He basically used another company he controlled to take customer cash and invest it in the stock market. It was an effective way to launder crypto into other assets. When crypto tanked and the stock market tanked, he was unable to liquidate assets to reimburse his customers.
My big question is: if your company owns tens of billions in crypto, why are you trying to convert it into other assets?
So basically people think crypto is magic, but this is just the pigeons coming home to roost.
As I understand it, there isn't a problem if he has transaction 1, buy some crypto with customer cash, in concert with transaction 2, buy an equivalent amount of something else - stocks, bonds, or just the cash paid to you on the sidelines.
But if his supposed business didn't do that, that's the problem.... it sounds like he bought stocks INSTEAD of crypto with the money.
If your cryptocurrency is worth 20 grand a coin and you buy "1 coin" and I have a straightforward crypto account whose integrity is not in question, then your crypto tanks, that is your problem. I don't have to pay you 20 grand. I have to pay you what it's worth that day, that second actually.
So you sell when it hits 10 grand a coin. No problem if he invested where it was supposed to be. Everybody would take exactly the bath they were supposed to take, no "reimbursement" involved. It's just cashing out.
But the guy acting as the bank... let's call him the "Bankman"... has to have enough to pay you and everybody else who thought they invested in crypto through him.
As you said, he didn't have enough liquid assets to pay guys out as they ran for the exits.
It was essentially a bank that didn't follow any banking rules and had no reserves because yeeehawwww!!!! it didn't have pesky government regulators all up in its business all the time because yay crypto.
What cracks me up is that he did even WORSE in those stocks than the crypto did, if he could not liquidate from Peter and pay Paul. Either that or he got greedy and plowed it into some product that gave him a better return either in terms of downside protection or just a straight percentage bonus, for leaving his money invested in his failing stocks -- I don't understand options, but it's possible options might explain his broke-assedness... or some other longer-than-the-blink-of-an-eye-duration instrument.
Anyway everybody wanted US-government-backed paper, in its electronic form no doubt, and all he had was magical-thinking-backed promises. Turns out he lost on all the bets that were supposed to cover the investments.
It's really no different than any other misuse of the money that rendered it unavailable. If he spent it on hookers and cocaine, if I understand it correctly, it would be the same issue, from a banking perspective. He said he would do banking stuff, but he really just took people's money and when they went to cash out all at once, there was nothing to pay them with.