This December issue of Crypto Link covers the significant developments surrounding FTX Trading Ltd. (FTX), including its bankruptcy filing and the charges against and arrest of its CEO, Samuel Bankman-Fried. In the midst of the parallel enforcement actions taken by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the United States Attorney's Office for the Southern District of New York, Sam Bankman-Fried and his alleged illicit dealings have similarly sparked the interest of both the public and lawmakers. Although the mainstream and crypto-specific press suggest that current legislative efforts to solidify a crypto regulatory regime will be substantially set back because of the FTX bankruptcy, the exact opposite seems to be the case. Bipartisan and bicameral support for two broad crypto-related regulations - CFTC regulation of crypto spot markets (minimally for Bitcoin and Ethereum) and the federal regulation of stablecoins - remain largely intact. If anything, the FTX scandal seems to have only encouraged members of Congress and agency leadership in their effort to properly regulate digital assets in a manner that provides certainty to a growing industry and protection for consumers. Despite Congress's efforts, SEC Chair Gary Gensler has emphasized that he and the SEC have all of the tools they need to get crypto under control, notwithstanding his apparent acknowledgement that legislation is necessary for stablecoins and Congress's overall dissatisfaction with his "regulation by enforcement" approach. Those who are 'crypto-hostile' in Congress and the Administration remain so, and while emboldened by recent events, they will probably be on the 'outside looking in' at any serious legislative effort. It is not going too far to conclude that the coming year could be a "Crypto Congress," with the stage set for establishing a meaningful and lasting legal and regulatory regime for the growing digital asset industry.
SPOTLIGHT ON FTX
FTX Files for Bankruptcy, CEO Bankman-Fried Steps Down and Binance Announces Intention to Acquire FTX
On November 11, 2022, FTX announced that it and approximately 130 additional affiliated companies (the FTX Group) had commenced voluntary proceedings under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. On the same date, Samuel Bankman-Fried (Bankman-Fried) resigned from his role as CEO as John J. Ray III was appointed as the new CEO of the FTX Group. On November 2, 2022, CoinDesk had reported on a leaked document that showed that Alameda held a large amount of a digital currency called FTT created by FTX, following which Changpeng "CZ" Zhao, CEO of Binance, announced on November 6, 2022 that his company would sell their FTT tokens - an announcement which led to the price of FTT dropping significantly. The sharp price drop resulted in many FTX customers seeking to withdraw their assets from the platform (amounting to an estimated $6 billion over three days) and on November 8, 2022, FTX stopped allowing its customers to withdraw money from the platform.
On November 8, 2022, Binance stated that it had reached an agreement to fully acquire FTX which Bankman-Fried similarly confirmed as a "strategic transaction". However, only a day later, Binance confirmed that "as a result of corporate due diligence", news reports concerning "mishandled customer funds and alleged U.S. agency investigations", and "issues beyond [their] control or ability to help", Binance had decided against pursuing the acquisition of FTX. The FTX Group's bankruptcy filing followed only days later.
FTX's statement can be found here, CoinDesk's article can be found here, CZ's posts can be found here and here, Bankman-Fried's post can be found here, Binance's post can be found here and further media coverage can be found here and here.
U.S. Attorney's Office Charges and Arrests Samuel Bankman-Fried in an Eight-Count Indictment with Fraud, Money Laundering and Campaign Finance Offenses
On December 13, 2022, the U.S. Attorney's Office for the Southern District of New York announced the unsealing of an indictment charging Bankman-Fried with conspiracy to commit securities fraud, conspiracy to commit money laundering and conspiracy to defraud the Federal Election Commission and commit campaign finance violations. According to the U.S. Attorney's Office press release, the charges arise from an "alleged wide-ranging scheme" by Bankman-Fried to misappropriate billions of dollars of customer funds deposited with FTX, the crypto trading platform of which he was the CEO and co-founder, and mislead investors and lenders to FTX and to Alameda Research LLC (Alameda), his privately-held crypto hedge fund. The announcement confirmed that Bankman-Fried was arrested on December 12, 2022 in the Bahamas on the aforementioned charges. Damian Williams, the U.S. Attorney for the Southern District of New York, noted that the charges relate to the "phenomenal downfall" of FTX and the charges make clear that "this was not a case of mismanagement or poor oversight, but of intentional fraud".
The U.S. Attorney's Office for the Southern District of New York's press release can be found here.
SEC Charges Samuel Bankman-Fried with Defrauding Investors in Crypto Asset Trading Platform FTX
On December 13, 2022, the same date that the U.S. Attorney's Office charged Bankman-Fried, the SEC charged Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX. According to the SEC's complaint, since at least May 2019, FTX raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 U.S.-based investors.
The SEC's complaint alleged that despite Bankman-Fried promoting FTX as a safe, responsible crypto asset trading platform, in reality, Bankman-Fried orchestrated a years-long fraud to conceal from FTX's investors: (1) the undisclosed diversion of FTX customers' funds to Alameda; (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited "line of credit" funded by the platform's customers and exempting Alameda from certain key FTX risk mitigation measures; and (3) undisclosed risk stemming from FTX's exposure to Alameda's significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens. In addition, the SEC's complaint alleged that Bankman-Fried used commingled FTX customers' funds at Alameda to make undisclosed venture investments, lavish real estate purchases and large political donations.
Investigations as to other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.
The SEC's press release can be found here.
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