Navigating the FTX Collapse: Tax Implications

ied, FTX was one of the top-five cryptocurrency exchanges globally. At its peak, it attracted names such as Kevin O’Leary, Shaquille O’Neal, Tom Brady, and Steph Curry. Seemingly everyone was talking about FTX, as the Miami Heat even named its arena after the exchange. Its collapse sent shockwaves through the crypto world and caught the attention of all regulators. Unfortunately, to this day, crypto investors who suffered losses on the exchange have little to no guidance on how to obtain a tax deduction. 

But don't despair just yet – in this guide, we'll deep dive into the FTX collapse, explore its background and causes, provide a detailed timeline of events, and update you on the current status and latest news. We'll also discuss the tax implications of the collapse and offer strategies to help you mitigate your losses and emerge stronger on the other side. With our expert insights, you'll be better equipped to navigate the choppy waters of the crypto world and emerge from this dark chapter with renewed confidence.

Tax Implications of the FTX Collapse

Funds Withdrawn Prior to Collapse

If you are one of the lucky FTX users who got their funds out of the exchange, your tax situation is fairly straightforward. You can file your crypto taxes as usual, reporting any capital gains or losses from FTX trading on your 1040, Form 8949. Any gains or losses from trades on FTX will be reported similarly to any other crypto or capital asset gains or losses. 

Please be mindful that FTX will issue a Form 1099-B for capital gains and losses from trades on FTX. As such, you should ensure to report based on the 1099-B since the Internal Revenue Service (IRS) also receives a copy of these documents.

Funds Frozen on FTX

For the many retail investors who had funds at FTX and were unable to withdraw them, the path to a tax deduction is not clear at this moment. Given the magnitude of this case, there is a possibility that the IRS may issue guidance relating to the case, or Congress might take action later this year. For this reason, we recommend that you extend your tax return if you had funds stuck on FTX, as the additional time to file might give you further guidance. Remember that it is an extension of time to file, not to pay, so you should make an extension payment if you expect to owe money. Do not forget to consider your state extension and payment as well.

Read on for further details on why deducting this loss is not appropriate.

Casualty Loss Deduction

Some taxpayers may be tempted to look at the casualty loss deduction in order to claim a loss for their funds on FTX. Unfortunately, the Tax Cuts and Jobs Act temporarily limited casualty loss deductions to those attributable to a federally declared disaster. This means that unless this is declared a federal disaster by the President, you cannot use this to deduct your FTX losses.

Worthless Securities

Internal Revenue Code (IRC) §165(g) allows for a deduction “if any security which is a capital asset becomes worthless during the taxable year”. In that case, taxpayers can treat the security as sold on the last day of the taxable year for $0, and deduct their tax basis. There are two issues with attempting to use this code section to deduct the loss. First, digital assets or crypto assets are not within the definition of security as per  IRC §165(g)(2). Second, the assets are not worthless. The amount the retail investors will be able to recover remains unknown. However, customers will be able to recover a portion of those funds when the dust settles. While this is better than suffering a total loss of funds, it complicates the tax situation as the amount of the loss may not be known for a while. To deduct a loss for tax purposes, you must know the amount of the loss.

Capital Loss for $0 on Form 8949

It would make sense to think that if you know your capital investment is worthless and you are likely not getting it back, you could deduct the cost of it for $0 proceeds on your 8949 as if you sold it for $0. But, if you never disposed of the coins or tokens, you never had a taxable disposal event. Therefore you cannot just consider these coins sold for $0 and deduct their cost. In the case that anyone decides to do this, consider you will have to report as income the value of the coins that you do get back, whenever that is.

Ponzi-Investment Loss

Taxpayers can deduct losses from ponzi-type investment schemes. However, we recommend working with a professional as you must qualify based on Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and then complete Section C of Form 4684. The issue is that it is unclear if this loss might qualify under these Revenue Procedures, given that it does not fit the definitions. 

What about the IRS Form 1099-MISC?

FTX is issuing 1099-MISCs for the tax year 2022. As explained in our 1099 deep dive, a 1099-MISC reports income. You can expect to receive one if you made any kind of crypto income on FTX, such as staking, rewards, yield, or receiving additional coins through FTX from an airdrop or fork.

You should report your income from Forms 1099-MISC as reported. The IRS also receives a copy of this form and will be expecting to see this reported in your tax return when you file. Be careful not to double report this income if it is also included in your Accointing tax report (it should be). 

“But the coins I received as rewards on FTX are locked and I cannot access them. Do I still have to report this income?” The unfortunate reality, pending further notice, is that, yes, you must report and pay tax on this income even if you are unable to access your funds. 

How to Use Form 1099-B?

If you traded on FTX, you would be receiving a Form 1099-B reporting your capital gains and losses from those trades. Yes, this is the same capital gains and losses that Accointing will calculate for you for your entire crypto portfolio, not just FTX.

So, if FTX is included within my Accointing report, can I just use those totals and ignore the 1099-B? No. As mentioned above, the IRS will receive a copy of this 1099, so they will be looking for you to report your FTX gains and losses based on the 1099-B. Not reporting based on the 1099-B could trigger a notice and require you to prove that the 1099 totals are, in fact, included in the information reported. As such, it is recommended to separately report the information from your 1099-B on Form 8949, then report other totals from Accointing separately while being careful not to double report your FTX gains.

Business Bad Debts

What about any businesses that had receivables from FTX? IRC §166(a) allows for a deduction for any debt that becomes worthless during the year.  As luck would have it, no precise test for measuring when bad business debt becomes wholly worthless exists. The determination of whether a debt is worthless at a particular time is a question of fact based on all surrounding circumstances and is a highly subjective determination.

A debt is considered worthless when the holder has given up hope of recovering it. The determination of whether a debt is worthless at a particular time is a factual determination based on all surrounding circumstances. The fact that this is a Chapter 11 reorganization means that anyone who owed money from FTX will have to wait until the recovery process is complete. If your business has a large debt to FTX, consult your tax advisor on the deductibility based on your facts and circumstances.

Background and Overview

FTX was a leading global cryptocurrency exchange that promised to revolutionize the way investors traded digital assets. Founded in 2019 by Sam Bankman-Fried, a former Wall Street trader, FTX quickly gained a reputation for its user-friendly platform and innovative trading products.

Prior to the formation of FTX, Sam Bankman-Fried noticed that the price of Bitcoin on Japanese exchanges was higher than in the U.S. Through his control of Alameda Research, he organized an arbitrage trade and moved up to $25 million of Bitcoin each day, buying Bitcoin in the U.S. and then selling it in Japan for a profit. Using the money he earned from this trade and others, Sam Bankman-Fried created FTX. The exchange focused on attracting high-risk traders who wanted to make leveraged bets on crypto assets.

The business model of FTX has been highly complex.

1. Next to crypto asset trading, provided trading and custodian services, including margin lending to clients and safekeeping of crypto assets. On its website, FTX offered clients up to 20x leverage for various trades.
2. Second, FTX was lending crypto assets to Alameda Research. Alameda appears to have been launched to carry out arbitrage trades, profiting from differences in crypto asset prices.

In 2019, FTX launched a native token known as FTT, which gave holders the right to reduce trading fees on the platform. Prior to the collapse of FTX, FTT had a total market capitalization of EUR 3 billion. 

FTX quickly attracted the interest of VC crypto investors. Binance invested a stake in the company six months after it launched, and in January 2022, right after the crypto boom had peaked, FTX raised $400 million in Series C funding. These investments put the company at a $32 billion valuation, allowing Sam Bankman-Fried’s share to catapult him to a prominent  position as the richest crypto investor.

By the time the venture capitalists had put in their final round of funding, FTX had grown to be the second-largest cryptocurrency exchange by volume.  Investors included Paradigm and Sequoia Capital, SoftBank, Temasek, Thoma Bravo, and Third PointIts.  By all accounts, FTX was on track to become the world's preeminent crypto exchange.

Timeline of Key Events

May to July 2022

• During the incorporation and formation of the FTX, the price of Bitcoin, which had traded at around $10,000, shot up in 2021, peaking at more than $64,000. Venture capital money flooded into all things blockchain and crypto, and crypto platforms moved to attract customers. However, during the bull market of 2018 - 2022, Crypto investors built up huge amounts of leverage due to the emergence of centralized lending schemes and decentralized finance. When the market deteriorated in Q2 of 2022, funds, lenders, and other crypto investors were forced to sell because of margin calls. 
• Following the collapse of TerraLuna, it was revealed that crypto companies relied on loans to one another. Following the collapse of Terraluna in June 2022, Three Arrows Capital filed for bankruptcy which led to the bankruptcy of Genesis, in the same month and  Voyager Digital, in July of the same year. 
• When Voyager Digital filed for bankruptcy, the firm disclosed that not only did it owe crypto billionaire Sam Bankman-Fried’s Alameda Research $75 million — Alameda also owed Voyager $377 million. To further complicate matters, Alameda owns a 9% stake in Voyager. In addition, Genesis reportedly had $175 million in assets locked on the FTX exchange and a lending relationship with Alameda.

November 2, 2022

• Coindesk reports on a leaked document showing that Alameda Research has an unusually large number of FTT tokens on its balance sheet, questioning the separation of the two entities and Alameda’s financial soundness. Specifically, the article reported Alameda’s assets to be $14.6 billion, including $3.66 billion worth of unlocked FTT and $2.16 billion of FTT collateral.
• FTT was worth around $25.50 at the time and was not considered liquid enough to support Alameda's balance sheet.

November 6, 2022

• Binance CEO Changpeng Zhao announces on Twitter that “due to recent revelations that have come to light, Binance has decided to liquidate any remaining FTT on its books,”. Binance received around $2.1 billion equivalent in cash (coins BUSD and FTT) after its exit from FTX equity in 2021. Binance held 23 million FTT tokens, worth about $529 million based on its current price;
• Following the announcement of Changpeng Zhao, Caroline Ellison, the CEO of Alameda Research, responds that Alameda would like to buy the tokens from Binance at $22 each;
• The announcement leads to a rapid decline in FTT's value, causing concern about FTX's liquidity and leading to a decline in the value of other coins like BTC and ETH.

November 7, 2022

• Sam Bankman-Fried, announces on Twitter that the platform has excess cash and clients’ funds are safe while also calling on Binance CEO to collaborate with him to improve the ecosystem.

November 8, 2022

• The price of FTT crates to less than $6;
• Binance CEO Changpeng Zhao revealed that Binance has entered a nonbinding agreement to purchase FTX completely. He also stated that the buyout would depend on a due diligence check of FTX's financials. 
• FTX halts all non-fiat customer withdrawals, and Bankman-Fried posts a string of apologies on Twitter, explaining FTX's liquidity issues and promising more transparency. On Twitter, Bankman-Fried posted a string of apologies explaining FTX’s liquidity issues and promising more transparency.

November 9, 2022

• Newsletters revealed that federal agencies in the US are investigating FTX.
• Binance spokesperson tells reporters: "As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com."

November 10, 2022

• FTX suspends onboarding of new clients;
• Sam Bankman-Fried tells staff in a memo that he is scrambling to raise funds and has held talks with Justin Sun, founder of the crypto token Tron;
• FTX announces a deal with blockchain platform Tron that would allow it to use digital wallets other than FTX to swap some tokens;
• SBF announces that Alameda Research will shut down;
• Regulators in the Bahamas freeze FTX’s assets. 

November 11, 2022

• FTX, Alameda Research, and other Bankman-Fried vehicles file for voluntary Chapter 11 bankruptcy proceedings in Delaware, allowing businesses to restructure their debt and continue operations.
• FTX.US also temporarily froze withdrawals on Nov. 11, following the bankruptcy announcement, despite earlier reassurances that FTX.US was not affected by FTX's liquidity troubles. Withdrawals were later reopened.
• FTX CEO Sam Bankman-Fried steps down from his position. He was replaced by John J. Ray III, who famously oversaw the liquidation of Enron.

November 12, 2022

• FTX says it has detected unauthorized transactions. Blockchain analytics firms estimate outflows between $473m and $659m in “suspicious circumstances”.
• The Financial Times published FTX's balance sheet dated November 10, revealing $9 billion in liabilities and just $900 million in assets that could be easily sold. The balance sheet includes a "hidden, poorly internally labeled 'fiat@' account" with a balance of negative $8 billion.

November 13, 2022

• Newsletters report that at least $1bn of customer funds have vanished from FTX. 
• Bahamas securities regulators launched a probe over the collapse of FTX.

November 15, 2022

• Financial regulators in the Bahamas appoint liquidators to run FTX's unit in the country.

November 16, 2022

• The US House Financial Services and Senate Banking committees announce they will hold hearings into the implosion of FTX in December.
• FTX outlines a “severe liquidity crisis” in US bankruptcy filings, which show the group could have more than 1 million creditors.
• Bankman-Fried is sued in a US court by investors alleging the company’s yield-bearing crypto accounts violated Florida law.
• Sam Bankman-Fried tells VOX that he regrets filing for bankruptcy and, instead, insisted that he should have kept trying to raise more money.  
• A court filing shows FTX’s Bahamas unit, FTX Digital Markets, is seeking protection from creditors in the US under Chapter 15 of the US Bankruptcy Code. Liquidators for FTX Digital Markets ``reject the validity” of FTX’s US bankruptcy proceedings.
• Crypto lending unit Genesis Global Capital with $2.8 billion in active loans, suspended customer withdrawals due to the FTX collapse. Crypto Exchange Gemini suffers $485 million in outflows, resulting in the suspension of its yield-earning program.

November 17, 2022

• In a bankruptcy court filing, new FTX CEO Ray says: "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented."
• FTX in a bombshell emergency court filing, said it has credible evidence that Bahamian regulators directed former CEO Sam Bankman-Fried to gain “unauthorized access” to FTX systems to obtain digital assets belonging to the company after it had filed for Chapter 11 bankruptcy protection. In the motion, filed in the U.S. Bankruptcy Court in Delaware, FTX said the alleged conduct puts “in serious question” a request by Bahamian regulators for recognition as liquidators in the bankruptcy.

December 12, 2022

• Authorities in the Bahamas arrest Bankman-Fried at the request of the U.S. government to extradite him for eight criminal charges, including wire fraud and conspiracy to defraud investors.
• Bankman-Fried was scheduled to testify in front of the House Financial Services Committee the following day.

December 13, 2022

• FTX CEO John J. Ray III testified to the House committee, stating that FTX had "no record-keeping whatsoever". Among other things, John J. Ray III also stated that:
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• The Securities and Exchange Commission (SEC) charges Samuel Bankman-Fried with orchestrating a scheme to defraud investors while raising more than $1.8 billion.

December 19, 2022

• Former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang plead guilty to "charges arising from their participation in schemes to defraud FTX’s customers and investors, and related crimes," according to federal prosecutors. The two are cooperating with the government in the FTX case against Sam Bankman-Fried.

December 22, 2022

• FTX co-founder Sam Bankman-Fried is back in the US, released on $250 million bail.

December 28, 2022

• U.S. authorities launched an investigation into the hack that swept $372 million of assets.

January 3, 2023

• Bankman-Fried returns to the New York courtroom and pleads not guilty to each of the charges against him. His decision to contest the allegations means there could potentially be a criminal trial on the matter.

February 5, 2023

• FTX is requesting refunds of donations made to politicians. The company first announced its intention in December to try to claw back hundreds of millions of dollars in donations to celebrities, charities, and Republican and Democratic politicians.

February 15, 2023

• FTX Lawyers are trying to claw back $400 million that Sam Bankman-Fried invested in Modulo Capital, funds that are sitting in a JPMorgan Chase account.

February 23, 2023

• An unsealed indictment reveals that Sam Bankman-Fried is facing a handful of additional charges, including bank fraud and operating an unlicensed money transmitter. He now faces up to 12 counts of the various charges in a trial expected to start in October. 

February 28, 2023

• The U.S. Securities and Exchange Commission and Commodity Futures Trading Commission charged former FTX director of engineering Nishad Singh with fraud allegations following his guilty plea to similar charges in a federal court.

March 1, 2023

• The trial of Caroline Ellison and Gary Wang begins in New York. Prosecutors allege that the two executives were involved in a scheme to inflate the value of FTX's assets and deceive investors. Bankman-Fried is expected to be a key witness in the trial.

March 2, 2023

• FTX bankruptcy filing shows an $8.9 billion shortfall.
• FTX Debtors Publish Second Presentation for Stakeholders.

March 6, 2023

• Alameda Research files a lawsuit against asset manager Grayscale Investments LLC to realize over  $250 million in asset value for FTX customers and creditors.

March 29, 2023

• FTX Noticing sent an email to customers with a net positive account balance as of November 11, 2022, providing them with a unique customer code and scheduled claim information. The email stated that the court has not yet set a deadline for submitting proofs of claim or interests, but that all known creditors, including customers, will receive notice of the deadline and instructions on how to submit proofs of claim or interests once it is set. The email also cautioned that provision of a unique customer code is not an admission of the validity of the claim or a waiver of any defenses thereto.

Where are my Funds?

As mentioned above, on March 2, 2023, FTX Debtors released their second stakeholder presentation, which contains a preliminary analysis of the now-defunct crypto asset exchange’s shortfalls. 

The latest presentation reveals a significant shortfall, as approximately $2.2 billion of the company’s total assets were located in FTX.com-related addresses, but only $694 million is considered liquid crypto assets such as Bitcoin, Tether, or Ethereum. In addition, John J. Ray III, FTX’s current CEO, stated that the debtor’s effort had been significant, and he added that the exchange’s assets were “highly commingled”. 

The presentation also updated the amount of liquid assets currently recovered and held by the debtors' group, which grew from $5.5 billion to $6.1 billion since its last report in January. Although the increase is primarily the result of updated digital asset pricing, the group also recovered $202 million held at Alameda, $125 million in stablecoins, and $57 million in assorted cryptocurrencies held at subsidiaries.

However, despite identifying all the assets, an $8.9 billion shortfall remains. “There is a substantial shortfall at the FTX.com exchange at the time of the petition, defined as the difference between digital asset claims on the FTX.com ledger and digital assets available to satisfy those claims. The shortfall is particularly significant for liquid crypto assets. Only a small amount of cash, stablecoin, and other liquid crypto assets remain in wallets preliminarily associated with the FTX.com exchange.”

The report also notes that while the shortfall at FTX US was substantial, it was smaller than that of the international exchange. Additionally, the FTX shortfall does not include Alameda Research assets, which consist of $956 million worth of Solana (SOL) and Aptos (APT), $820 million held at third-party exchanges, $185 million in stablecoin assets held in cold storage, and $169 million in Bitcoin (BTC) held in cold storage.

Furthermore, the presentation discloses that unauthorized transfers removed an additional $293 million from wallets preliminarily sourced to the FTX.COM exchange and $139 million from wallets preliminarily sourced to the FTX.US exchange. 

What is the risk for Clawbacks?

Clawbacks are legal actions that enable a bankrupt entity to retrieve payments or transfers made before filing for bankruptcy, provided they are deemed unfair or fraudulent to other creditors. Clawbacks serve as insurance against fraud or misconduct, a decline in company profits, or poor employee performance. Within 90 days of filing for bankruptcy, the trustee retains the right to demand payment from creditors.

The liquidators of FTX have indicated that they will pursue clawbacks both in and out of court although the legal situation. According to John J. Ray III, FTX's corporate funds have been used to purchase homes and personal items for employees and advisers, with no documentation of those transactions as loans. Some of the real estate has been recorded in the names of those employees and advisers, according to court filings. If FTX s owners or executives used the company's funds as their own personal piggy bank, those transfers could also be recovered as fraudulent transfers.

FTX has already initiated the clawback process and has requested that the donations to celebrities, charities, and Republican and Democratic politicians shall be returned by February 28th, with a warning that they "reserve the right to commence actions before the Bankruptcy Court" if the funds are not returned by that date. Interest will accrue from the date any action is commenced.

Recovering the funds will not be a straightforward process. Clawbacks are not easy to execute and may involve years of litigation and negotiation. FTX's financial controls have failed, and the existing financial information is unreliable, according to the new CEO, John J. Ray III. Despite this, Ray has stated in court filings that his goals include maximizing value for FTX stakeholders and investigating claims against FTX's co-founders, including Bankman-Fried. It will likely take time for FTX's new executives to determine the extent to which the company transferred property without receiving reasonably equivalent value.

Customers who withdrew their crypto assets from FTX before the bankruptcy may potentially be asked to return the paid amount if a judge finds that the withdrawals were not part of normal business operations. Those customers who are required to return payments made within 90 days prior to the bankruptcy would have unsecured claims against the estate for those amounts.

According to Adam Levitin, a law professor at Georgetown University, there is a chance that preference actions could be initiated against anyone who withdrew funds from the exchange leading up to the bankruptcy. However, Levitin notes that safe harbors for securities or commodities transactions could apply and complicate the preference actions. There is an existing bankruptcy safe harbor that enables commodities and securities to continue to be traded on an exchange without the risk of clawback.

Recipients of alleged preferences may argue that they only took their own property and were not paid by the company as creditors. Joseph Cioffi, a partner at Davis & Gilbert LLP, suggests that the reported $5 billion of withdrawals by customers on the eve of the bankruptcy filing indicates a significant risk of preferential and fraudulent transfer actions against customers. Cioffi believes that customers are likely to have defenses based on their expectations and lack of knowledge of FTX’s scheme.

The risk of clawbacks for retail investors who withdrew their funds from FTX before its collapse may depend on several factors, such as:

• The timing of their withdrawals: The bankruptcy court might authorize FTX to claw back withdrawals that were made within 90 days of its bankruptcy filing or longer if fraud is involved.
• The source of their funds: If FTX can prove that their withdrawals were funded by customer money that was misused by FTX for other purposes, such as venture investments, they may have a stronger case for clawbacks.
• The fairness of their withdrawals: If FTX can prove that their withdrawals were unfair or detrimental to other creditors who were unable to withdraw their funds, they may have a stronger case for clawbacks.

However, clawbacks are not guaranteed and may face legal challenges and negotiations. 

Moving Forward

Regulatory Implications 

In the wake of FTX's collapse, the cryptocurrency industry is facing increased scrutiny from financial regulators. Policymakers have long emphasized the need for effective rules in the crypto sector, citing risks to consumers after a string of significant market crashes and corporate failures. However, despite this, the crypto industry remains largely unregulated globally, with firms only required to conduct checks to Prevent Money Laundering and Combat Terrorist Financing.

In the UK, the government is planning to implement robust regulations for crypto assets that ensure transparency, fairness, and consistency with the approach to traditional finance, thus mitigating the most significant risks in the sector.

In the US, lawmakers have made little legislative progress in establishing crypto oversight, despite several attempts last year that failed. Until January 2022, the most significant legislative progress has been on overseeing stablecoins such as Tether's USDT and Circle Internet Financial’s USDC, which are pegged to the US dollar to keep their values stable. However, in February 2023, US regulators initiated the process of going after crypto staking, following a $30 million fine against Kraken, and unregistered securities following a Wells notice to Paxos, the issuer of Binance USD. Specifically, the SEC believes it has the most straightforward claim to jurisdiction over crypto assets since staking is classified as an interest-bearing product under its rulebook. As for Binance USD, the SEC has issued a Wells Notice, which is a formal letter that informs a company of planned enforcement action, as it believes the cryptocurrency is an unregistered security. Paxos has a certain number of days to argue why the charges should not be brought against the prospective defendants.

In the EU, lawmakers are assessing and validating the Markets in Crypto Assets (MiCA) regulation, which is expected to go into effect in 2024. According to EU officials, under the MiCA regime, no company providing crypto assets in the EU would have been allowed to be organized in the way FTX reportedly was.

Finally, following the turbulence in the crypto asset space in 2021, the Australian government has indicated its intention to introduce legislation in 2023 to improve regulatory frameworks around cryptocurrency.

Keep your Funds Safe

Following the collapse of FTX; many crypto investors are anxiously awaiting who could be the next major exchange to collapse. We have even seen Forbes write an article alleging that similar practices to those going on at FTX have occurred at Binance. While CZ clarified this is all FUDD, who can blame crypto investors for being overly cautious given what we just went through with FTX? Even with SEC compliance, there is never 100% certainty that a business will not fail (see Enron). Therefore, traders and investors must take steps to mitigate the risks of any exchanges collapsing.

Do not store funds on an exchange. Many exchanges have come forward and told users that they do not want them to store their funds with them. At the end of the day, it is a liability for the exchanges and they would prefer to simply facilitate your trades, not store your funds. Exchanges are exchanges, not banks. Remember, not your keys, not your crypto. If you wish to store your crypto assets you should use a cold wallet, never an exchange. Use the exchange only to make trades, and if you are an active trader we recommend you only keep enough capital to trade and that you allocate across multiple exchanges to mitigate the risk of something going wrong.

Do Your Own Research

Remember to always do your own research on any exchange on which you will deposit your funds. Don’t trust an exchange just because there is a basketball arena named after it or because a millionaire investor recommended the exchange. Always do your own research, and yes, that does mean more than watching a YouTube video about the exchange from your favorite influencer. You should read news articles about the exchange, issues with regulators and how compliant they are, and how transparent the exchange is. Nowadays, many reputable exchanges will provide some type of on-chain proof of reserves. But you shouldn’t stop there; if the exchange is publicly traded, i.e., Coinbase, go to sec.gov and read through their annual and other reports the company files.

Conclusion 

In conclusion, the collapse of FTX has brought to light the need for effective regulations in the cryptocurrency industry. While governments and policymakers around the world are working to establish robust regulations to ensure transparency, fairness, and consistency with traditional finance, it is crucial for crypto investors to take steps to mitigate the risks of exchange collapses. This includes not storing funds on exchanges, doing thorough research on any exchange before depositing funds, and using cold wallets for storing crypto assets. As the crypto industry continues to evolve, it is important to stay informed and stay vigilant to ensure the safety and security of your investments.