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FTX: how customer deposits were misused and a $32 billion exchange collapsed in days

FTX grew into one of the world's largest crypto exchanges. In November 2022, reporting on its sister trading firm Alameda Research triggered a run on deposits, revealing that customer funds had been used by Alameda. FTX filed for bankruptcy within days, and its founder was convicted of fraud.

  • Primary cause: Fraud & misreported numbers
  • Governance failure
  • Lost customer trust
Founded
2019
Ended
2022
Headquarters
Bahamas
Sector
Fintech & Crypto
Capital raised
~$1.8B
Peak valuation
$32B (January 2022)

What happened

Filed for bankruptcy in November 2022. Co-founder Sam Bankman-Fried was convicted of fraud in 2023 and sentenced to 25 years in prison.

What FTX was

Sam Bankman-Fried and Gary Wang founded FTX in 2019, two years after starting the trading firm Alameda Research. FTX grew fast, raised money from top investors, bought stadium naming rights, and was valued at $32 billion in January 2022.

On November 2, 2022, CoinDesk reported that much of Alameda's balance sheet consisted of FTX's own token. Customers rushed to withdraw billions; FTX couldn't pay them and filed for bankruptcy on November 11. In November 2023 a jury convicted Bankman-Fried on seven counts of fraud and conspiracy.

Why it failed

  1. 1

    Customer funds were not kept separate

    Prosecutors showed that customer deposits went to Alameda and were used for investments, loans, and spending. An exchange that can't return deposits on demand isn't solvent, however fast it is growing.

  2. 2

    Almost no governance

    FTX had no functioning board, weak accounting, and control concentrated in a small group. The executive brought in to run the bankruptcy described a near-complete failure of corporate controls.

  3. 3

    Conflicts of interest built into the structure

    Running an exchange and a trading firm under common control created incentives to favour the trading firm. Special privileges for Alameda on the exchange made the misuse possible.

The product lesson

Investor diligence, brand campaigns, and celebrity endorsements don't replace basic controls. For any product that holds customers' money, segregation of funds, independent audits, and a real board are core product features. Who can move money, and how it is tracked, is never a back-office detail.

Early warning sign to watch for

Nobody outside a small founding group can explain where customer funds are held.

Compiled from public reporting, court records, and company statements. Figures are approximate. Where legal proceedings are mentioned, convictions are described as convictions and charges as allegations. Corrections welcome at hello@productmanagement.space.

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