SEC Crypto Crackdown Just Beginning After FTX Blast

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The United States Securities and Exchange Commission is just beginning its crackdown on crypto firms that refuse to comply with its rules.

SEC Chairman Gary Gensler said in an interview Thursday that the agencies’ patience is running out for digital asset exchanges and other firms that evade its regulations. Hours earlier, the watchdog — which had previously filed a lawsuit against FTX co-founder Sam Bankman-Fried — sued two other crypto executives for their alleged roles in the collapse of the digital asset exchange.

Gary Gensler, Chairman of the United States Securities and Exchange Commission

Photographer: Ting Shen/Bloomberg

The track is getting shorter to start following the rules and registering with the agency, Gensler said. Casinos in this Wild West are non-compliant intermediaries, he added.

Although he declined to identify the companies under scrutiny or comment on the next stage of the FTX investigation, Gensler warned of a number of practices plaguing the industry.

Over the past year and a half, the SEC chief has argued that most tokens are really just unregistered securities traded on the blockchain. He says they must follow the agency’s strict trade and investment rules.

Client funds

Gensler chastised the platforms for not siloing different parts of their business, such as custody and market-making functions. He also said client funds are often not segregated properly, an issue that received a lot of attention after FTX’s failure.

The SEC has accused former FTX CEO Bankman-Fried and two of his former senior associates, Caroline Ellison and Gary Wang, of participating in a multi-year scheme to defraud investors by misrepresenting the exchange as a secure platform, all at the same time. divert client funds to Alameda Research trading company and conceal other risks and issues.

Read more: Bankman-Fried Associates Flip as FTX Founder Arrives in New York

On Thursday, Gensler also took issue with so-called proof-of-reserve reports, which some crypto firms release to prove they have enough funds to back up customer deposits. Gensler said the practice, which has been used by major crypto firms including Binance Holdings Ltd., falls short of disclosures needed to protect investors.

Proof of reserves is neither a complete accounting of a company’s assets and liabilities nor satisfies the segregation of client funds under securities laws, Gensler said.

More generally, the SEC chief signaled that regulators remain focused on maintaining the financial records of crypto companies.

Some in this space have talked about ways to give customers confidence that their crypto is really there, Gensler said, without referencing any specific company. To do this, they must comply with proven rules on custody, segregation of client funds and accounting.

To contact the reporter on this story: Allyson Versprille in Washington at [email protected]

To contact the editors responsible for this story: Ben Bain at [email protected]

beth williams

2022 Bloomberg LP All rights reserved. Used with permission.

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