FTX Collapse

The FTX collapse in November 2022 is the single most important crypto fraud case study ever, and one of the most important financial fraud cases of the past two decades. Understanding it is non-negotiable for anyone operating in this space.

The basic facts: FTX was the second-largest crypto exchange in the world. Sam Bankman-Fried (SBF), the founder, was on the cover of Forbes, Fortune, and Bloomberg Markets. He was the second-largest donor to Democratic political candidates in the 2022 cycle. He was being interviewed by major financial press as one of the smartest people in finance. FTX had raised at a $32 billion valuation from blue-chip venture capital firms including Sequoia Capital, Tiger Global, Paradigm, and the Ontario Teachers' Pension Plan. The Miami Heat arena was renamed FTX Arena.

In a single week in early November 2022, the whole thing collapsed. A balance sheet leak showed that Alameda Research (a hedge fund secretly owned by SBF) had a large position in FTT, FTX's own exchange token. Binance's CEO announced Binance would sell its FTT holdings. The price of FTT cratered. Users tried to withdraw their funds from FTX. Within seventy-two hours it became clear that FTX did not have the funds. Customer deposits had been transferred to Alameda Research, which had used them for trading, venture investments, real estate, political donations, and personal expenses. The hole was roughly $8 billion.

FTX filed for bankruptcy on November 11. SBF was arrested in the Bahamas in December. He was extradited to the US, convicted on seven counts of fraud and conspiracy in November 2023, and sentenced to twenty-five years in federal prison in March 2024.

The lesson is not "crypto is a scam." Crypto's underlying technology and most of its institutions functioned through the FTX collapse exactly as designed. Bitcoin did not break. Ethereum did not break. DeFi protocols on chain did not break. The exchanges that held customer assets in segregated custody (Coinbase, Kraken) did not break. The thing that broke was a centralized exchange that lied about how it held customer funds and used those funds as a private piggy bank. This is a category of fraud that has existed forever and will exist forever. Bernie Madoff was structurally the same fraud. Enron was structurally the same fraud. MF Global was structurally the same fraud.

The specific lesson for crypto is that custody matters more than brand. The lesson is the difference between an exchange that holds your assets segregated in trust (with auditable reserves) and an exchange that commingles your funds with its own operations. The lesson is that no amount of media glow, political donations, or celebrity endorsement makes an institution solvent. The lesson is that yields above market rates are signal. The lesson is that the only audit that matters is one you can verify yourself, which for crypto means proof of reserves and ideally non-custodial holding for any size that exceeds your operating need.

The post-FTX consequences shaped the regulatory landscape. The CFTC, SEC, and DOJ all became substantially more aggressive about crypto enforcement. Proof of reserves became a de facto requirement for major exchanges. The market for centralized exchange tokens (BNB, OKB, etc.) was permanently impaired. The crypto-native venture capital ecosystem went through a year of contraction. Many of the institutional relationships SBF cultivated were quietly dismantled.

Read at least one in-depth piece about FTX if you have not. The Michael Lewis book "Going Infinite" is a controversial primary source — Lewis spent significant time with SBF before the collapse and produced a portrait that some critics felt was too sympathetic, though the underlying reporting is detailed. The Matt Levine columns from November 2022 through the trial are the best running commentary. The trial transcripts themselves are public and worth reading directly. Whatever you read, internalize this: the brand of an institution and the solvency of an institution are different things, and conflating them is how people lose their savings.