What happened when the FTX exchange failed, and what does proof of reserves really prove?

What FTX was

FTX was a crypto exchange where customers could buy and sell crypto, trade derivatives and borrow money to trade. By 2022, according to the US appeals court that later heard the case, its customers traded around $10 billion to $15 billion a day.³

Samuel Bankman-Fried co-founded FTX and was its chief executive.¹ He also founded a crypto trading firm, Alameda Research.² Alameda was FTX's largest customer and its main market maker.³ Module 19 explains what market makers do.

What customers were told

US prosecutors said Bankman-Fried repeatedly told customers that their deposits were safe, held in custody for them, kept separate from the company's own assets, and would not be used by FTX.² The CFTC's complaint said FTX called itself "the safest and easiest way to buy and sell crypto".⁶

What went wrong

In December 2022, three US agencies brought charges. These were accusations at that point, not proof.^1,6,2

• The CFTC alleged that FTX customer assets were routinely held by Alameda and mixed with Alameda's own funds. It said hidden features in FTX's code, including an "allow negative flag", let Alameda withdraw billions of dollars of customer assets.⁶
• The SEC alleged that Alameda got special treatment on FTX, including a virtually unlimited "line of credit" funded by FTX's customers.¹
• The CFTC's complaint said the defendants' actions caused the loss of over $8 billion of customer deposits, the figure Module 8 also uses.⁶

The appeals court later described what set off the collapse. On 2 November 2022, a crypto news site published a version of Alameda's balance sheet, and customers rushed to withdraw.³ On 11 November 2022, FTX filed for bankruptcy because it could not meet customers' withdrawal requests.³

How the cases went

On appeal, Bankman-Fried argued that FTX and Alameda were only short of cash for a time, and held enough assets to make customers whole in the end. He said the trial court wrongly stopped him showing that evidence.³

The appeals court rejected his appeal. It relied on a Supreme Court decision that came after his trial: proving fraud does not require proof that the defendant meant to leave the victims with a net financial loss.³ It agreed with the trial court that FTX customers were defrauded as soon as he moved their money to Alameda, however strongly he believed he might later pay it back.³

When he was sentenced, prosecutors said he had channelled billions of dollars of customer deposits from FTX to Alameda.² They said he had FTX's code changed so that Alameda could withdraw almost unlimited amounts of crypto.²

FTX's bankruptcy estate has been paying creditors in rounds, in cash.^10,11 Its 2024 disclosure statement, which set out the repayment plan, said claims were valued in US dollars at crypto prices on the November 2022 bankruptcy filing dates. It said some customers should not gain just because the coins in their accounts later rose in price.¹⁰ Its July 2026 release said that after a fifth round, paid from 31 July 2026, the two main classes of customer claims would have received 105% of their allowed amounts in total. Smaller "convenience" claims, of $50,000 or less, would have received 120%.^11,10

Proof of reserves

Some crypto firms publish "proof of reserves" reports. PCAOB staff, introduced below, say firms may use them to reassure customers worried about the safety of their assets.⁵ SEC staff describe proof of reserves as a voluntary way for a crypto firm to give evidence that, in total, it held enough reserve assets to cover what it holds for customers, at a given point in time.⁴

Kraken, a crypto exchange, explains its own method. An independent accountant takes an anonymous snapshot of all client balances and puts them into a Merkle tree, a data structure that lets each customer check that their balance was included.¹² The accountant then checks that the blockchain addresses Kraken controls hold at least as much as those client balances.¹² Kraken adds that the check cannot find hidden claims on those funds, or prove that they were not borrowed to pass the review.¹² Its page, read on 22 October 2026, showed a snapshot dated 30 June 2026.¹²

What proof of reserves does not prove

In March 2023, staff at the SEC and at the Public Company Accounting Oversight Board (PCAOB), which oversees audits of US public companies, warned about these reports.^4,5

• One moment only. A report may show only a snapshot of assets at one point in time.⁴
• Debts left out. It does not tell the whole story about the firm's liabilities, its debts, or whether customers must "stand in line" behind other creditors if it fails.^4,5
• Borrowed coins. The checks may not show whether the firm borrowed assets to make its reserves look big enough.⁵
• What happens next. It may not stop the firm moving customer assets soon after the snapshot.^4,5
• The firm sets the terms. It can choose, for example, which wallets and accounts are examined.⁴
• Not an audit. PCAOB staff said these reports are not audits and give no meaningful assurance.⁵ Module 22 covers audits and attestations for stablecoins.