A traditional exchange? FTX was anything but.

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FTX’s terms of service did not mention how or where client assets would be stored. Instead, there was a brief line saying that legal title to any digital assets passed to FTX remained with the client.

What to know about the collapse of FTX

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What is FTX? FTX is a now bankrupt company that used to be one of the largest cryptocurrency exchanges in the world. It allowed customers to exchange digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The Bahamas-based company has built its business on risky business options that are not legal in the United States.

Who is Sam Bankman Fried? He is the 30-year-old founder of FTX and former CEO of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to Effective Altruism, a charitable movement that urges adherents to donate their wealth in efficient and logical ways.

How did the FTX problems start? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold his stake in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. This decision, which lowered the price of FTT, spooked investors.

What led to the collapse of FTX? Mr. Zhaos’ announcement drove the price down and spooked investors. Traders rushed to pull out of FTX, resulting in an $8 billion shortfall for the company. Binance, FTX’s main rival, offered a loan to save the company, but then pulled out, forcing FTX to file for bankruptcy on November 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse sparked Justice Department and Securities and Exchange Commission investigations focused on whether FTX improperly used client funds to support Alameda Research, a crypto trading platform Mr. Bankman-Fried had helped get it started. On December 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The next day, the SEC also filed civil fraud charges.

None of the digital assets in your account are owned by, or shall or may be lent to, FTX Trading; FTX Trading does not represent or treat Digital Assets in User Accounts as belonging to FTX Trading, under the Terms of Service. There was no similar statement for cash.

FTX’s alleged use of client assets to fund its business would be highly unlikely on US exchanges, which receive no money from clients. Instead, stock market investors send their money to a broker who is a member of the stock exchange and can act on behalf of their clients. Large institutional investors typically hold money with a custodian bank like State Street or BNY Mellon, sending transaction details through their brokers to the exchange. Custodian banks are responsible for protecting investors’ assets, with strict rules on what they can do with them.

The exchange simply acts as a meeting place for buyers and sellers, collecting transactions and other fees for providing the service. Every transaction made on a stock exchange contains instructions on what needs to happen next to ensure that the money ends up in the correct accounts and that ownership of any stock bought or sold passes to the buyer.

Most banks are also brokers, catering primarily to professional and wealthy investors. Robinhood, Charles Schwab and other brokerages target retail investors. Exchanges are prohibited from owning brokerages except to send trades to other exchanges if there is a better price for a stock elsewhere. And brokerages can own no more than 20% of an exchange.

The rules are intended to prevent any conflicts of interest that may arise if a brokerage shares ownership with the exchange where trades take place and where the broker or his client can make and lose money on trades.

By contrast, Alameda Trading, one of the largest FTX trading firms that was at the center of its collapse, was also co-founded by Mr. Bankman-Fried. FTX has been accused of using customer money to support Alamedas business activity. Given the bankruptcy, it is likely that FTX customers will never get all their money back.

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