sister trading firm): its balance was dominated by $5.8B of FTT - FTX's own exchange token. A "reserve" made of your own IOUs. When Binance announced (6 Nov) it would sell its FTT, the run began. Withdrawals stalled; on 11 November FTX filed for bankruptcy; roughly $8B in customer funds were missing.
2. The mechanism: where the money went
Customer deposits were routed to Alameda and used for trading, investments (venture portfolios) and loans - the "Not your keys, not your coins" pattern at institutional scale, hidden behind a split structure: FTX US (presented as squeaky-clean, regulated) vs. FTX global (where the flows happened). The proof was there for anyone who looked: no third-party audit, no verifiable proof of reserves, an "unverified balance sheet" of $15B assets vs. $9B liabilities signed by one person. The balance sheet was leaked 2 weeks before the collapse.
Remember: FTX's marketing had every credibility marker - investors, logos, media presence, a "regulated" US arm. None of it was custody. Credibility signals and custody are different properties; only one of them protects your funds.
3. The proofs were public - a lesson in verification
What could a diligent depositor have checked, before the collapse? (1) PoR quality: FTX had none of substance - no Merkle report, no liabilities disclosure. (2) Corporate structure: the sister-company setup with unclear custody separation - a structural red flag in every industry. (3) The token's role: an exchange token used as a "reserve" by its own founder's trading firm is not a reserve; it is circular credit. (4) Regulatory optics vs. reality: the "regulated" FTX US arm did not hold customer funds from the global exchange - regulation of one arm never certified the other. All four flags are now permanent fields in our profile system.
4. The aftermath - justice is not recovery
Sam Bankman-Fried was convicted in November 2023 and sentenced to 25 years; other executives pleaded guilty. Bankruptcy proceedings recovered substantial assets - most creditors will eventually be paid in USD terms at petition-date values. But that recovery story has a dark side most summaries skip: in the 18 months after the collapse, claim prices traded at 10-30 cents on the dollar, and many retail users sold their claims at that level - taking the loss in exchange for liquidity. Justice took years; the claim market priced despair in weeks. Neither FTX's story nor its recovery should read as "it all worked out".
5. When this analysis fails
Hindsight analysis inflates the flag-readability: with the collapse known, every detail looks load-bearing. The honest frame is this: the structural flags (sister company, own token as reserve, no verifiable PoR, no third-party audit) were readable in advance by anyone who cared to look - that is what makes them systemic fields, not unique accidents. The case is also not an argument against all exchanges; it is an argument for checking the fields that separate custody from marketing.
Risk: The single most important sentence in crypto custody: if the exchange cannot show you verifiably what it holds and what it owes, you are not a depositor - you are an unsecured creditor. FTX made that sentence an $8B footnote.