Balances on a cex are an entry in that company's database and a claim on that company, not coins you control. If the firm fails, you are an unsecured creditor in a bankruptcy that may run for years and pay back a fraction, often valued at the price on the date of failure rather than today's.
The failure pattern repeats: customer assets rehypothecated to fund proprietary trading, related-party loans, no segregation of client funds, and thin or absent regulatory oversight because the entity was domiciled somewhere convenient. Several large venues failed this way in 2022.
Practical mitigations are unexciting: keep only trading working capital on a venue, withdraw profits to self-custody, prefer venues with real regulatory supervision and segregation rules, and treat proof-of-reserves as one input rather than an all-clear.
Related: cex, proof-of-reserves, withdrawal-freeze, self-custody