A Reverse Death Investigation. In the space of a single week in November 2022, FTX went from a $32 billion exchange courted by regulators and celebrities to a bankrupt shell unable to return customer deposits. This dossier reconstructs, from court filings and reported testimony, how a firm marketed as a paragon of crypto compliance came to be described by its own court-appointed restructuring officer as a case of "old-fashioned embezzlement" dressed in the language of innovation.
Founded in 2019 by Sam Bankman-Fried, FTX rose quickly on the back of aggressive marketing, a Super Bowl advertisement, stadium naming rights, and a public persona built around effective altruism and regulatory engagement. Behind the public exchange sat Alameda Research, a trading firm Bankman-Fried had founded earlier and continued to control. The relationship between the two entities is the center of gravity for everything that followed.
The Structural Conflict
An exchange holds customer assets in custody; a trading firm takes proprietary market risk. When the same person controls both, the temptation to treat customer deposits as a funding source for the trading arm is structural. According to prosecutors and the testimony of former FTX executives, that is precisely what happened. Customer funds deposited at FTX were routed to Alameda and used for venture investments, political donations, luxury real estate, and trading losses.
Critically, Alameda was reportedly exempted from the automated liquidation engine that protected FTX against insolvent positions. Where any ordinary customer would have been margin-called and closed out, Alameda could carry a deeply negative balance. Internal code reportedly contained a special exemption, allowing the trading firm to draw on customer liquidity effectively without limit.
The Token That Held It Together
Much of FTX's apparent strength rested on FTT, its own exchange token. FTT was concentrated in the hands of FTX and Alameda, and Alameda's balance sheet reportedly used FTT as a major asset and as collateral. This created a circular dependency: the firm's solvency depended on the price of a token it printed and controlled.
A balance sheet propped up by a self-issued, thinly traded token is not a balance sheet. It is a confidence trick that holds only as long as no one tries to sell.
That confidence broke when a report surfaced detailing Alameda's heavy reliance on FTT. A rival exchange announced it would liquidate its FTT holdings. The price collapsed, Alameda's collateral evaporated, and the hole beneath FTX customer accounts was suddenly visible to everyone.
The Run
Within days, customers attempted to withdraw billions. An exchange that genuinely held customer assets one-for-one could have honored those requests. FTX could not. Withdrawals were halted. A hurried attempt at a rescue acquisition by a competitor collapsed once the acquirer reviewed the books. On 11 November 2022, FTX and roughly 130 affiliated entities filed for bankruptcy in Delaware.
The restructuring team that took over described what they found in unusually blunt terms:
- An absence of reliable corporate records and reliance on informal group chats and approval-by-emoji.
- Corporate funds reportedly used to purchase homes and personal items recorded as loans to insiders.
- No dependable list of bank accounts or who had authority over them.
- Commingling of customer and corporate assets that made any clean accounting nearly impossible.
The Reckoning
Sam Bankman-Fried was extradited from the Bahamas and charged with multiple counts of fraud and conspiracy. Several of his closest associates, including Alameda's chief executive and FTX's senior engineering and finance leaders, pleaded guilty and cooperated with the government. In November 2023, after a trial in the Southern District of New York, Bankman-Fried was convicted on all counts. In March 2024 he was sentenced to 25 years in prison.
The forensic lesson of FTX is not exotic. The mechanics described in court were the oldest in finance: take money held in trust, spend it on things that lose value or cannot be recovered, and hope inflows continue to cover outflows. The cryptographic packaging concealed nothing once the audit began. What had been missing was the simplest safeguard of all, a genuine separation between the people who held the customers' money and the people who were free to gamble with it.
Recovery efforts have since returned substantial value to creditors, aided by the appreciation of certain assets after the collapse. But the return of money does not absolve the conduct. The deposits were taken without consent and without disclosure, and the eventual recoveries were a function of market luck, not of the safeguards customers had been promised.