Crypto · Intermediate · 4 min

Exchange collapses as case studies (FTX and co.)

You can describe what went wrong at FTX, Celsius and Terra, and name the lessons for anyone keeping money with a crypto firm.

The year of collapse

In 2022, some of the best-known names in crypto collapsed within a few months: a stablecoin worth tens of billions, a large crypto lender, and one of the world's largest crypto exchanges.

Their customers thought they were holding dollars, coins or interest-bearing deposits. What they actually held was a claim on firms they could not see into. This lesson looks at the three cases as warnings, not as history.

Trust they couldn't check

Terra (May 2022). TerraUSD was an algorithmic stablecoin meant to hold one dollar. When confidence broke, it lost its peg. The SEC says the collapse wiped out about 40 billion dollars in market value almost overnight. In 2024, a jury found Terraform Labs and its founder liable for securities fraud, and the company was ordered to pay about 4.47 billion dollars.

Celsius (2022). Celsius offered high interest on crypto deposits and lent them on. It froze customer withdrawals in 2022. In 2023, the SEC charged the company and its founder with misleading investors about its program, and with manipulating the price of its own token. The founder later pleaded guilty in a criminal case.

FTX (November 2022). FTX was one of the largest crypto exchanges. When customers rushed to withdraw, their money was not there. The US Department of Justice says its founder misappropriated billions of dollars in customer funds, using them for personal spending, investments, political donations and loans to his trading firm. In March 2024, he was sentenced to 25 years in prison.

The common thread: customers could not see how their assets were held. Commingling, mixing customer assets with a firm's own or other customers' assets, and lending them out without clear consent, turned firm failures into customer losses.

The lessons match the SEC's custody advice: ask whether a provider keeps your assets separate, whether it lends them out, and what protections apply. In the EU, MiCA now requires authorized providers to keep client assets separate, but no rule removes the need to choose providers carefully.

A run on missing money

A fictional exchange shows each customer a balance. Behind the scenes, part of the deposits has been lent to an affiliated trading firm.

A news report raises doubts about the affiliate. Customers start to withdraw.
Within days, withdrawals exceed the money the exchange still holds. It halts them.
In the insolvency, customers become creditors. Years later, they recover part of their money.

On their screens, the balances looked exactly the same the day before the halt as months earlier.

Common mistakes

"Too big to fail." Some of the largest firms failed.
Chasing high interest on crypto deposits. High yields usually mean your assets are lent out.
Trusting balances on a screen. A number is a claim, not proof of reserves.
Keeping everything on one platform. One failure can take all of it.

The takeaway

FTX misused customer funds, Celsius misled depositors, and Terra's stablecoin collapsed. The common lesson: know who holds your assets and how.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the case in which a stablecoin lost its link to the dollar.

Tap the chart.

The SEC says the collapse of TerraUSD in May 2022 wiped out about 40 billion dollars in market value almost overnight.
2What sentence did FTX founder Samuel Bankman-Fried receive in March 2024?

The US Department of Justice: 25 years in prison and forfeiture of 11 billion dollars, for fraud including misappropriating customer funds.
3What is commingling?

The SEC advises asking whether a custodian commingles or lends out customer assets.
4Which lesson do these cases have in common?

In each case, customers trusted a firm or mechanism they could not check.

of 4 correct.