Explainer · Crypto Safety
FTX collapse explained: what exchange failures teach beginners
In November 2022 the crypto exchange FTX stopped customer withdrawals and filed for bankruptcy within days. The details are complicated. The lesson for a beginner is not.
Quick answer
FTX paused customer withdrawals on November 8, 2022 and filed for bankruptcy three days later [1]. US prosecutors say Sam Bankman-Fried stole over $8 billion of customers' money [3]. Crypto left on a platform depends on that company's honesty and solvency.
Key points
- FTX told customers it kept their assets separate from its own [1], while the SEC alleged customer funds were diverted to an affiliated trading firm [2].
- Sam Bankman-Fried was sentenced to 25 years in prison for stealing over $8 billion of customers' money [3].
- Celsius promised yields up to 18% and a $750 million insurance policy; the FTC says the promises were false [4].
- When a custodian goes bankrupt you may lose access to your crypto, and US crypto accounts lack SIPC and FDIC protection [5] [6].
- Keeping only what you need on a platform limits what one failure can take: $200 of a $2,000 total is 10% (calculated).
On this page
What happened at FTX?#
FTX was a crypto trading platform run by Sam Bankman-Fried. Alameda Research was a trading firm in the same group of affiliated companies [1]. According to the SEC's complaint, a news report in early November 2022 said Alameda held a large position in FTT and other FTX-associated tokens [1]. Another crypto company, Binance, then announced it would sell its FTT holdings, and many FTX customers rushed to withdraw their funds [1].
Then the withdrawals stopped. On November 8, 2022 it paused all customer withdrawals, and the price of FTT fell by about 80% [1]. On November 11, 2022, FTX, Alameda and their affiliated companies filed for bankruptcy [1]. From frozen withdrawals to bankruptcy took three days (calculated).
The legal cases followed quickly. On December 13, 2022 the SEC charged Bankman-Fried with defrauding investors in FTX [2]. On March 28, 2024 a US federal court sentenced him to 25 years in prison, three years of supervised release and over $11 billion in forfeiture [3].
A run like this is the moment custody risk becomes real. While an exchange is healthy, the coins in your account look like yours. When withdrawals stop, they become a claim on a company that may not have the assets to pay.
Where did FTX customers' money go?#
The gap between what customers were told and what regulators say happened is the core of the story. The table puts the two side by side.
| Topic | What FTX told customers | What the SEC and prosecutors say happened |
|---|---|---|
| Separation of assets | Customer assets were segregated from FTX's own, and the digital assets in an account were not FTX's property | Customer funds were diverted to Alameda Research without disclosure |
| Risk controls | Sophisticated, automated risk measures protected customer assets | Alameda alone could run a negative balance, had a line of credit that grew to tens of billions of dollars, and was the only customer exempt from automatic liquidation |
| Customer money | Deposits belonged to customers | Customer funds went to personal use, investments, millions of dollars of political contributions and repaying Alameda's loans |
Statements and allegations from the SEC complaint [1] and SEC press release [2]; use of funds from the US Department of Justice sentencing release [3].
Automatic liquidation is the rule that closes a trader's positions when losses eat through their collateral (see liquidation). In plain terms, one affiliated customer played by different rules from everyone else on the platform. The Department of Justice put the final figure plainly: Bankman-Fried was sentenced for stealing over $8 billion of his customers' money [3].
How did Celsius fail, and what did it have in common with FTX?#
Celsius was a different kind of business with a similar ending. It offered interest-bearing accounts, crypto-backed loans and an exchange, and it filed for bankruptcy in July 2022 [4]. According to the FTC, Celsius told customers its platform was safer than banks, that they could withdraw their deposits at any time and that it held a $750 million insurance policy for deposits, and those promises were false [4]. The FTC says Celsius took title to and misappropriated customer deposits totalling more than $4 billion [4].
The common thread is custody. In both cases customers handed their coins to a company, US authorities say the company used them in ways customers were not told about [3] [4], and when it failed the coins were not there to give back.
Why can't customers simply withdraw when an exchange fails?#
Because on a custodial platform the company, not you, controls the coins. The SEC's custody bulletin warns that if a third-party custodian is hacked, shuts down or goes bankrupt, you may lose access to your crypto, and that some custodians lend out deposited crypto or commingle customer assets instead of holding them separately [5].
The protections people expect from banks are usually missing. The SEC says accounts with crypto asset entities do not have the SIPC and FDIC protections that broker and bank accounts generally have, and that customers might lose legal ownership of their assets and might not get them back [6]. The UK compensation scheme says it cannot protect you if a crypto platform goes out of business [7]. Our page on sipc fscs protection explains what those schemes do cover.
What can a beginner do differently?#
None of these steps makes crypto safe. They reduce how much a single company's failure can take from you.
- Check the platform before you deposit
Look it up on your regulator's register and read how it holds customer assets. Our guide asks the question directly: is a crypto exchange safe? In the EU, ESMA says clients of providers not authorised under MiCA do not get MiCA safeguards for client assets [8].
- Keep only what you need on the platform
If you hold $2,000 of crypto and keep $200 on an exchange for trading, a freeze there affects 10% of your holdings instead of 100% (calculated). The rest still carries its own risks.
- Treat high yields and safety claims as questions
Ask where the yield comes from and whether the platform lends out your coins. Celsius's insurance and safety claims were false, according to the FTC [4].
- Do not rely on a proof of reserves report
The US audit regulator warns that these reports are not audits, likely ignore what the platform owes, and cover a single point in time [9].
- Learn self-custody before you use it
Holding your own keys removes the company, but a lost or stolen wallet can mean permanent loss [5]. Read custodial vs non custodial wallet and seed phrase vs private key first.
Mistakes beginners make after an exchange collapse#
- Answering a recovery offer
After a collapse, scammers offer to get your money back for a fee. The FCA describes exactly this recovery scam [10], and the CFTC warns that fraud victims may be targeted multiple times [11]. More in crypto scams.
- Thinking a big name means safety
FTX was promoted as having automated risk measures to protect customer assets [2]. Size and advertising tell you nothing about how deposits are used.
- Moving everything to self-custody in a panic
Self-custody swaps company risk for your own: lost, stolen, damaged or hacked wallets can mean permanent loss [5]. Learn the set-up with a small amount first.
- Assuming it was a one-off
FTX and Celsius failed in different ways in the same year. The pattern, a company using customer coins it said were safe, is what to watch for, not one name.
Frequently asked questions#
When did FTX collapse?
FTX paused all customer withdrawals on November 8, 2022, and FTX, Alameda and affiliated companies filed for bankruptcy on November 11, 2022, according to the SEC's complaint [1].
What happened to Sam Bankman-Fried?
He was sentenced on March 28, 2024 to 25 years in prison, plus three years of supervised release and over $11 billion in forfeiture, according to the US Department of Justice [3].
Did FTX customers get their money back?
Could the same thing happen at another exchange?
Any custodian can fail. The SEC warns that a third-party custodian can be hacked, shut down or go bankrupt, and that you may then lose access to your crypto [5].
The bottom line#
FTX and Celsius both told customers their coins were safe, and according to US prosecutors and the FTC, both used those coins in ways customers were not told about. When they failed, customers were left depending on bankruptcy proceedings. Check any platform before you use it, keep only what you need there, treat yields and safety claims as questions, and learn self-custody before relying on it. Read the risk disclosure before buying any crypto.
Sources
- Securities and Exchange Commission v. Samuel Bankman-Fried, Complaint, Case 1:22-cv-10501 (S.D.N.Y.), Document 1, filed 12/13/22.
- SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX (Press Release 2022-219).
- Samuel Bankman-Fried Sentenced To 25 Years In Prison (U.S. Attorney's Office, Southern District of New York).
- FTC Reaches Settlement with Crypto Platform Celsius Network; Charges Former Executives with Duping Consumers into Transferring Cryptocurrency into their Platform and then Squandering Billions in User Deposits.
- Crypto Asset Custody Basics for Retail Investors - Investor Bulletin.
- Exercise Caution with Crypto Asset Securities: Investor Alert.
- Five things to consider about cryptoassets.
- Public Statement: ESMA calls on unauthorised crypto-asset service providers ... (ESMA75-113276571-1710, "MiCA transitional period ends").
- Investor Advisory: Exercise Caution with Third-Party Verification/Proof of Reserve Reports.
- Crypto investment scams.
- CFTC Warns Customers to Watch for Follow-on Frauds (Release 8936-24).
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
