You will be able to explain how FTX failed and why customer asset segregation matters.
In October 2022, FTX looked like one of the safest names in crypto. It was among the largest exchanges in the world, its founder appeared before lawmakers and on magazine covers, its brand was on a sports arena, and Singapore's Temasek was among the well-known investment firms that had put money into it. A month later it was bankrupt, and customers could not withdraw. This lesson is about why, and why the answer goes straight back to the rule you met in lesson 3.2, The protections MAS requires for retail customers.
FTX was a crypto exchange founded in 2019 by Sam Bankman-Fried, with its main international business run from the Bahamas. Customers deposited cash and crypto, traded with each other and with professional firms, and could borrow to trade larger positions.
Bankman-Fried also controlled Alameda Research, a crypto trading firm he had set up before FTX. The two were separate companies on paper. The links between them, and what that meant for customers, were not clear from the outside.
In early November 2022, a news report revealed that much of Alameda's balance sheet consisted of FTT, a token that FTX itself had created. That raised an obvious question. If Alameda's wealth was mostly a token whose value depended on FTX, how solid was either company?
Customers began withdrawing in large numbers. Within days FTX could not meet them, and it stopped processing withdrawals. On 11 November 2022 FTX and its related companies, including Alameda, filed for bankruptcy in the United States.
The reason it could not pay soon became clear. Customer funds deposited with FTX had been used by Alameda for its own trading, investments and other spending. The money that customers saw in their accounts was not all sitting where it should have been. When everyone asked for it at once, it was not there.
In November 2023 a jury in a US federal court in New York convicted Bankman-Fried of fraud and conspiracy. The legal process has continued since then, and the details of the bankruptcy and what customers recovered are matters of public record that you can read for yourself.
Every customer at FTX believed their balance was their own. What they actually held was a claim on FTX for that balance, the arrangement described in lesson 4.1, A wallet holds keys, not coins. When a firm treats customer assets as if they were its own, the claim stops being worth what the screen says.
That is the failure the trust and segregation rule in lesson 3.2 is designed to prevent. A licensed provider in Singapore must keep retail customers' tokens separate from its own assets and hold them on trust for customers. Under that rule, handing them to a related trading firm would be a plain breach of the law, with nothing ambiguous about it.
Segregation cannot stop a firm that is determined to commit fraud. What it does is make the rule clear, give a regulator something to inspect, and give customers a stronger legal position if the firm fails. FTX's international exchange, the one most non-US customers used, was based in the Bahamas and did not hold a MAS licence.
It would be comforting to think only careless retail customers lost out. They did not. Temasek, which had invested in FTX, wrote off its entire investment after the collapse. Other large, professional investors around the world did the same.
That matters for you in two ways. First, a famous investor's name on a company is not evidence that the company is safe. Those investors were backing FTX as a business, and they had no special protection as customers. Second, if teams with lawyers and analysts missed the problem, a retail customer reading the website certainly would. Your protection has to come from things you can actually check, and from how much you leave with any single firm.
With hindsight, some checks would have helped and some would not.
Licensing was checkable. A Singapore customer could have searched the MAS Financial Institutions Directory and found that FTX's international exchange was not licensed by MAS. That would not have revealed the fraud, but it would have shown that none of the Singapore protections applied.
Related-party links were partly visible. It was public that the same person controlled FTX and a large trading firm. That on its own proved nothing, but it was a reason to ask how customer assets were kept apart.
Reading the terms would not have saved anyone. FTX's terms described customer assets as belonging to customers. The problem was that the firm did not follow its own terms, and no retail customer could see inside it.
What would have helped most was not a check at all. It was keeping only what you needed on any one exchange, and not leaving savings there because it was convenient. Picture FTX as it looked in mid-2022, with its arena, its famous backers and its smooth app. Which checks were open to you then, and which of them would really have kept your money safe?
List three checks a retail customer could have made on FTX before the collapse and say whether each would have helped.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).