Custody and cash · 18 / 86 · 2 min
Exchanges and custody
An exchange is a company in the middle. You deposit, you trade, you withdraw. Those are three different steps.
The balance on the screen is their database until a withdrawal lands in keys you hold.
A worked case
Someone finishes a trade and calls the coins theirs. Withdrawals are paused that night. The trade happened inside the firm. The coins never left it.
Their keys
While the coins are deposited, the exchange can move them. Your screen shows an IOU in their database. The chain may show the exchange's wallets, not an address that is yours alone.
The three steps
A deposit can sit pending. A trade can happen inside their system without a personal on-chain transfer. A withdrawal is when you ask them to send coins to a wallet you control.
Until the withdrawal confirms in a wallet you control, they can still freeze the account.
FTX: the balance was a claim on a fraud
An exchange is three steps wearing one login: you deposit, you trade inside their database, you try to withdraw. Until the withdrawal lands in keys you hold, the number is their number. FTX made that concrete. In November 2022 customers could not withdraw. In December the US Securities and Exchange Commission charged founder Samuel Bankman-Fried, saying he had diverted customer assets to his trading firm, Alameda Research, and to other uses. He was later convicted of fraud in a US criminal case. The screen had shown balances. The coins and the dollars were not sitting where the screen implied.
You do not need the trial transcript to use the lesson. Deposit, trade, and withdraw are different risks. A firm can be liquid on the way in, busy on the way through, and shut on the way out. Interest paid for leaving coins on the platform is the firm using your deposit. Ask what they do with it. If the answer is a vibe, leave less there.
The SEC's complaint is an allegation that became a court outcome. It is not a template for every exchange. It is the public record of what a famous one did with the money customers thought was at rest.
Read it yourself
These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.
Apply the check
Open a question. The line is about this topic. It is not a verdict that anything is safe.
The exchange, on the spread and the fee.
The company, in its terms and its matching engine.
The company, by freezing the withdrawal.
Check yourself
Is an exchange balance a wallet you control?
No. It is their account entry until you withdraw.
After this you can say whether a balance is an IOU or coins in a wallet you control.