• Tue. Nov 29th, 2022

FTX’s rapid rise and sudden demise – the SEC must act

ByChad J. Johnson

Nov 14, 2022

The epic and sudden rise implosion from FTX – a top cryptocurrency exchange until this weekend – sounds like an old-school Bernie Madoff Ponzi scheme. It is alleged that former CEO Sam Bankman-Fried, along with others, engaged in reckless business activities, in an effort to avoid imminent demise.

Through the company’s affiliated hedge fund, Alameda Research, Bankman-Fried and other employees at the Bahamas-based headquarters have been accused of tapping into clients’ funds and digital assets. Without permission, in a futile effort to keep the company afloat, he secretly transferred $10 billion in client assets that were used to bail FTX out of impending disaster.

This conduct, in regulated financial institutions, is prohibited and carries serious civil and criminal consequences. Since FTX is based outside of the United States and there are open questions about whether or not cryptos are securities, there will be scrutiny of the activities that have taken place.

How did it happen?

The Bankman-Fried exchange is known, in part, for its own token, FTT. A rival crypto CEO, Changpeng Zhao (known as CZ), who runs Binance, said on Twitter that he would sell his holdings in FTT because he didn’t feel comfortable. CZ offered to invest in or take over FTX, but he quickly changed his mind after doing due diligence. CZ backs off worried investors. It was the crypto equivalent of a backstroke. Customers wanted their assets removed from the platform, and people who held FTTs and other digital assets in other companies rushed to sell their holdings for fear of losing some or all of their money. .

Regulators are investigating

The US Department of Justice, Commodity Futures Trading Commission, and Securities and Exchange Commission (SEC), which took a hands-off approach under SEC Chairman Gary Gensler, are now taking a hard look at the crypto exchange. to determine if criminal activity has occurred. , and why the client’s assets were used without their knowledge.

There are also unresolved questions about how a 27 year old with little experience built an empire in three years, has enough money to put their name on the stadiumsobtained Tom Brady and other high profile celebrities brag about their company, bought from other crypto companies and gave millions to The politicians.

FTX and related entities, including Alameda Research, have requested Chapter 11 Bankruptcy petition in U.S. Bankruptcy Court for the District of Delaware on Friday. Bankman-Fried, in a statement, announced that he would step down as CEO of the company. Since FTX has invested and holds stakes in a number of crypto-related companies, such as Voyager Digital, Celsius network and crypto hedge funds Capital of the Three Arrows, it will be necessary to investigate these and other entities. Since many of these companies are not subject to US regulation, there is much concern about whether investors could get their money back.

To be compared to Warren Buffet and bankrupt JPMorgan

Bankman-Fried has been heralded as the next Warren Buffet and JPMorgan as he rescues several struggling crypto platforms. His fortune was estimated at around $16.8 billion before last week. Now he’s most likely broke in one of the “one of the greatest wealth destructions in history.”

If unauthorized transactions weren’t enough, FTX’s legal and financial teams discovered that Bankman-Fried had a “back doorinto the company’s accounting system. This allowed the embattled CEO to alter financial records without employees or auditors finding out the true situation. It was reported that the remaining assets had been diverted from the exchange by pirates.

As these events unfolded, on Thursday, the prodigy tweeted: “I screwed up, and I should have done better.”

The SEC must act quickly before more people are injured

Gensler, the head of the SEC, must immediately investigate FTX, as well as all crypto-related platforms. It must put in place rules and regulations. For example, since crypto trading can be volatile and lead to heavy losses, should only accredited investors be allowed to buy, sell and trade these digital assets? Alternatively, potential investors should take a course or complete assessments to show they understand the risks associated with these investments and trading vehicles.

We have all seen the project “pumps” with the posters claiming the huge sums of money that could be made. Regulated companies have strict rules about what people can say or write about the performance of securities or financial instruments. This is not the case in the crypto sector.

The SEC will need to significantly increase its budget and aggressively hire additional staff to examine this area. If not, there will be more of these explosions and unsuspecting participants will lose their nest egg.

Unfortunate events will be good news for lawyers, compliance officers, accountants, auditors and regulators, all of whom will be in high demand.