Why did FTX collapse? Customer funds, Alameda and missing controls

Why did FTX collapse, in 3 documented causes?

The 3 causes work as a chain. First, customer deposits were not kept apart from the funds of Alameda Research, a trading firm linked to FTX. Second, Alameda held a large amount of FTT, a token that FTX itself created, so its assets rose and fell with the exchange’s own fortunes. Third, controls that should have stopped these links did not exist.

A trigger completed the chain. When customers asked for their money in November 2022, FTX needed cash and had assets that had lost value. The sections below take each cause in order and mark which statements come from court documents and which come from press reports.

How did FTX customer funds end up with Alameda?

The Wall Street Journal, citing anonymous sources, reported that FTX lent Alameda more than half of its customers’ funds to cover losses in May and June 2022. Caroline Ellison, the chief executive of Alameda, later testified at the trial of Sam Bankman-Fried that she was one of his main accomplices in channeling FTX customer funds into Alameda.

A customer who deposits money at an exchange expects it to sit in a separate account. Lending those deposits to a related firm changes the deal without telling the customer. This is the central cause, and a companion guide examines the shared balance sheet in detail.

How did the FTT token make the FTX collapse worse?

CoinDesk reported on 2 November 2022 that 40% of Alameda Research’s $14.6 billion in assets was FTT, whether unlocked, locked or used as collateral. A token created by the exchange has no value outside the exchange’s own success. If the exchange wobbles, the token falls, and the collateral shrinks at the same time.

That is what happened on 8 November 2022, when FTT lost 80% of its value. Collateral that falls with the borrower gives little protection to a lender, and in this case the lender was effectively FTX’s own customer base.

Which controls were missing when FTX collapsed?

In his declaration of 17 November 2022, John J. Ray III, who replaced Sam Bankman-Fried as chief executive, wrote that he had never seen such a complete failure of corporate controls in his career. He cited compromised systems integrity and a lack of trustworthy financial information.

A control is a rule that stops one person from acting alone. Typical examples are a second signature on a transfer, an independent finance team, and records that an outsider can audit. When those rules are absent, one decision can move customer money without a second look.

What triggered the run on FTX in November 2022?

The CoinDesk report of 2 November started doubt. On 8 November, Binance announced a nonbinding letter of intent to purchase FTX, then stepped back on 9 November, citing reports of mishandled customer funds and pending investigations. Reports cite $6 billion in customer withdrawals, and FTX stopped processing them on 9 November.

A run is a self-feeding process: each withdrawal makes the next customer more worried. An exchange that holds all deposits in cash can meet a run. An exchange whose deposits sit in loans and a self-issued token cannot, and FTX filed for bankruptcy on 11 November 2022.

Which warning signs of the FTX collapse were visible earlier?

Observers described the exchange as unusually intertwined with its sister firm, Alameda Research, which was also FTX’s main market maker and sometimes took trading losses to attract customers to the exchange. Those facts were public before November 2022 and described a close tie between a platform and a trader on that platform.

A tie like this does not prove a failure. It gives a reader a prompt to ask for separate accounts and independent audits. In hindsight the prompt was strong, because the tie touched every other cause: the customer funds, the token and the controls.

Which reasons for the FTX collapse rest on court evidence?

Court findings and testimony support the claim that customer funds were channelled to Alameda: a jury found Sam Bankman-Fried guilty on all 7 counts on 2 November 2023. Press reports support the size of early figures, such as the $8 billion owed that the New York Times cited at the filing.

Reading a case this way gives you 3 levels: court facts, official filings, and press reports. Quote court facts as fact, filings as figures at a date, and press reports with the name of the newspaper. This keeps your own work accurate when numbers change.

What can a reader check at an exchange after the FTX collapse?

3 checks map to the 3 causes. Ask whether customer assets are held in segregated accounts. Ask whether the exchange or a related firm counts its own token as collateral. Ask who can approve a large transfer and whether an independent party audits the records.

A firm that publishes the answers in writing gives you something to verify. A firm that treats the questions as unusual gives you a signal of its own. The EQOS Asia method page shows how such signals feed a structured score, and the contact page lets you bring a concrete case.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile