MSTR Cat

Crypto Law/Level IV · Holders' traps/4.1 Custody/Lesson 3

FTX: commingling and fraud

FTX’s terms promised customers that their assets stayed theirs, but customer money flowed to an affiliated trading firm, and the promise could not bring it back.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Cheapest protection is avoidance: hold long-term coins in self-custody and keep only working balances on platforms with an affiliated trading or market-making firm; US moves between your own wallets are not taxable, though basis records must follow the coins.
  2. Free pre-deposit check: confirm whether segregation is required by a regulator (NYDFS custody guidance, MiCA Article 75(7)) or only promised in terms; FTX’s title clause did not protect customers once assets were commingled.
  3. If a platform fails, file the free proof of claim by the bar date; FTX valued customer claims in US dollars at November 2022 petition prices, so later price rises are not recovered in kind.
  4. A loss on a bankruptcy claim is fixed when distributions end or the claim is sold to a claims buyer; selling can turn a slow recovery into cash and a capital loss now, at a discount to face value.

MaterialsThe SEC’s complaint against Samuel Bankman-Fried (filed 13 December 2022), paragraphs on the Terms of Service and the ‘fiat@’ (after the address fiat at ftx.com) accountThe Second Circuit’s opinion in United States v. Bankman-Fried, No. 24-961 (decided 12 June 2026)The terms of any platform you use that has an affiliated trading or market-making business

Wonder

  1. If FTX’s terms said my coins were mine, how could they be spent?
  2. What does commingling mean, and why is it so dangerous?
  3. Did FTX customers get their money back, and at what value?

Explore

  1. FTX was a crypto exchange founded by Samuel Bankman-Fried, who also controlled Alameda Research, a trading firm. According to the Second Circuit’s 2026 opinion, Alameda was FTX’s largest customer and main market maker, and FTX gave it a large line of credit that let it keep negative balances on FTX’s books. On 2 November 2022 a version of Alameda’s balance sheet was published by a crypto news site, setting off a rush of customer withdrawals. On 11 November 2022 FTX and over 100 affiliates filed for Chapter 11 in Delaware, and John J. Ray III replaced Bankman-Fried as chief executive.
  2. On paper, customers were well protected. The SEC’s complaint quotes FTX’s Terms of Service: customers ‘control the Digital Assets held in your Account’; ‘title to your Digital Assets shall at all times remain with you and shall not transfer to FTX’; and none of them ‘are the property of, or shall or may be loaned to, FTX Trading’. These are the custody-style terms lesson 4.1.1 describes as the stronger kind. Yet the terms were only promises. What happened inside the company is what decided the outcome.
  3. Commingling means mixing customer assets with the company’s own or an affiliate’s, so that no one can say which coin or dollar belongs to whom. The SEC alleged that customers were told to wire money to bank accounts of North Dimension, an Alameda subsidiary, and that these deposits were tracked in an internal account called ‘fiat@’ (after the address fiat at ftx.com). At trial, Gary Wang, FTX’s co-founder and chief technology officer, testified that ‘special privileges’ were built into FTX’s code that let Alameda withdraw almost without limit, amounting to a $65 billion line of credit. Ray said he had never seen ‘such a complete failure of corporate controls’.
  4. A jury convicted Bankman-Fried on 2 November 2023 of all seven counts: 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 he was sentenced to 25 years in prison and ordered to forfeit about $11 billion. The US Court of Appeals for the Second Circuit affirmed the conviction and sentence on 12 June 2026, rejecting his arguments, including that the forfeiture was an excessive fine. Other executives, including Caroline Ellison and Wang, testified for the government after pleading guilty.
  5. In bankruptcy, customers became claimants against a shortfall. The plan, confirmed by Judge John Dorsey of the Delaware bankruptcy court in October 2024, took effect on 3 January 2025. Customer claims were fixed in US dollars using crypto prices at the November 2022 petition date. Someone who held bitcoin on FTX therefore received a dollar recovery based on its 2022 price, not the coin itself or its later value, even though bitcoin’s price rose sharply afterward. The FTX Recovery Trust has also sued people and firms to recover money, a topic covered in lesson 4.3.6.
  6. FTX teaches that strong contract wording does not stop misuse, and that a platform tied to its own trading firm carries a particular conflict. A practical check: find out whether your platform has an affiliate that trades, makes markets or lends, whether customer assets are segregated under a regulator’s rules or only under its own terms, and whether an independent party examines that segregation. Proof-of-reserves reports help less than they seem (lesson 4.1.6). These questions are about understanding risk; this lesson does not rank platforms or suggest using any of them.

Key facts

  • FTX and more than 100 affiliates filed for Chapter 11 in Delaware on 11 November 2022.
  • FTX’s Terms of Service stated that title to customers’ digital assets would at all times remain with the customer and not transfer to FTX.
  • The SEC alleged that FTX customer deposits sent to North Dimension, an Alameda subsidiary, were tracked in an internal account called ‘fiat@’ (after the address fiat at ftx.com).
  • Samuel Bankman-Fried was convicted on all seven counts on 2 November 2023 and sentenced on 28 March 2024 to 25 years in prison.
  • The Second Circuit affirmed Bankman-Fried’s conviction and sentence on 12 June 2026 in case No. 24-961.
  • FTX’s Chapter 11 plan took effect on 3 January 2025, with customer claims valued in US dollars at petition-date prices.

Exercise nine, six, three, one

9CollectList up to 9 warning signs, drawn from the FTX case or from a platform you know, that customer assets might not be kept separate, such as an affiliated trading firm or a platform token used as collateral.
6ClusterSort them into 6 categories: ownership structure, use of customer funds, internal controls, banking arrangements, public statements, and regulatory oversight.
3DistillReduce the 6 categories to 3 groups: signs you can check from public documents, signs only an insider or auditor could see, and signs that appeared only after the collapse.
1CrystallizeWrite 1 sentence explaining why FTX’s promise that customers kept title to their assets did not protect them.

Fact check

Dates, figures and claims checked against the published sources listed below.

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