The collapse of FTX: the run, the bankruptcy, and the 25-year sentence

FTX was an exchange, which means it held other people’s money

FTX was a cryptocurrency exchange: a company where customers deposited dollars and coins and traded them on its platform. The CFTC’s December 2022 release describes FTX’s operations beginning around May 2019 and identifies Bankman-Fried as its founder and CEO. It raised more than $1.8 billion from investors.

The key fact about any exchange is that it holds your money for you. When you keep bitcoin on an exchange you do not hold the keys; the company does, and your balance is a promise. FTX told customers, in the SEC’s account, that their assets were kept safe and separate from the company’s own. Bankman-Fried also controlled a separate trading firm, Alameda Research, founded in 2017, which he said had no special access to the exchange.

Both statements were untrue, a jury later found. Understanding why requires a little about how custody works, which our article on Bitcoin wallets covers, and a little about how exchanges have failed before, which our dossier on the history of Bitcoin exchanges covers.

Nine days in November 2022

The collapse began with a news story. On 2 November 2022, CoinDesk reported that a balance sheet it had obtained showed Alameda holding a very large position in FTT, a token issued by FTX itself. On 6 November the chief executive of Binance, a rival exchange, announced that Binance would sell its own FTT holdings, then worth more than $500 million, citing “recent revelations.” Customers began pulling money out of FTX.

On 7 November Bankman-Fried tweeted that “FTX is fine. Assets are fine,” that the exchange did not invest client assets, and that it was processing all withdrawals. He later deleted the tweet. On 8 November FTX paused all customer withdrawals and the price of FTT fell by about 80 percent. The same day Binance announced a non-binding agreement to acquire FTX.com; on 9 November it withdrew after due diligence, citing reports of mishandled customer funds. The SEC says customers withdrew about $5 billion in a single day and that Bankman-Fried was seeking emergency funding to cover a shortfall of about $8 billion.

On 10 November he tweeted an apology. On 11 November he resigned, and FTX and about 100 affiliated companies filed for Chapter 11 bankruptcy protection in the United States. John J. Ray III, whose career included the Enron bankruptcy, became chief executive in the early hours of that morning and later told Congress that his first act was to authorize the filings.

Where the money went, according to regulators and the new CEO

On 13 December 2022 the SEC and the Commodity Futures Trading Commission filed civil complaints in Manhattan. The SEC alleged that from the start of FTX’s operations, customer deposits had been sent into bank accounts controlled by Alameda, that Alameda had an effectively unlimited “line of credit” drawn from customer assets, and that Bankman-Fried used commingled customer funds for venture investments, real estate and political donations. The CFTC described an “allow negative flag” in FTX’s code that let Alameda trade and withdraw even when its account had no money in it, and put customer losses at more than $8 billion.

The new chief executive was blunter. Testifying to the House Financial Services Committee on 13 December 2022, Ray said that in more than 40 years of restructuring work, “never in my career have I seen such an utter failure of corporate controls at every level of an organization.” He listed what he had found: senior managers with access to systems holding customer assets and no controls to stop them redirecting those assets, private keys to hundreds of millions of dollars of crypto stored without effective security, Alameda able to borrow customer funds “without any effective limits,” commingled assets, and no audited or reliable financial statements.

These were allegations at the time, and the SEC and CFTC cases are civil. The criminal case is where the allegations became findings.

Charges, a verdict and 25 years

Bankman-Fried was arrested in the Bahamas on 12 December 2022, and the next day federal prosecutors in Manhattan unsealed an eight-count indictment charging wire fraud, conspiracy to commit commodities and securities fraud, money laundering conspiracy and campaign finance offenses. The US Attorney said it was “not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple.” That was the prosecution’s claim; a jury had yet to weigh it.

On 2 November 2023, after a one-month trial before Judge Lewis A. Kaplan, the jury convicted him on all seven counts it was asked to decide: two counts of wire fraud, two of wire fraud conspiracy, and conspiracies to commit securities fraud, commodities fraud and money laundering. On 28 March 2024, Judge Kaplan sentenced him to 25 years in prison, three years of supervised release and forfeiture of more than $11 billion. The Justice Department said he had misappropriated billions of dollars of customer funds, defrauded FTX investors of more than $1.7 billion and Alameda’s lenders of more than $1.3 billion, and had directed changes to FTX’s code so Alameda could withdraw “effectively unlimited amounts.”

A distribution announcement is not proof of every customer’s recovery

The FTX Recovery Trust announced a third distribution scheduled for 30 September 2025. Its class table described cumulative distributions of 78% for eligible Class 5A dotcom customer claims and 95% for eligible Class 5B US customer claims after that round. It specified eligibility requirements and expected processing time through distribution providers.

These percentages are measured against allowed claims under the plan, not against a promise to return the original number of coins. An announcement of scheduled distribution is not evidence that every claimant received funds on that date. This entry does not treat that 2025 statement as a current balance of recoveries.

Why this was a company failure, not a Bitcoin failure

It is worth being precise about what failed. FTX was a company that took custody of customers’ money and, according to the jury’s verdict, used it without permission. Bitcoin the network has no customers and holds nobody’s deposits; coins in a wallet whose keys you hold cannot be lent out by anyone else. The CFTC’s complaint says FTX marketed itself as “the safest and easiest way to buy and sell crypto.” What failed was that promise, made by a company, not the ledger underneath it.

That is the same lesson as the 2016 Bitfinex hack and the collapse of Mt. Gox, and it is why the phrase “not your keys, not your coins” is repeated so often. Ray’s list of what FTX lacked, from audited accounts to controls on who could move customer assets, is a list of things any institution holding other people’s money needs and that Bitcoin itself never needed, because it never holds anything for anyone. Our guide to private keys and seed phrases explains what holding your own coins actually involves.

None of that makes the losses smaller for the people who trusted FTX. It does mean the right question after any exchange failure is not “did Bitcoin break?” but “who was holding the coins, and what did they do with them?”