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A Traditional Exchange? FTX Was Anything But.

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FTX’s terms of service made no mention of how, or where, client assets can be stored. As an alternative, there was a temporary line saying that the legal title of any digital assets passed to FTX remained the property of the shopper.

What to Know About the Collapse of FTX

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What’s FTX? FTX is a now bankrupt company that was one among the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency often known as FTT. The corporate, based within the Bahamas, built its business on dangerous trading options that will not be legal in the US.

Who’s Sam Bankman-Fried? He’s the 30-year-old founding father of FTX and the previous chief executive of FTX. Once a golden boy of the crypto industry, he was a significant donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to provide away their wealth in efficient and logical ways.

How did FTX’s troubles begin? Last yr, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving numerous FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the worth of FTT, spooked investors.

What led to FTX’s collapse? Mr. Zhao’s announcement drove down the worth and spooked investors. Traders rushed to withdraw from FTX, causing the corporate to have a $8 billion shortfall. Binance, FTX’s principal rival, offered a loan to save lots of the corporate but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested within the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.

“Not one of the Digital Assets in your Account are the property of, or shall or could also be loaned to, FTX Trading; FTX Trading doesn’t represent or treat Digital Assets in User’s Accounts as belonging to FTX Trading,” said the terms of service. There was no similar declaration for money assets.

FTX’s alleged use of customer assets to fund its activities can be highly unlikely at U.S. stock exchanges, which don’t touch any customer money. As an alternative, stock market investors send their money to a broker who’s a member of the exchange and might act on behalf of their clients. Larger institutional investors typically hold money with a custodian bank like State Street or BNY Mellon, sending trade details via their brokers to the exchange. Custodian banks are answerable for protecting investors’ assets, with strict rules on what they’ll do with them.

The exchange simply acts as a gathering place for buyers and sellers, collecting transaction and other fees for providing the service. Every trade conducted on an exchange comprises instructions about what should occur next to be sure that money leads to the proper accounts and that the ownership of whatever stock is being bought or sold transfers to the client.

Most banks are also brokers, catering mainly to skilled and high net price investors. Robinhood, Charles Schwab and other brokerages goal retail investors. Exchanges are prohibited from owning brokerages, aside from for sending trades to other exchanges if there may be a greater price for a stock elsewhere. And brokerages can own, at most, 20 percent of an exchange.

The foundations are meant to forestall any conflicts of interest that may arise if a brokerage shares ownership with the exchange where the trades occur, and where the broker or its client stand to make and lose money on trades.

In contrast, Alameda Trading, one among the largest trading firms on FTX that was at the middle of its collapse, was also co-founded by Mr. Bankman-Fried. FTX has been accused of using customer money to prop up Alameda’s trading activity. Given the bankruptcy, it’s likely that FTX customers won’t ever get all of their a refund.

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