Analysis: Bankman-Fried Fraud Accusations Sidestep Debate Over How US Law Views Crypto

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NEW YORK, Jan 9 (Reuters) – Sam Bankman-Fried may struggle to argue that fraud charges against him should be dismissed due to uncertainty over how U.S. law treats cryptocurrency, as other prominent defendants in criminal cases involving digital assets have done.

Indeed, the charges brought by federal prosecutors in Manhattan against the founder of the now bankrupt crypto exchange FTX have largely sidestepped an ongoing debate over whether cryptocurrencies should be regulated in as securities or commodities, legal experts told Reuters.

Bankman-Fried, 30, was charged with two counts of wire fraud and six counts of conspiracy last month in Manhattan federal court for allegedly stealing deposits from FTX customers to pay bills. debts of his hedge fund, Alameda Research, and lying to equity investors about FTX’s financial condition. . He pleaded not guilty.

“It’s a pretty simple deception,” said Shane Stansbury, a Duke University School of Law professor and former Manhattan federal prosecutor. “You really don’t need to go into the details of how we view cryptocurrencies.”

Whether cryptocurrencies are considered securities, such as stocks or bonds, or commodities – a category which in the United States encompasses trading in currencies as well as commodities such as oil gross – remains largely unresolved.

But the uncertainty is irrelevant to most of the charges against Bankman-Fried, experts say. Although he faces one count of conspiracy to commit securities fraud, this charge alleges that he misled investors in FTX shares and does not touch on the nature of the assets being traded. in stock exchange.

He also faces two counts of wire fraud and two counts of conspiracy for allegedly providing false information to Alameda lenders about the hedge fund’s financial health and for the alleged theft of client assets.

“There is no need to establish that what customers ultimately purchased with fiat currency was a security or a commodity or anything,” said Mark Kasten, an attorney at Buchanan Ingersoll & Rooney in Philadelphia. “Clients put money on the platform and the money was supposed to be used in a certain way. And according to the indictment’s allegations, that was not the case.”

A spokesperson for the U.S. Attorney’s Office in Manhattan declined to comment.

Defense attorneys for Bankman-Fried did not respond to a request for comment. The former billionaire has previously acknowledged flaws in FTX’s risk management practices, but said he does not believe he is criminally liable.

DEBATE COULD DECIDE RULES

Gary Gensler, Chairman of the United States Securities and Exchange Commission (SEC), said bitcoin is a commodity, but other digital assets behave more like securities – broadly defined as contracts in which investors benefit from the efforts of others – because their value derives from promotion.

The debate is important for cryptocurrency companies because it could determine which agency regulates trading in digital assets. The U.S. Commodity Futures Trading Commission (CFTC) is seen by many crypto players as potentially friendlier than the better-funded SEC.

San Francisco-based blockchain payments firm Ripple is challenging a 2020 SEC lawsuit accusing it of conducting an unregistered securities offering by arguing that its XRP token is not a security and therefore is not not subject to SEC oversight. The case is ongoing.

Damian Williams, Manhattan’s top federal prosecutor who took office in 2021, has made cracking down on cryptocurrency-related financial crimes a centerpiece of his tenure.

Last year, in the first-ever insider trading cases involving digital assets, his office filed wire fraud charges against Nathaniel Chastain, a former employee of the OpenSea non-fungible token (NFT) market, and Ishan Wahi. , a former director of cryptocurrency exchange Coinbase Global Inc (COIN.O).

Both pleaded not guilty and argued that the charges should be dismissed because insider trading charges must involve securities or commodities. By bringing charges of wire fraud in both cases, prosecutors avoided taking a position on how cryptocurrencies or NFTs should be classified.

In October, a judge denied Chastain’s attorneys’ motion to dismiss the charges.

Bankman-Fried’s attorneys are unlikely to attempt a similar argument because wire fraud charges are simpler, Kasten said.

He said the Massachusetts Institute of Technology (MIT) graduate’s defense would likely focus on arguments that he had no intention of committing fraud, that other FTX and Alameda executives bore the blame and that he was not involved in daily life. day-to-day business operations.

But prosecutors could also prove wire fraud charges by establishing that a defendant willfully blinded himself to the consequences of his actions, said Victor Hou, a partner at Cleary Gottlieb and a former Manhattan federal prosecutor.

“Electronic fraud is a powerful and frequently used weapon in the prosecutor’s arsenal because it covers an exceptionally wide range of illegal behavior,” Hou said.

Reporting by Luc Cohen in New York; Editing by Daniel Wallis

Our standards: The Thomson Reuters Trust Principles.

Luke Cohen

Thomson Reuters

New York Federal Courts Reports. Previously, he worked as a correspondent in Venezuela and Argentina.

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