Damien Soitout
When the platform is the risk, ask where custody sits. A balance on a screen is a claim, not the asset.
A screen shows a price. Custody is the question of who holds the thing if that screen goes dark.
A screen can show you a balance for months and teach you the wrong lesson. The lesson feels like this: the number is yours, because you can see it, and the company behind the number is a pipe. Then the company stops. The number is still painted on yesterday's screenshot, and the thing you thought you held is a claim in someone else's insolvency. I am writing on 24 November 2022, in the weeks after a large platform failed. When the platform is the risk, the title is about custody. It is not about a coin, and it is not about a price I think you should chase.
FTX Trading Ltd. and affiliated debtors filed chapter 11 petitions on 11 November 2022 and 14 November 2022 in the United States Bankruptcy Court for the District of Delaware. The main case is 22-11068 (JTD), before Judge John T. Dorsey. The public docket home for that information is the claims agent's page, Epiq's FTX case site. The date is already past and the record is public. What any creditor recovers is a fact the court and the debtor's advisers will state in their own papers, when they state it. Your job, if you kept something on a platform, is older and simpler than the recovery story. Where does the thing sit, and in whose name?
Anyone who left value on someone else's system can use the question. A broker's app, an exchange, a wallet held by a company, a marketplace that “stores” a collectible, a payroll tool that holds a week of wages. The industries differ. The structure is the same. You have a relationship with an intermediary. The intermediary's failure becomes your problem to the extent your property was only a promise on their books. A story about the intermediary, how fast it grew, who praised it, what the chart did last spring, is not a holding. The holding is a legal fact. If you cannot say the fact, you have a story.
Custody is a place and a name. The place might be your own possession: cash in a drawer, a security registered in your name, a key you control without a company in the middle. The place might be a regulated firm that is allowed to hold customer property under rules you can read. The place might be a company that pooled customer property with its own and called the pool a feature. Those are not three flavors of the same safety. They are three different answers, and only the answer changes what happens on the morning the company cannot open.
Ask the question before you are angry, and write the answer in ordinary words. What do I own if this company vanishes tonight? Is it a security in my name, a claim on the company's balance sheet, or a balance the company displayed? Who is the custodian, if the word appears in the contract? What law is named in the agreement, and which court would see a failure? If the honest answer is “I do not know, I liked the app,” you have learned something while the lesson is still cheap. Confirmation is the enemy of this exercise. I have written about that bias in the danger of confirmation bias. A rising balance confirms the story you wanted. It does not confirm custody. Go and read the agreement anyway, especially if the balance has been kind to you.
A broker is a specific kind of intermediary, not a synonym for “the app I use.” I set the term out in what a broker is. Use that piece when you need the role. Then use the public page that matches the role. Investor.gov, the U.S. Securities and Exchange Commission's site for the public, keeps a starting point on working with an investment professional: working with an investment professional. Open it and read what it asks of you before you treat a slick platform as if it were that professional. A clean interface is not a duty. A duty is something a person or a firm owes you under a rule you can find.
The FTX filing shows a narrow and useful scene. Customers who could see balances discovered that seeing is not holding, and that a platform can be the risk even when the assets people discuss are fashionable. Wisdom, this week, is not a ticker. Wisdom is the discovery that a bankruptcy case has a number, a judge, and a stack of petitions, and that your screenshot is not in charge of that stack. Life after a business fails is its own subject. I have written about the human side in life after bankruptcy. Read it if you are the person who owes, or the person whose counterparty failed. It will not move you up a creditor list. It will stop you treating the legal event as a personal curse with no procedure.
Young savers are the people most likely to learn the wrong moral, because a platform is often their first “investment.” I have written about starting early in ideas for investing from a young age. The idea that survives this month is boring. Know what you hold. Know who holds it. Prefer a structure you can explain to a friend without using the company's advertising. If you cannot explain the custody, you do not yet have an investment. You have a membership. Memberships end when the club ends.
There is a wider confusion, which I have tried to slow down in how much money there is in the world, between a number on a screen and the systems that make a number mean something. A platform's number felt like money because it spent, until it didn't. Money that depends on one company's promise is a credit. Credit can be excellent. It is still credit. Calling it “your crypto” or “your shares” does not change the credit if the company was free to use what you deposited. Read the verb in the terms. “Hold for you” and “owe you” are different verbs. The second verb is a claim. Claims stand in line.
People reach for a protection scheme the way they reach for a parent. Some schemes are real, and they are narrow on purpose. The Securities Investor Protection Corporation explains the narrowness on what SIPC protects. SIPC protects cash and securities at a financially troubled brokerage that is a SIPC member, when those assets are missing from customer accounts and a liquidation has begun. The limit it states is $500,000, which includes up to $250,000 for cash. The protection is there to restore missing customer property of that kind. It does not protect you against a market decline, against bad advice, or against securities that became worthless. It is not the FDIC, and it does not insure the price of what you bought.
Read the next line on that page with equal care. SIPC says that digital or crypto assets, when they are investment contracts that were never registered, are not “securities” under the law it administers, and are not protected. A logo that looks financial is not a membership card. If your platform is not a SIPC-member brokerage, the page you like will not adopt you because you are disappointed. I am using SIPC as a public example of how a real scheme talks: it names the kind of firm, the kind of asset, the moment protection starts, and the losses it will not replace. Bring that standard to any promise you are offered. If the promise cannot name those four things, it is a mood.
None of this is a reason to sneer at people who lost access to balances they were told were theirs. The sneer is cheap and it arrives too late. The useful sentence is the one you can ask next time, and this time if anything is still sitting on a similar system. Where is custody? What happens if the screen goes dark?
