Jan 24 (Reuters) – Paranoid? The domino downfall of FTX and other crypto custodians is enough to make the most trusting investor grab their bitcoin and shove it under the mattress.
Indeed, holders big and small are taking “self-custody” of their funds, moving them from crypto exchanges and trading platforms to personal digital wallets.
In a sign of this shift among retail investors, the number of bitcoin held in smaller wallets – those with under 10 bitcoin – rose to 3.35 million as of Jan. 11, up 23% from the 2.72 million held a year ago, according to data from CoinMetrics.
As a percentage of total bitcoin supply, wallet addresses holding under 10 bitcoin now own 17.4%, up from 14.4% a year ago.
“A lot of this really depends on how frequently you’re trading,” said Joshua Peck, founder of hedge fund TrueCode Capital. “If you’re just going buy and hold for the next 10 years, then it’s probably worth making the investment and learning how to custody your assets really, really well.”
The stampede has been turbocharged by the FTX scandal and other crypto collapses, with large investors leading the way.
The 7-day average of daily movement of funds from centralized exchanges to personal wallets jumped to a six-month high of $1.3 billion in mid-November, at the time of FTX collapse, according to data from Chainalysis.
Big investors with transfers of above $100,000 were responsible for those flows, the data showed.
Reuters Graphics
WHERE ARE MY KEYS?
Not your keys, not your coins.
This mantra among early crypto enthusiasts, cautioning that access to your funds is paramount, regularly trended online last year as finance platforms dropped like flies.
Self-custody’s no walk in the park, though.
Wallets can range from “hot” ones connected to the internet or “cold” ones in offline hardware devices, although the latter typically don’t appeal to first-time investors, who often buy crypto on big exchanges.
The multi-level security can often be cumbersome and expensive process for a small-time investor, and there’s always the challenge of guarding keeping your encryption key – a string of data similar to a password – without losing or forgetting it.
Meanwhile, hardware wallets can fail, or be stolen.
“It’s very challenging, because you have to keep track of your keys, you have to back those keys up,” said Peck at TrueCode Capital, adding: “I’ll tell you it’s a very challenging prospect of doing self custody for a multi-million-dollar portfolio of crypto.”
Institutional investors are also turning to regulated custodians – specialized companies that can hold funds in cold storage – as many traditional finance firms would not legally be able to “self-custody” investors’ assets.
One such firm, BitGo, which provides custodian services custody for institutional investors and traders, said it saw a 25% increase in onboarding inquiries in December versus the month before from those looking to move their funds from exchanges, plus a 20% jump in assets under custody.
David Wells, CEO of Enclave Markets, said trading platforms were extremely cautious of the risks of storing the investors’ assets with a third party.
“A comment that stuck with me was ‘investors will forgive us for losing some of their money through our trading strategies, because that’s what they sign up for, what they’re not going to forgive us is for being poor custodians’.”
Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru; Editing by Pravin Char
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
Jan 20 (Reuters) – Federal prosecutors have seized nearly $700 million in assets from FTX founder Sam Bankman-Fried in January, largely in the form of Robinhood stock, according to a Friday court filing.
Bankman-Fried, who has been accused of stealing billions of dollars from FTX customers to pay debts incurred by his crypto-focused hedge fund, has pleaded not guilty to fraud charges. He is scheduled to face trial in October.
The Department of Justice revealed the seizure of Robinhood shares earlier this month, but it provided a more complete list of seized assets Friday, including cash held at various banks and assets deposited at crypto exchange Binance.
The ownership of the seized Robinhood shares, valued at about $525 million, has been the subject of disputes between Bankman-Fried, FTX, and bankrupt crypto lender BlockFi.
The most recent asset seizure reported by the DOJ took place on Thursday, when prosecutors seized $94.5 million in cash from an account at Silvergate Bank which was associated with FTX Digital Markets, FTX’s subsidiary in the Bahamas. The DOJ seized more than $7 million from other Silvergate accounts associated with Bankman-Fried and FTX.
The DOJ previously seized nearly $50 million from an FTX Digital Markets account at Moonstone Bank, a small bank in Washington state.
DOJ also said that assets in three Binance accounts associated with Bankman-Fried were subject to criminal forfeiture, but did not provide an estimate of the value in those accounts.
Reporting by Dietrich Knauth; Editing by Noeleen Walder and Daniel Wallis
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Jan 5 (Reuters) – FTX’s former top lawyer Daniel Friedberg has cooperated with U.S. prosecutors as they investigate the crypto firm’s collapse, a source familiar with the matter said, adding pressure on founder Sam Bankman-Fried who was arrested on criminal fraud charges last month.
Friedberg gave details about FTX in a Nov. 22 meeting with two dozen investigators, the person said. The meeting, held at the U.S. Attorney for the Southern District of New York’s office included officials from the Justice Department, Federal Bureau of Investigation, and the U.S. Securities and Exchange Commission, the source said. Emails between attendees scheduling the meeting with those agencies were seen by Reuters.
At the meeting, he told prosecutors what he knew of Bankman-Fried’s use of customer funds to finance his business empire, the source said. Friedberg recounted conversations he had with other top executives on the subject and provided details of how Bankman-Fried’s hedge fund Alameda Research functioned, the source said.
Friedberg’s cooperation has not been previously reported. He has not been charged and has not been told he is under criminal investigation, the source said. Instead, he expects to be called as a government witness in Bankman-Fried’s October trial, the person said.
Friedberg’s lawyer, Telemachus Kasulis, the FBI and FTX did not respond to requests for comment on his cooperation. The SEC, the Department of Justice and Bankman-Fried’s spokesman declined to comment.
Bankman-Fried is accused of diverting billions of dollars in FTX client funds to Alameda to bankroll venture investments, luxury real estate purchases, and political donations. On Tuesday, he pleaded not guilty in Manhattan federal court.
Manhattan U.S. Attorney Damian Williams, who is leading the criminal case against now bankrupt FTX, said last month: “If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it.”
Two of Bankman-Fried’s closest associates, Caroline Ellison, Alameda’s former chief executive, and Gary Wang, FTX’s former chief technology officer, pleaded guilty to fraud and agreed to cooperate. A lawyer for Ellison didn’t respond to a request for comment. Wang’s lawyer declined to comment.
MEETING WITH PROSECUTORS
FTX filed for bankruptcy protection on Nov. 11. A few days later, on Nov. 14, Friedberg received a call from two FBI agents based in New York. He told them he was willing to share information but needed to ask FTX to waive his attorney-client privilege, according to a person familiar with the matter and emails viewed by Reuters.
Friedberg wrote to FTX the next day asking the company to waive his privilege so he could cooperate with prosecutors, according to the email seen by Reuters. FTX did not do so, but agreed with Friedberg on the points he could disclose to investigators, the person said.
Friedberg then wrote back to the two FBI agents, telling them in an email reviewed by Reuters: “I want to cooperate in all respects.”
The U.S. Attorney’s Office set up a meeting where Friedberg signed so-called proffer letters prepared for him by the SEC and other agencies, according to the source and an email exchanged by participants. Proffer letters typically describe a potential agreement between authorities and individuals who are witnesses or subjects of an investigation.
“THROUGH THICK AND THIN”
Prior to his work advising FTX, Friedberg advised a mix of banking, fintech, and online gaming companies.
One of his previous employers, a Canadian online gaming firm named Excapsa Software, where he was general counsel, also drew controversy due to a cheating scandal involving a poker site it operated called Ultimate Bet. A Canadian gaming commission in 2008 fined Ultimate Bet $1.5 million for failing to enforce measures to prevent fraudulent activities. Excapsa has since dissolved.
According to an audio recording available on the website PokerNews, Friedberg and some other Ultimate Bet associates privately discussed that year how to handle the scandal and minimize the amount of refunds owed to players. Friedberg previously told NBC News that the audio was illegally recorded but NBC’s article did not say that Friedberg challenged its authenticity.
Friedberg first represented Bankman-Fried in 2017 as outside counsel while at U.S. law firm Fenwick & West, where he chaired its payment systems group, the source familiar with the matter said. At the time, the source said Friedberg advised Bankman-Fried on running Alameda, which he founded that year.
In 2020, when Bankman-Fried launched a separate exchange for U.S. customers called FTX.US, Friedberg moved in-house as FTX’s chief regulatory officer.
In a now-deleted blog post published that year on FTX’s website, Bankman-Fried wrote that Friedberg was FTX’s legal advisor “from the very beginning,” noting he had been “with us through thick and thin.”
Friedberg resigned from his position on Nov. 8, a day after Bankman-Fried disclosed to top executives that FTX was almost out of money, according to the source and three other people briefed on the talks, along with text messages his legal team exchanged at the time.
Additional reporting by Hannah Lang; editing by Megan Davies and Anna Driver
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NASSAU, Bahamas/NEW YORK, Dec 13 (Reuters) – U.S. prosecutors on Tuesday accused Sam Bankman-Fried, the founder of crypto currency exchange FTX, of fraud and violating campaign finance laws and a judge in the Bahamas denied him bail, sending him to a local correctional facility instead.
The former FTX CEO, who was arrested in the Bahamas on Monday, lowered his head and hugged his parents after the magistrate judge refused bail citing a “great” risk of flight.
He was ordered remanded to a correctional facility in the island nation until Feb. 8, where he will initially held in the medical department, according to a local official.
The day’s events capped a stunning fall from grace in recent weeks for the 30-year-old, who amassed a fortune valued over $20 billion as he rode a cryptocurrency boom to build FTX into one of the world’s largest exchanges before it abruptly collapsed this year.
Bankman-Fried has previously apologized to customers and acknowledged oversight failings at FTX, but said he does not personally think he has any criminal liability.
Earlier on Tuesday, U.S. Attorney Damian Williams in New York said Bankman-Fried made illegal campaign contributions to Democrats and Republicans with “stolen customer money,” saying it was part of one of the “biggest financial frauds in American history.”
“While this is our first public announcement, it will not be our last,” he said, adding Bankman-Fried “made tens of millions of dollars in campaign contributions.”
Bankman-Fried faces a maximum sentence of 115 years in prison if convicted on all eight counts, prosecutors said, though any sentence would depend on a range of factors.
Williams declined to say whether prosecutors would bring charges against other FTX executives and whether any FTX insiders were cooperating with the investigation.
In his first in-person public appearance since the cryptocurrency exchange’s collapse, Bankman-Fried appeared in court on Tuesday in the Bahamas, where FTX is based and where he was arrested at his gated community in the capital, Nassau.
He appeared relaxed when he arrived at the heavily guarded Bahamas court and told the court he could fight extradition to the United States.
Bahamian prosecutors had asked that Bankman-Fried be denied bail if he fights extradition.
“Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options,” his lawyer, Mark S. Cohen, said in an earlier statement.
‘BRAZEN’ SCHEME
[1/12] Sam Bankman-Fried, who founded and led FTX until a liquidity crunch forced the cryptocurrency exchange to declare bankruptcy, is escorted out of the Magistrate Court building, last month he was arrested after being criminally charged by U.S. prosecutors, in Nassau, Bahamas December 13, 2022. REUTERS/Dante Carrer
FTX’s current CEO, John Ray, told congressional lawmakers on Tuesday that FTX lost $8 billion of client money, saying the company showed “absolute concentration of control in the hands of a small group of grossly inexperienced, nonsophisticated individuals.”
In the indictment unsealed on Tuesday morning, U.S. prosecutors said Bankman-Fried had engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.
He also defrauded lenders to Alameda by providing false and misleading information about the hedge fund’s condition, and sought to disguise the money he had earned from committing wire fraud, prosecutors said.
Both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) alleged Bankman-Fried committed fraud in lawsuits filed on Tuesday.
The CFTC sued Bankman-Fried, Alameda and FTX on Tuesday, alleging fraud involving digital commodity assets.
Since at least May 2019, FTX raised more than $1.8 billion from equity investors in a years-long “brazen, multi-year scheme” in which Bankman-Fried concealed FTX was diverting customer funds to Alameda Research, the SEC alleged.
CRYPTO INVESTORS LOST BILLIONS
Bankman-Fried, who founded FTX in 2019, was an unconventional figure who sported wild hair, t-shirts and shorts on panel appearances with statesmen like former U.S. President Bill Clinton. He became one of the largest Democratic donors, contributing $5.2 million to President Joe Biden’s 2020 campaign. Forbes pegged his net worth a year ago at $26.5 billion.
FTX filed for bankruptcy on Nov. 11, leaving an estimated 1 million customers and other investors facing losses in the billions of dollars. The collapse reverberated across the crypto world and sent bitcoin and other digital assets plummeting.
The collapse was one of a series of bankruptcies in the crypto industry this year as digital asset markets tumbled from 2021 peaks. A crypto exchange is a platform on which investors can trade digital tokens such as bitcoin.
As legal challenges mount, the U.S. Congress is also looking at crafting legislation to rein in a loosely-regulated industry.
FTX has shared findings with the SEC and U.S. prosecutors, and is investigating whether Bankman-Fried’s parents were involved in the operation.
The attorney general’s office of the Bahamas said it expected Bankman-Fried to be extradited to the United States.
Bankman-Fried resigned as FTX’s CEO the same day as the bankruptcy filing. FTX’s liquidity crunch came after he secretly used $10 billion in customer funds to support his proprietary trading firm Alameda, Reuters has reported. At least $1 billion in customer funds had vanished.
Additional reporting by Luc Cohen and Jack Queen in New York and Hannah Lang, Chris Prentice and Susan Heavey in Washington
Writing by Nick Zieminski and Deepa Babington
Editing by Noeleen Walder, Megan Davies, Anna Driver and Matthew Lewis
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Luc Cohen
Thomson Reuters
Reports on the New York federal courts. Previously worked as a correspondent in Venezuela and Argentina.
NEW YORK, Nov 30 (Reuters) – Sam Bankman-Fried, the founder and former CEO of now-bankrupt crypto exchange FTX, attempted to distance himself from suggestions of fraud in his first public appearance since his company’s collapse stunned investors and left creditors facing losses totaling billions of dollars.
Speaking via video link at the New York Times’ Dealbook Summit with Andrew Ross Sorkin on Wednesday, Bankman-Fried said he did not knowingly commingle customer funds on FTX with funds at his proprietary trading firm, Alameda Research.
“I didn’t ever try to commit fraud,” Bankman-Fried said in the hour-long interview, adding that he doesn’t personally think he has any criminal liability.
He also denied knowing the full scale of Alameda’s position on FTX, claiming that it caught him by surprise.
The liquidity crunch at FTX came after Bankman-Fried secretly moved $10 billion of FTX customer funds to Alameda Research, Reuters reported, citing two people familiar with the matter. At least $1 billion in customer funds had vanished, the people said.
Bankman-Fried told Reuters in November the company did not “secretly transfer” but rather misread its “confusing internal labeling.”
FTX filed for bankruptcy and Bankman-Fried stepped down as chief executive on Nov. 11, after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.
“That week, so much happened,” he said.
Bankman-Fried said he was speaking from the Bahamas and that the interview was against the advice of his lawyers. He was seen in the video link talking from a room, dressed in a black T-shirt and occasionally drinking from a mug.
FTX faces a flurry of investigations. The U.S. Attorney’s Office in Manhattan in mid-November began investigating how FTX handled customer funds, a source with knowledge of the probe told Reuters. The Securities and Exchange Commission and Commodity Futures Trading Commission have also opened probes.
When asked if he could come to the United States, Bankman-Fried replied that to his knowledge he could, and that he wouldn’t be surprised if he traveled to Washington for upcoming congressional hearings on the company’s collapse.
The implosion of FTX marked a stunning fall from grace for the 30-year-old entrepreneur who rode a cryptocurrency boom to a net worth that Forbes pegged a year ago at $26.5 billion. After launching FTX in 2019, he became an influential political donor and pledged to donate most of his earnings to charities.
He said Wednesday that he now has “close to nothing” left and is down to one working credit card with “maybe $100,000 in that bank account.”
Since FTX filed for bankruptcy, Bankman-Fried has distanced himself from the image he projected in media interviews and on Capitol Hill, telling a Vox reporter his advocacy for a crypto regulatory framework was “just PR” and his discussions on ethics within the industry were at least partly a front.
Bankman-Fried said he was “confused” as to why FTX’s U.S. entity, which was included in the bankruptcy filing, is not processing customer withdrawals. Redemptions are currently paused for both U.S. and international customers.
“To my knowledge all American customers and all American regulated businesses here are, I think at least in terms of client assets, are okay,” he said, adding that derivatives contracts at one of its U.S. subsidiaries were “fully collateralized.”
WHAT HAPPENED
Bankman-Fried said that Alameda had built up a substantial position on FTX and that as digital asset prices plummeted this year, Alameda became increasingly more levered to the point of no return earlier this month.
“Realistically speaking, (there was) no ability for FTX to be able to liquidate that position and generate everything that was owed,” he said.
He added that he “wasn’t trying to commingle funds,” but said that when FTX didn’t have a bank account, some customers wired money to Alameda and were credited on FTX, which likely led to discrepancies.
Bankman-Fried stepped down as CEO of Alameda in October 2021, four years after founding the company, and ceded the role to Caroline Ellison and Sam Trabucco, who acted as co-CEOs until Trabucco departed the firm in August.
For his part, Bankman-Fried said he regretted focusing on the bigger picture at FTX at the expense of risk management, which he said he paid less attention to over “the last year or two.”
His companies “completely failed” on risk management, he said.
“There was no person who was chiefly in charge of positional risk of customers on FTX, and that feels pretty embarrassing in retrospect.”
Reporting by Carolina Mandl and Lananh Nguyen in New York and Manya Saini in Bengaluru; writing by Hannah Lang in Washington; editing by Megan Davies, Deepa Babington and Sam Holmes
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FTX bought a 10% stake in IEX with an option to acquire 100%
FTX spent $2 billion on ‘acquisitions for regulatory purposes’
Documents show FTX saw its regulatory status as a way of luring new capital from major investors
Nov 18 (Reuters) – Before it collapsed this month, FTX stood apart from many rivals in the largely unsupervised crypto industry by boasting it was the “most regulated” exchange on the planet and inviting closer scrutiny from authorities.
Now, company documents seen by Reuters reveal the strategy and tactics behind founder Sam Bankman-Fried’s regulatory agenda, including the previously unreported terms of a deal announced earlier this year with IEX Group, the U.S. stock trading platform featured in Michael Lewis’s book “Flash Boys” about fast, computer-driven trading.
As part of that deal, Bankman-Fried bought a 10% stake in IEX, with an option to buy it out completely in the next two and half years, according to a June 7 document. The partnership gave the 30-year-old executive the opportunity to lobby IEX’s regulator, the U.S. Securities and Exchange Commission, on crypto regulation.
That deal and others referenced in the documents, which include business updates, meeting minutes and strategy papers, illuminate one of FTX’s broader goals: quickly crafting a congenial regulatory framework for itself by acquiring stakes in companies that already had licenses from authorities, shortcutting the often drawn-out approval process.
FTX spent some $2 billion on “acquisitions for regulatory purposes,” the FTX documents seen by Reuters from a Sept 19 meeting show. Last year, for example, it bought LedgerX LLC, a futures exchange, which gave it three Commodity Futures Trading Commission licenses in one swoop. The licenses gave FTX access to U.S. commodities derivatives markets as a regulated exchange. Derivatives are securities that derive their value from another asset.
FTX also saw its regulatory status as a way of luring new capital from major investors, the documents show. In documents to support its ask for hundreds of millions of dollars in funds, it held out its licenses as a key competitive advantage. The “regulatory moats,” it said, created barriers for rivals and would give it access to lucrative new markets and partnerships beyond the reach of unregulated entities.
“FTX has the cleanest brand in crypto,” the exchange proclaimed in a June document presented to investors.
Bankman-Fried did not respond to a request for comment on questions about FTX’s regulatory strategy. FTX did not respond to requests for comment.
An SEC spokesperson declined to comment for this article. The CFTC also declined to comment.
In a text exchange this week with Vox, Bankman-Fried made an about-face on regulatory matters. Asked if his prior praise of regulations was “just PR,” he said in a sequence of texts: “yeah, just PR… fuck regulators… they make everything worse… they don’t protect customers at all.”
An IEX spokesperson declined to confirm details of the transaction with FTX, except to say that FTX’s “small minority stake” in IEX cannot be sold to a third party without its consent. “We are currently evaluating our legal options with respect to the prior transaction,” the spokesperson said.
PATCHWORK OF REGULATORS
FTX collapsed last week after a futile bid by Bankman-Fried to raise emergency funds. It had come under some regulatory oversight through the dozens of licenses it picked up via its many acquisitions. But that didn’t protect its customers and investors, who now face losses totaling billions of dollars. As Reuters reported, FTX had been secretly taking risks with customer funds, using $10 billion in deposits to prop up a trading firm owned by Bankman-Fried.
Four lawyers said the fact that Bankman-Fried was courting regulators while taking massive risks with customer funds without anyone noticing exposes a yawning regulatory gap in the cryptocurrency industry. “It’s a patchwork of global regulators — and even domestically there are huge gaps,” said Aitan Goelman, an attorney with Zuckerman Spaeder and former prosecutor and CFTC enforcement director. “That’s the fault of a regulatory system that has taken too long to adjust to the advent of crypto.”
A person familiar with the SEC’s thinking on crypto regulation said the agency believes crypto firms are illegally operating outside of U.S. securities laws and instead lean on other licenses that provide minimal consumer protection. “Those representations, while nominally true, don’t cover their activity,” the person said.
Reuters Graphics Reuters Graphics
‘STEP 1: LICENSES’
Bankman-Fried had big ambitions for FTX, which by this year had grown to more than $1 billion in revenues and accounted for about 10% of trading in the global crypto market, from a standing start in 2019. He wanted to build a financial app, where users could trade stocks and tokens, transfer money and bank, according to an undated document titled, “FTX Roadmap 2022.”
“Step 1” toward that goal, the “Roadmap” document said, “is to become as licensed as reasonably possible.”
“Partially this is to make sure that we’re regulated and compliant; partially this is to be able to expand our product offering,” the document said.
That’s where FTX’s acquisition spree came in, according to the documents. Instead of applying for every license, which can take years and sometimes uncomfortable questions, Bankman-Fried decided to buy them.
But the strategy also had its limits: At times, the companies it acquired didn’t have the precise licenses it needed, the documents show.
One of FTX’s goals, according to the documents, was to open up the U.S. derivatives markets to its customers in the country. It estimated the market would bring additional trading volume to the tune of $50 billion a day, generating millions of dollars in revenue. To do that, it needed to persuade the CFTC to amend one of the licenses held by LedgerX, FTX’s newly acquired futures exchange.
The application process went on for months, and FTX had to pony up $250 million for a default insurance fund, a standard requirement. FTX anticipated the CFTC could ask it to increase the fund to $1 billion, according to minutes of a March meeting of its advisory board.
FTX collapsed before it could get the approval, and has now withdrawn its application.
Buying companies for licenses also had other advantages, the documents reviewed by Reuters demonstrate: It could give Bankman-Fried the access he desired to regulators.
A prime example is the IEX deal, which was announced in April. In a joint interview to CNBC, Bankman-Fried and IEX CEO Brad Katsuyama said they wanted “to shape regulation that ultimately protects investors.” What matters the most here, Bankman-Fried added, is that “there is transparency and protection against fraud.”
Reuters could not determine how much FTX paid for the stake.
Bankman-Fried was invited to meet SEC Chairman Gary Gensler and other SEC officials along with Katsuyama in March.
A source close to IEX said the purpose of the meeting was to let the SEC know in advance about its deal with FTX, which had not been publicly announced at that point, and to discuss the possibility of IEX creating a trading venue in digital assets, such as bitcoin. FTX’s role was to provide the crypto-trading infrastructure, the source said.
SEC officials outright rejected their initial plan because it would have involved the creation of a non-exchange trading venue that is more lightly regulated, something the agency opposes for cryptocurrencies, the source familiar with the SEC’s thinking said.
Reuters could not determine the extent of Bankman-Fried’s involvement in subsequent conversations with the SEC. In their mind, SEC officials had agreed to meet with Katsuyama in March, and Bankman-Fried was just tagging along, the source familiar with the SEC’s thinking said. He kept mostly silent during the meeting, with Katsuyama in the “driver’s seat,” the source added.
Whatever his involvement, FTX talked up its discussions to its investors. In a September meeting of its advisory board, FTX said talks with the SEC were “extremely constructive.”
“We are likely to have pole position there,” it said, according to the meeting minutes.
The person familiar with the SEC’s thinking said they would dispute FTX was in the “pole position.” Anything the SEC did to regulate crypto trading would be open to all market participants, the source said.
The source close to IEX said the exchange never entered into any operational agreements with FTX, adding that it never got to that point.
A May FTX document provides a rundown of FTX’s contacts with individual regulators. The document, which has not been previously reported, shows how in most cases FTX was able to resolve the issues that cropped up.
In February, for example, South African authorities published a warning to consumers that FTX and other crypto exchanges were not authorized to operate there. So FTX entered into a commercial agreement with a local exchange to continue providing the services. “FTX is now fully regularised in respect of its current activities in South Africa,” FTX said.
The regulator, South African Financial Sector Conduct Authority, did not respond to a request for comment.
The May document also shows that FTX had a brush with the SEC. The SEC had conducted inquiries earlier this year into how crypto companies were handling customer deposits. Some firms were offering interest on deposits, which the SEC said could make them securities and should be registered under its rules. In the list of its regulatory interactions, FTX noted that the inquiry was looking at whether those assets were being “lent out or otherwise used for operational purposes.”
This month, as Reuters has reported, it emerged that FTX had done just that, moving billions of dollars in client funds to Bankman-Fried’s trading firm, Alameda Research.
In the May document, FTX said the SEC’s exam staff, which scrutinizes market practices that could present a risk to investors, was concerned about a different matter: a rewards program that it offered to customers, under which it paid interest on crypto deposits.
According to the document, FTX told the regulator it did not have the same issues as products from other providers that the agency had investigated.
“We confirmed these were solely rewards based and do not involve lending (or other use) of the deposited crypto,” FTX wrote. The SEC wrote back, saying it had completed its “informal inquiry” and did not need further information “at this time.”
The SEC had no comment on the inquiry. In an email to Reuters, Bankman-Fried wrote: “FTX’s response there was accurate; FTX US’s rewards program did not involve lending out any assets.”
Reporting by Chris Prentice and Hannah Lang in Washington, Angus Berwick in London; editing by Megan Davies, Paritosh Bansal and Chris Sanders
Our Standards: The Thomson Reuters Trust Principles.
Nov 10 (Reuters) – (This story contains language some readers may find offensive in paragraph 2)
On Tuesday morning, Sam Bankman-Fried, owner of cryptocurrency exchange FTX, caught his employees off-guard with a somber message.
“I’m sorry,” he told them. “I fucked up.”
The reason for the mea culpa: His announcement half an hour earlier that FTX’s arch-rival, Binance, planned to mount a shock takeover of its main trading platform to save it from a “liquidity crunch.” Binance founder Changpeng “CZ” Zhao, whom the billionaire had accused of sabotage, would now be his White Knight.
The seeds of FTX’s downfall were sown months earlier, stemming from mistakes Bankman-Fried made after he stepped in to save other crypto firms as the crypto market collapsed amid rising interest rates, according to interviews with several people close to Bankman-Fried and communications from both companies that have not been previously reported.
Some of those deals involving Bankman-Fried’s trading firm, Alameda Research, led to a series of losses that eventually became his undoing, according to three people familiar with the company’s operations.
The interviews and messages also shine new light on the bitter rivalry between the two billionaires, who in recent months competed for market share and publicly accused each other of seeking to hurt the one another’s businesses. It culminated on Wednesday, with Binance pulling out of its deal and throwing FTX’s future into uncertainty.
Stuck without a buyer, Bankman-Fried was now searching for alternative backers, two people close to him said. After Binance pulled out, he told FTX staff in a message that Binance had not previously told them of any reservations about the deal and he was “exploring all options.”
Neither Binance nor FTX responded to requests for comment. Bankman-Fried told Reuters on Tuesday that “I’ll probably be too swamped” to do interviews. He didn’t respond to further messages.
Binance earlier said it decided to pull out of the deal as a result of its due diligence on FTX and news reports about U.S. investigations into the company.
Zhao’s unveiling of the planned takeover capped a stunning reversal for Bankman-Fried. The 30-year-old had set up Bahamas-based FTX in 2019 and led it to become one of the largest exchanges, accumulating a near $17 billion fortune.
News of the liquidity crunch at FTX – valued in January at $32 billion with investors including SoftBank and BlackRock – sent reverberations through the crypto world.
The price of major coins plummeted, with bitcoin slumping to its lowest in almost two years, heaping further pain on a sector whose value has fallen about two-thirds this year as central banks tightened credit.
By ditching the deal, Binance had also avoided the regulatory scrutiny that would likely have accompanied the takeover, which Zhao had flagged as a likelihood in a memo to employees that he posted on Twitter.
Financial regulators around the world have issued warnings about Binance for operating without a license or violating money laundering laws. The U.S. Justice Department is investigating Binance for possible money laundering and criminal sanctions violations. Reuters reported last month that Binance had helped Iranian firms trade $8 billion since 2018 despite U.S. sanctions, part of a series of articles this year by the news agency on the exchange’s financial crime compliance.
RELATIONSHIP SOURS
Zhao and Bankman-Fried’s relationship began in 2019. Six months after FTX’s launch, Zhao bought 20% of the exchange for about $100 million, a person with direct knowledge of the deal said. At the time, Binance said the investment was “aimed to grow the crypto economy together.”
Within 18 months, however, their relationship had soured.
FTX had grown rapidly and Zhao now viewed it as a genuine competitor with global aspirations, former Binance employees said.
When FTX in May 2021 applied for a license in Gibraltar for a subsidiary, it had to submit information about its major shareholders, but Binance stonewalled FTX’s requests for help, according to messages and emails between the exchanges seen by Reuters.
Between May and July, FTX lawyers and advisors wrote to Binance at least 20 times for details on Zhao’s sources of wealth, banking relationships, and ownership of Binance, the messages show.
In June 2021, however, an FTX lawyer told Binance’s chief financial officer that Binance wasn’t “engaging with us properly” and they risked “severely disrupting an important project for us.” A Binance legal officer responded to FTX to say she was trying to get a response from Zhao’s personal assistant, but the requested information was “too general” and they may not provide everything.
By July of that year, Bankman-Fried had tired of waiting. He bought back Zhao’s stake in FTX for about $2 billion, the person with direct knowledge of the deal said. Two months later, with Binance no longer involved, Gibraltar’s regulator granted FTX a license.
That sum was paid to Binance, in part, in FTX’s own coin, FTT, Zhao said last Sunday – a holding he would later order Binance to sell, precipitating the crisis at FTX.
Reuters Graphics
“TRYING TO GO AFTER US”
This May and June, Bankman-Fried’s trading firm, Alameda Research, suffered a series of losses from deals, according to three people familiar with its operations. These included a $500-million loan agreement with failed crypto lender Voyager Digital, two of the people said. Voyager filed for bankruptcy protection the following month, with FTX’s U.S. arm paying $1.4 billion for its assets in a September auction. Reuters could not determine the full extent of losses Alameda suffered.
Seeking to prop up Alameda, which held almost $15 billion in assets, Bankman-Fried transferred at least $4 billion in FTX funds, secured by assets including FTT and shares in trading platform Robinhood Markets Inc, the people said. Alameda had disclosed a 7.6% share in Robinhood that May.
A portion of these FTX funds were customer deposits, two of the people said, though Reuters could not determine their value.
Bankman-Fried did not tell other FTX executives about the move to prop up Alameda, the people said, adding he was afraid that it could leak.
On Nov. 2, however, a report by news outlet CoinDesk detailed a leaked balance sheet that allegedly showed that much of Alameda’s $14.6 billion in assets were held in FTT. Alameda CEO Caroline Ellison tweeted that the balance sheet was merely for a “subset of our corporate entities,” with over $10 billion of assets not reflected. Ellison did not return requests for comment.
That failed to douse growing speculation over what Alameda’s financial health might mean for FTX.
Then Zhao said Binance would sell its entire share in the token, FTT, worth at least $580 million, “due to recent revelations that have come to light.” The token’s price collapsed 80% over the next two days and a torrent of outflows from the exchange gathered pace, blockchain data show.
WITHDRAWAL SURGE
In his message to staff this week, Bankman-Fried said the firm saw a “giant withdrawal surge” as users rushed to withdraw $6 billion in crypto tokens from FTX in just 72 hours. Daily withdrawals normally totaled tens of millions of dollars, Bankman-Fried told his employees.
After Zhao’s tweet that Binance would sell its FTT holding, Bankman-Fried projected confidence that FTX would weather its rival’s attacks. He told staff on Slack that withdrawals were “not shockingly, way up,” but they were able to process the requests.
“We’re chugging along,” he wrote. “Obviously, Binance is trying to go after us. So be it.”
But by Monday the situation became dire. Unable to quickly find a backer, or sell other illiquid assets short-notice, Bankman-Fried contacted Zhao, according to a person familiar with the call. Zhao later confirmed that Bankman-Fried had called him.
Bankman-Fried signed a non-binding letter of intent for Binance to buy FTX’s non-U.S. assets. This valued FTX at several billion dollars, two people familiar with the letter said – enough for the exchange to cover all withdrawal requests but a fraction of its January valuation.
Zhao announced the potential deal several hours later, with Bankman-Fried tweeting “a huge thank you to CZ.”
“Let’s live to fight another day,” Bankman-Fried told staff on Slack.
His employees were shocked. Even executives had been in the dark about the Alameda shortfall and takeover plan until Bankman-Fried informed them that morning, two people working with him said. Both people said they had been unaware that the withdrawal situation was so serious.
Then came Binance’s announcement on Wednesday scrapping the takeover. “The issues are beyond our control or ability to help,” Binance said. Zhao tweeted “Sad day. Tried,” with a crying emoji.
Reporting by Angus Berwick in New York and Tom Wilson in London; additional reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Editing by Paritosh Bansal and Chris Sanders
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NEW YORK, Oct 22 (Reuters) – Nasdaq Inc (NDAQ.O) has put the brakes on initial public offering (IPO) preparations of at least four small Chinese companies while it investigates short-lived stock rallies of such firms following their debuts, according to lawyers and bankers who work on such stock launches.
The stock exchange operator’s actions come amid a surge in the shares of Chinese companies that raise small amounts, typically $50 million or less, in their IPO. These stocks rise as much as 2,000% in their debuts, only to nosedive in the days that follow, bruising investors who are bold enough to speculate on penny stocks.
Douglas Ellenoff, a corporate and securities attorney at Ellenoff Grossman & Schole LLP, said he was informed by the Nasdaq that certain IPOs will not be allowed to proceed “until they determined what has been the aberrational trading activity in certain Chinese issuers earlier this year.”
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“These were last-minute phone calls, just as we thought we were going to go somewhere with the deals,” Ellenoff said.
Nasdaq started asking the advisers of small Chinese IPO candidates questions in mid-September. The questions concerned the identity of their existing shareholders, where they reside, how much they are investing and if they were offered interest-free debt so they can participate, according to one of the bankers, Dan McClory, who is head of equity capital markets at Boustead Securities.
The lawyers and bankers spoke to Reuters on condition that the names of the four companies whose IPOs were halted not be disclosed.
It is not clear what action the Nasdaq will take once it completes its probe and whether all or some of the halted IPOs will be allowed to continue. A Nasdaq spokesman declined to comment.
Seven sources who work on IPOs of small Chinese companies spoke to Reuters on the condition that neither they nor their clients be identified. These sources said that the ephemeral stock rallies were caused by a few overseas investors who concealed their identities and snapped up most of the shares in the offerings, creating the perception that the debuts were in demand.
As a result, Chinese IPOs in the United States have returned this year on average a staggering 426% in their first day of trading, compared with 68% for all other IPOs, according to data from Dealogic.
The Securities and Exchange Commission (SEC) and other U.S. financial regulators have yet to announce a case of successfully prosecuting such pump-and-dump schemes because Chinese companies and their overseas bankers have so far been effective in carrying them out secretly, the seven sources said.
An SEC spokesperson did not immediately respond to a request for comment.
LOOPHOLES
Nasdaq’s intervention underscores how liquidity standards it adopted in the last three years to prevent stock manipulation in small IPOs have loopholes that Chinese companies are exploiting. The rules dictate that a company going public should have at least 300 investors holding at least 100 shares each, totaling a minimum of $2,500.
Yet these requirements have not been sufficient to prevent trading manipulation in some penny stocks. Small Chinese companies have been attracted to Nasdaq’s exchange rather than the New York Stock Exchange because the former has traditionally been the venue of red-hot technology startups – an image these companies often try to project.
“Almost all of these microcap IPOs are ‘story’ stocks, where the promoters try to convince unsophisticated retail investors that this could be the next Moderna or this could be the next Facebook,” said Jay Ritter, a University of Florida professor who studies IPOs.
There have been 57 listings of small Chinese companies in the last five years, up from 17 listings in the prior five years, according to Dealogic. So far this year there have been nine such listings despite the U.S. IPO market facing its worst drought in nearly two decades due to market volatility fueled by the Federal Reserve raising interest rates to fight inflation.
McClory said the trend highlights the looser regulatory requirements for listings in the United States compared with China. “It is virtually impossible for these companies to list onshore in China, and now the Hong Kong market has completely shut down as well,” he said.
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Reporting by Echo Wang in New York
Editing by Greg Roumeliotis and Matthew Lewis
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Oct 19 (Reuters) – A federal appeals court ruled on Wednesday that the U.S. Consumer Financial Protection Bureau’s funding apparatus is unconstitutional, faulting a system Democrats designed to insulate the agency from requiring congressional appropriations.
The New Orleans-based 5th U.S. Circuit Court of Appeals ruled that the CFPB’s independent funding through the Federal Reserve rather than budgets passed by Congress violated the separation of powers principles in the U.S. Constitution.
That ruling, by a panel of three judges appointed by then-President Donald Trump, a Republican, in the process vacated a 2017 regulation the agency adopted aimed at combating “unfair and abusive” practices in the payday lending industry.
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The Community Financial Services Association of America sued in 2018 to challenge the rule, which barred lenders from making a new attempt to withdraw funds from an account where two consecutive attempts had failed unless consumers consented.
“Even among self-funded agencies, the Bureau is unique,” U.S. Circuit Judge Cory Wilson wrote. “The Bureau’s perpetual self-directed, double-insulated funding structure goes a significant step further than that enjoyed by the other agencies on offer.”
A CFPB spokesperson said there was “nothing novel or unusual about Congress’s decision to fund the CFPB outside of annual spending bills.”
The bureau could ask the full 5th Circuit to reconsider the case or take it to the U.S. Supreme Court.
Multiple other courts have deemed the CFPB’s funding constitutional, a point the 5th Circuit acknowledged but disagreed with.
The ruling marked the latest in a series of legal challenges to the CFPB, which Congress created in 2010 through the passage of the Dodd-Frank Act during Democrat Barack Obama’s presidency, in response to the 2008 financial crisis.
Republicans have long opposed the agency. The Supreme Court in 2020 ruled in another case that the protection Congress originally afforded the CFPB director, who could only be fired for cause, was unconstitutional.
“Extreme right-wing judges are throwing into question every rule the CFPB enforces to protect consumers and businesses alike,” U.S. Senator Elizabeth Warren, the Massachusetts Democrat who proposed the CFPB’s creation, wrote on Twitter.
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Reporting by Nate Raymond in Boston; Editing by Stephen Coates and William Mallard
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Nate Raymond reports on the federal judiciary and litigation. He can be reached at nate.raymond@thomsonreuters.com.
WASHINGTON, Oct 17 (Reuters) – When a Washington state beauty salon charged Simran Bal $1,900 for training after she quit, she was shocked.
Not only was Bal a licensed esthetician with no need for instruction, she argued that the trainings were specific to the shop and low quality.
Bal’s story mirrors that of dozens of people and advocates in healthcare, trucking, retail and other industries who complained recently to U.S. regulators that some companies charge employees who quit large sums of money for training.
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Nearly 10% of American workers surveyed in 2020 were covered by a training repayment agreement, said the Cornell Survey Research Institute.
The practice, which critics call Training Repayment Agreement Provisions, or TRAPs, is drawing scrutiny from U.S. regulators and lawmakers.
On Capitol Hill, Senator Sherrod Brown is studying legislative options with an eye toward introducing a bill next year to rein in the practice, a Senate Democratic aide said.
At the state level, attorneys general like Minnesota’s Keith Ellison are assessing how prevalent the practice is and could update guidance.
Ellison told Reuters he would be inclined to oppose reimbursement demands for job-specific instruction while it “could be different” if an employer wanted reimbursement for training for a certification like a commercial driving license that is widely recognized as valuable.
The Consumer Financial Protection Bureau has begun reviewing the practice, while the Justice Department and Federal Trade Commission have received complaints about it.
The use of training agreements is growing even though unemployment is low, which presumably gives workers more power, said Jonathan Harris who teaches at the Loyola Law School Los Angeles.
“Employers are looking for ways to keep their workers from quitting without raising wages or improving working conditions,” said Harris.
The CFPB, which announced in June it was looking into the agreements, has begun to focus on how they may prevent even skilled employees with years of schooling, like nurses, from finding new, better jobs, according to a CFPB official who was not authorized to speak on the record.
“We have heard from workers and worker organizations that the products may be restricting worker mobility,” the official said.
TRAPs have been around in a small way since the late 1980s primarily in high-wage positions where workers received valuable training. But in recent years the agreements have become more widespread, said Loyola’s Harris.
Licensed esthetician Simran Bal, who was taken to court by her former employer to repay $1900 in trainings they required her to attend, poses for a portrait outside the King County District Court in Shoreline, Washington, U.S., October 13, 2022. Bal, whose case was dismissed, says she was already licensed for services the trainings covered. REUTERS/Lindsey Wasson
One critic of the CFPB effort was the National Federation of Independent Business, or NFIB, which said the issue was outside the agency’s authority because it was unrelated to consumer financial products and services.
“(Some state governments) have authority to regulate employer-driven debt. CFPB should defer to those governments, which are closer to the people of the states than the CFPB,” it added.
NURSING AND TRUCKING
Bal said she was happy when she was hired by the Oh Sweet salon near Seattle in August 2021.
But she soon found that before she could provide services for clients, and earn more, she was required to attend trainings on such things as sugaring to remove unwanted hair and lash and brow maintenance.
But, she said, the salon owner was slow to schedule the trainings, which would sometimes be postponed or cancelled. They were also not informative; Bal described them as “introductory level.” While waiting to complete the training, Bal worked at the front desk, which paid less.
When she quit in October 2021, Bal received a bill for $1,900 for the instruction she did receive. “She was charging me for training for services that I was already licensed in,” said Bal.
Karina Villalta, who runs Oh Sweet LLC, filed a lawsuit in small claims court to recover the money. Court records provided by Bal show the case was dismissed in September by a judge who ruled that Bal did not complete the promised training and owed nothing. Villalta declined requests for comment.
In comments to the CFPB, National Nurses United said they did a survey that found that the agreements are “increasingly ubiquitous in the health care sector,” with new nurses often affected.
The survey found that 589 of the 1,698 nurses surveyed were required to take training programs and 326 of them were required to pay employers if they left before a certain time.
Many nurses said they were not told about the training repayment requirement before beginning work, and that classroom instruction often repeated what they learned in school.
The International Brotherhood of Teamsters said in comments that training repayment demands were “particularly egregious” in commercial trucking. They said firms like CRST and C.R. England train people for a commercial drivers license but charge more than $6,000 if they leave the company before a certain time. Neither company responded to a request for comment.
The American Trucking Associations argues that the license is portable from one employer to another and required by the government. It urged the CFPB to not characterize it as employer-driven debt.
Steve Viscelli, a sociologist at the University of Pennsylvania who spent six months training and then driving truck, said the issue deserved scrutiny.
“Anytime we have training contracts for low-skilled workers, we should be asking why,” he said. “If you have a good job, you don’t need a training contract. People are going to want to stay.”
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Reporting by Diane Bartz; Editing by Chris Sanders and Lisa Shumaker
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Focused on U.S. antitrust as well as corporate regulation and legislation, with experience involving covering war in Bosnia, elections in Mexico and Nicaragua, as well as stories from Brazil, Chile, Cuba, El Salvador, Nigeria and Peru.