"Industry"
People gave us money and now they want it back but we spent it
People gave us money and now they want it back but we spent it
If an exchange cannot 1:1 fund withdrawals it is not an exchange, it's a ponzi scheme. Full stop.
All real exchanges should be releasing evidence of 1:1 backed customer deposits ASAP like Coinbase has. And if they don't, it should be considered a canary of systemic risk.
https://www.benzinga.com/fintech/22/11/29692377/crypto-com-r...
This is the same analysis that shows that Tether is a fraud. If they took a dollar for every dollar token sold and then paid to store those dollars as collateral they'd be losing money, and would have no profit because they sell $1 for $1. They are wildly profitable though which proves that it's from crime because their base model has zero profit.
Recently though, the last few years, you can loan crypto for zero time and with zero risk in a process called a flash loan. You structure a single transaction to borrow funds, spend those funds and profit, and return those funds with interest. This actually allows an exchange to use user funds without risking them.
Hopefully we're done with centralized exchanges though, because even if they can be made possible they can never actually be made safe for the users.
The issue with FTX etc is that they didn't segregate their revenue model from their customer accounts. That's a no-no not only from a legal perspective but from a risk management perspective.
What the failing crypto exchanges are doing is similar to you buying stock in Apple, but they figure that Wal-Mart will give a better return, so they buy that instead, and when you go to sell your Apple, they hope to pocket the difference. With the fintech variety of financial engineering on top of this.
[1]: https://en.wikipedia.org/wiki/Deposit_insurance
[2]: https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...
Those two entities have two different functions in any financial system.
You should not be using your exchange like a bank. Even more importantly, your exchange should not be using your assets as a bank would.
This is the most important sentence to say over and over again in this entire discussion. Crypto people have somehow forgot this idea or maybe most of them never realized it in the first place. Your wallet is where your coins should be stored - the exchange is a place where you have pointers to your N wallets for N coins - not the freaking contents of the wallets themselves!
Crypto exchanges, on the other hand, mostly operate as broker-dealers, who happen to be engaging in off-exchange transactions (which are mostly illegal, or heavily regulated at least, in traditional assets). Furthermore, some, such as FTX, have taken it upon themselves to act as banks on top of this all. It's true that you can borrow money from a traditional broker-dealer, however, behind the scenes, regulations T, U, and X govern the process by which the BD pledges securities held in your account as collateral (which you allow them to do when you sign a margin agreement), in exchange for money from the bank, who in turn is governed by a heck of a lot of regulations and in turn is backed by the Federal Reserve and FDIC.
Basically, they're trying to be the entire financial system spun up in a few lines of html, javascript, and whatever flavor of the day scripting language they happen to be using is. Big surprise -- it's not working very well.
At the end of the day, the ones doing a better job are the ones that at least are leaving the banking side of things out of it, and charging a higher spread on executed trades, so that they can avoid needing to monetize simply holding your assets. This isn't a surprise -- if someone's charging you less than 1% on your trades, you should be VERY supicious.