FTX CEO Sam Bankman-Fried appeared at a Senate committee hearing earlier this year on cryptocurrencies.
Photo:
Sarah Silbiger/Bloomberg News
Alameda Research’s chief executive and senior FTX officials knew that FTX had lent its customers’ money to Alameda to help it meet its liabilities, according to people familiar with the matter.
Alameda’s troubles helped lead to the bankruptcy of FTX, the crypto exchange founded by
Sam Bankman-Fried.
Alameda is a trading firm also founded and owned by Mr. Bankman-Fried.
In a video meeting with Alameda employees late Wednesday Hong Kong time, Alameda CEO
Caroline Ellison
said that she, Mr. Bankman-Fried and two other FTX executives,
Nishad Singh
and
Gary Wang,
were aware of the decision to send customer funds to Alameda, according to people familiar with the video. Mr. Singh was FTX’s director of engineering and a former Facebook employee. Mr. Wang, who previously worked at Google, was the chief technology officer of FTX and co-founded the exchange with Mr. Bankman-Fried.
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Alameda faced a barrage of demands from lenders after crypto hedge fund Three Arrows Capital collapsed in June, creating losses for crypto brokers such as
Voyager Digital Ltd.
, the people said.
Ms. Ellison said on the call that FTX used customer money to help Alameda meet its liabilities, the people said.
On Friday, FTX, Alameda, FTX US and other FTX affiliates filed for bankruptcy protection.
Bankruptcy means that it could be a long time before individual investors and others owed their funds are able to potentially recover any of them, if ever.
Ms. Ellison didn’t return a phone message and an email seeking comment. Messrs. Singh and Wang didn’t respond to multiple messages seeking comment. Ryne Miller, FTX US’s chief legal officer, declined to comment.
Cryptocurrency platform FTX filed for chapter 11 on Friday and CEO Sam Bankman-Fried resigned. WSJ’s Vicky Ge Huang explains what happened to the company and what this could mean for investors. Photo: Olivier Douliery/AFP
Write to Dave Michaels at dave.michaels@wsj.com, Elaine Yu at elaine.yu@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
FTX said it is investigating abnormalities with wallet movements.
Photo:
DADO RUVIC/REUTERS
Bankrupt cryptocurrency exchange FTX is probing a potential hack and asked customers to stay off the FTX website, the company said. More than $400 million worth of crypto funds appears to be missing, according to crypto analytics firm Elliptic Enterprises Ltd.
The potential hack occurred Friday after FTX filed for bankruptcy. Ryne Miller, FTX US’s general counsel, said in a Saturday tweet that FTX and FTX US had started moving all digital assets to cold storage—crypto wallets that aren’t connected to the internet—after the bankruptcy filing.
FTX is “investigating abnormalities with wallet movements related to the consolidation of FTX balances across exchanges,” Mr. Miller said on Twitter. He called the movements unauthorized transactions and said the facts are still unclear. FTX will “share more info as soon as we have it,” he said.
A post in the exchange’s official Telegram channel called the fund flows a hack.
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Approximately $473 million in crypto assets appeared to be taken from FTX without permission, according to
Tom Robinson,
co-founder of Elliptic. The tokens were quickly converted to ether, the second-largest cryptocurrency, on so-called decentralized exchanges.
Such platforms process transactions automatically, making them popular among hackers to prevent funds from being seized, he said.
—Caitlin Ostroff contributed to this article.
Write to Elaine Yu at elaine.yu@wsj.com and Vicky Ge Huang at vicky.huang@wsj.com
Beleaguered cryptocurrency platform FTX filed for bankruptcy protection Friday, and Chief Executive
Sam Bankman-Fried
resigned.
FTX and a bevy of affiliates said they had more than 100,000 creditors and tens of billions of dollars in assets and liabilities. It is the largest crypto-related bankruptcy ever, and a demise remarkable for its swiftness as well as its size.
Just a week ago, FTX was an industry titan, and Mr. Bankman-Fried its smiling public face. In January, FTX raised money from Silicon Valley’s most sophisticated investors, at a valuation of $32 billion. A few weeks ago, Mr. Bankman-Fried was publicly musing about raising more, to get even bigger.
That is all gone. The bankruptcy will likely wipe out billions of equity value, leaving investors including Sequoia Capital and Thoma Bravo with stiff losses. It will maroon the crypto and cash deposits belonging to a legion of customers. FTX faces investigations or asset freezes from regulators and prosecutors around the world.
It has also rattled the crypto world. Crypto lender BlockFi, which had obtained a financial lifeline from FTX in July—one of several companies FTX had rescued earlier in the year—paused withdrawals Thursday evening.
Among the affiliates filing for bankruptcy protection is FTX US, a smaller unit that operated in the U.S. Most of FTX’s business was offshore. FTX and its affiliates filed in federal bankruptcy court in Delaware, where the U.S. unit is registered.
Thursday morning, Mr. Bankman-Fried said the troubles at FTX were confined to its international operations. He tweeted that FTX US “was not financially impacted” and that “every user could fully withdraw.” Later that day, FTX US said it might stop trading. On Friday, FTX US filed for bankruptcy along with the rest of FTX.
Bitcoin slipped after the announcement to trade near $16,500.
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At issue in the bankruptcy proceedings and the investigations is to determine what happened to the billions that FTX raised, that its customers deposited, and that it earned from operating what appeared—for a time—to be a successful cryptocurrency exchange.
FTX in 2021 also paid $250 million—a quarter of its revenue that year—to a “related party” for software royalties, according to documents viewed by The Wall Street Journal.
Mr. Bankman-Fried wrote on Twitter roughly an hour after the bankruptcy announcement that he was “shocked to see things unravel the way they did earlier this week.”
FTX’s troubles began last weekend, after rival exchange Binance said it would sell its holdings of an FTX equity-like token—spooked by a CoinDesk report showed the depth of the relationship between FTX and Alameda.
John J. Ray
III has been named the new CEO of FTX Group, the company said. The bankruptcy filing includes FTX Trading Ltd., the company presiding over the global trading website FTX.com, and Alameda Research, a trading firm founded by Mr. Bankman-Fried, in addition to FTX US.
Mr. Ray was chairman of Enron Corp.’s successor company, Enron Creditors Recovery Corp., and oversaw the energy-trading company’s liquidation after it filed for bankruptcy in late 2001. The recovery rate for Enron creditors as of 2008 was about 52 cents on the dollar, the company said at the time. Mr. Ray’s successes included securing a $1.7 billion settlement with
Citigroup
in 2008. He had accused the bank of helping Enron mislead investors.
Other noteworthy bankruptcy cases in which Mr. Ray served in similar roles include Nortel Networks Inc., Fruit of the Loom and
Overseas Shipholding Group Inc.
In the petition, Mr. Bankman-Fried said that
Stephen Neal
would be appointed as the chairman of the board of FTX Group if he is willing to serve. He also said that he is being advised by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.
FTX is the latest in a string of crypto companies seeking bankruptcy protection this year.
Photo:
Leon Neal/Getty Images
Bankruptcy means that it could be a long time before retail traders and others owed their funds are able to potentially recover any of them, if ever. Creditors to Mt. Gox, the Japanese crypto exchange that failed following a 2014 hack, are still waiting for their funds almost a decade later.
The collapse in digital-currency prices earlier this year triggered a rash of crypto-related bankruptcy filings, including Celsius Network LLC,
Voyager Digital Ltd.
and Three Arrows Capital.
Crypto investors may be confronted with an uphill battle to get their crypto deposits back in bankruptcy proceedings because their investments are likely to be treated as unsecured claims without collateral rights.
FTX’s bankruptcy also calls into question the fate of Voyager Digital. In September, the firm won the auction to buy the bankrupt lender’s assets with a purchase price of about $50 million, The Wall Street Journal has reported.
Voyager said Friday that the firm has reopened the bidding process for the company and is in active discussions with potential buyers. Voyager said it didn’t transfer any assets to FTX US, which previously submitted a $5 million good-faith deposit as part of the auction process. The funds are held in escrow, according to Voyager.
Voyager also recalled loans from Alameda Research for 6,500 bitcoin and 50,000 ether. The company currently has no loans outstanding with any borrower, it said. However, Voyager had about $3 million worth of cryptocurrencies stuck on FTX at the time of its bankruptcy filing.
—Jonathan Weil
contributed to this article.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com
Corrections & Amplifications Sam Bankman-Fried said he is being advised by the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. An earlier version of this article incorrectly said FTX was being advised by the law firm. (Corrected on Nov. 11)
The rout in cryptocurrencies worsened this week with the collapse of the offshore exchange FTX. With bitcoin recently down more than 60% in 2022, many crypto investors would surely like to forget about digital assets, at least for now.
That would be a mistake. The Internal Revenue Service hasn’t lost interest in cryptocurrencies, and investors need to focus on key tax issues before year-end.
New rules and enforcement actions are coming to ferret out crypto transactions that often went unreported in the past. There’s a bit of good news as well: This year’s painful selloff brings an opportunity for crypto holders to harvest losses to offset future taxes.
Here’s more to help investors make smart crypto moves in the next few weeks—and get ready for new IRS scrutiny.
Crypto losses as a tax-saving tool
There’s a silver lining for investors whose crypto holdings are in taxable accounts rather than tax sheltered accounts such as IRAs.
The benefit is that if an investor sells this crypto and books a capital loss, it can be used to offset future capital gains on winners. These gains don’t have to be on digital assets; they could be on stocks, real estate, or other investments.
If an investor with capital losses has no capital gains to shelter, the losses can offset up to $3,000 of ordinary income such as wages per tax return, per year. These losses don’t expire.
Say that John has a $20,000 loss in his crypto holdings now. If he sells and has no capital gains to offset, he can reduce his wage income by $3,000 this year and in future years. If he then has a capital gain of $5,000 two years from now, he won’t owe tax on it—and he’ll still have $9,000 to offset future taxes.
In a key way, crypto losses have an advantage over stock losses. If an investor sells shares at a loss, the “wash-sale” rules penalize him if he also buys the same stock within 30 days before or after the sale.
But the wash-sale rules don’t currently apply to cryptocurrencies. So crypto investors can have their cake and eat it too, by taking losses now to shelter future gains and then repurchasing favorites right away. There’s no need to wait and risk missing a market surge—if there is one.
New IRS reporting by brokers
The 2021 Infrastructure Investment and Jobs Act included a provision requiring crypto brokers to report customers’ sale proceeds to the IRS on a 1099 form, if it’s held in a taxable account. The requirements are akin to what brokerage firms report for investors’ stock sales.
The change aims to clamp down on many crypto investors’ cavalier—and sometimes criminal—tax avoidance. Until Congress acted, few crypto transactions had to be reported to the IRS by third parties such as exchanges, and many investors have ignored crypto tax rules. In a recent court filing, the IRS said that in 2019 only about 100,000 tax returns reported crypto transactions. That’s far less than would be expected given research showing that about 20% of American adults have bought, traded, or used cryptocurrencies.
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The new law is set to take effect Jan. 1, 2023, so the first forms would go to taxpayers and the IRS in early 2024. However, tax specialists say the date may be postponed because the Treasury Department hasn’t issued regulations detailing the laws defining thorny issues such as who is a crypto broker. Crypto firms also need to update software.
The new rules will likely increase complexity, even for crypto investors complying with the law—so it could make sense to accelerate moves into this year. More paperwork will likely lead to more errors by taxpayers and the IRS that take time to untangle, says Shehan Chandrasekera, head of tax strategy at CoinTracker, a provider of crypto tax-filing software.
For crypto holders who aren’t compliant, he adds, “The new reporting doesn’t change the taxation of cryptocurrencies. But it will tell the IRS about your transactions—so it’s important to put things in order now.”
New court-ordered searches for crypto tax cheats
In August and September federal judges approved two new summonses requiring a crypto exchange and a bank to turn over customer information to the IRS to uncover tax cheating using cryptocurrency.
The crypto exchange is sFox, a crypto prime dealer with more than 175,000 customers whose transactions have totaled more than $12 billion since 2015, according to a Justice Department statement. The bank is M.Y. Safra Bank, which had an agreement to provide banking services to sFox customers. Neither business is accused of wrongdoing.
sFox and M.Y. Safra must turn over to the IRS account information on sFox customers who had $20,000 or more in crypto transactions in any one year from Jan. 1, 2016 to Dec. 31, 2021.
To justify the summonses, the agency provided examples of 10 unnamed people who didn’t declare taxable income from transactions conducted largely through sFox. The unreported income ranged from $1 million by someone allegedly involved in a Ponzi scheme to $5,000 by someone whose return showed wages, retirement income, and Social Security payments—but no crypto profits.
The IRS has already used this strategy, called a John Doe summons, to pursue crypto tax cheats with transactions of $20,000 or more at three other exchanges:
Coinbase,
Kraken and Circle. From these and other efforts, the agency has assessed more than $110 million in tax due on unreported crypto income, with more expected. Penalties and interest could nearly double the total that some taxpayers owe.
Future summonses are likely, says Don Fort, a former chief of IRS criminal investigations now with the Kostelanetz law firm: “The IRS and Justice Department have become adept at tailoring requests judges will approve.”
The IRS’s dogged pursuit of past cases is a reminder to investors with unreported crypto income that it may not stay hidden—and the consequences could be severe.
Write to Laura Saunders at Laura.Saunders@wsj.com
Corrections & Amplifications Taxpayers who have no taxable capital gains can deduct up to $3,000 of capital losses against ordinary income such as wages. An earlier version of the story incorrectly said the deduction would reduce income tax, not income. (Corrected on Nov. 11)
Sam Bankman-Fried’s fall from grace has dealt an unprecedented blow to the crypto industry’s reputation — and some of this infamy may rub off on politicians who took his money, as well as on former regulators and Capitol Hill staffers who took well-paying jobs representing digital-asset companies before Congress.
Bankman-Fried, founder and CEO of the crumbling cryptocurrency exchange FTX, was one of the most generous donors to political causes during the 2022 election cycle, doling out $40 million, mostly to Democrats, with a particular focus on buoying crypto-friendly politicians in Democratic primaries.
FTX, like many other crypto firms, also aggressively recruited former federal regulators and Capitol Hill staffers, an often-criticized practice but one that has been common in the financial-services industry for decades.
Jeff Hauser, director of the left-leaning Revolving Door Project, said that Democratic politicians who worked closely with Bankman-Fried will have much to explain to the progressive wing of the party.
“A lot of people in the Democratic party got really close to Sam Bankman-Fried, and it reflects very badly on people who took this guy seriously,” he said. “People who in their past lives have taken on corporate power have been bedazzled by money seemingly being thrown their way.”
Bankman-Fried was the primary funder of the Protect Our Future PAC, which spent tens of millions of dollars in Democratic primaries this year. He also floated the idea of spending upwards of $1 billion in the 2024 presidential election to beat Donald Trump if he were the Republican nominee.
Promises of money on this scale likely tantalized many Democratic politicians, Hauser said, whether or not Bankman-Fried ever planned to go through with those contributions.
The crypto industry has also wielded influence by hiring former Capitol Hill staff and federal financial regulators to lobby and advise them on regulatory matters. The Campaign for Accountability, a nonpartisan anticorruption watchdog, published a report in February that found 240 examples of officials with key positions in the White House, Congress, federal regulatory agencies and national political campaigns moving into and out of the industry.
“The crypto industry is following the standard playbook for advancing special interests in Washington, including using all the levers of the influence industry,” Dennis Kelleher, president and CEO of the nonpartisan financial-reform organization Better Markets, told MarketWatch. “One of the most pernicious parts of that is the revolving door, where former officials essentially sell out their public service by using their access and influence on behalf of their private clients.”
Kelleher praised the performance of federal banking and securities regulators who have succeeded in keeping the carnage in the crypto markets segregated from the traditional financial system as popular tokens like bitcoin
BTCUSD,
-1.14%
and ether
ETHUSD,
-1.61%
lost more than 70% of their value over the past year.
Nevertheless, he believes crypto’s influence campaign has convinced lawmakers that what’s needed is to pass legislation that would tailor the financial-regulatory apparatus to be more friendly to the business models of digital-asset companies, rather than increasing funding for market regulators to enforce the regulations already on the books.
A bill put forward in June by Republican Sen. Cynthia Lummis of Wyoming and Democratic Sen. Kirsten Gillibrand of New York would do just that, granting regulatory authority for the most popular cryptocurrencies to the Commodity Futures Trading Commission, which critics of the bill say is more crypto-friendly than the Securities and Exchange Commission.
Another bipartisan bill from Senate Agriculture Committee Chairwoman Debbie Stabenow of Michigan, a Democrat, and Sen. John Bozeman of Arkansas, the committee’s ranking Republican, envisions a similar setup.
Kelleher said that these bills are the product of the crypto industry’s intense lobbying efforts, and without that push, lawmakers might see that what is needed is more funding to enforce securities laws that already exist.
“People need to realize that the crypto industry is basically lawless,” Kelleher said, adding that exchanges like FTX could have made the decision to register as a securities exchange with the SEC, whose supervision would have ensured that the company couldn’t engage in the type of activities that led to its downfall.
“The industry made the conscious decision to not comply with the law, to spend hundreds of millions of dollars on public officials to get a special law passed so they get special treatment,” he said.
After that CPI shock earlier in the week, Wall Street is fielding a fresh batch of data on Thursday, with the headline retail sales number coming in stronger than expected. And a disastrous rail strike may be inverted.
But there’s no cheering up billionaire investor and hedge-fund manager Ray Dalio who in our call of the day asserts the Fed has no choice but to keep driving up interest rates, at a high price to stocks.
And he’s putting some fairly precise guesswork out there. “I estimate that a rise in rates from where they are to about 4.5% will produce about a 20% negative impact on equity prices,” Dalio said in a LinkedIn post dated Tuesday.
Some are forecasting the Fed could hike interest rates by 100 basis points next week, a move not seen since the likewise inflationary 80s. The central bank’s short-term rate hovers between 2.25% to 2.5%, but Nomura, for one, sees that rate headed to 4.75% by 2023.
But Dalio thinks interest rates could even reach the higher end of a 4.5%-to-6% range. “This will bring private sector credit growth down, which will bring private sector spending, and hence the economy down with it,” he says.
Behind this prediction is the Bridgewater Associates founder belief that the market is severely underestimating where inflation will end up — at 2.6% over the next 10 years versus what he sees as 4.5% to 5% in the medium term, barring shocks.
Read: Why a single U.S. inflation report roiled global financial markets — and what comes next
As for what happens when people start losing money in the markets — the so-called “wealth effect” — he expects less spending as they and their lenders grow more cautious.
“The upshot is that it looks likely to me that the inflation rate will stay significantly above what people and the Fed want it to be (while the year-over-year inflation rate will fall), that interest rates will go up, that other markets will go down, and that the economy will be weaker than expected, and that is without consideration given to the worsening trends in internal and external conflicts and their effects.”
The markets
Stock futures
ES00,
-0.25%
YM00,
+0.02%
NQ00,
-0.48%
are slightly lower post data, as Treasury yields
TMUBMUSD10Y,
3.437%
TMUBMUSD02Y,
3.852%
keep climbinging and the dollar
DXY,
-0.10%
firms up.
Oil prices
CL.1,
-1.63%
are lower, along with gold
GC00,
-0.83%.
China stocks
SHCOMP,
-1.16%
HSI,
+0.44%
slipped after the country’s central bank left rates unchanged. European natural-gas prices
GWM00,
+4.13%
are on the rise again. Bitcoin
BTCUSD,
+0.64%
is trading at just over $20,000.
The buzz
Shares of Union Pacific
UNP,
-3.69%,
Norfolk Southern
NSC,
-2.16%
and CSX
CSX,
-1.05%
are rallying in premarket after the White House said it has reached a tentative railway agreement with unions. No deal by Friday would mean strikes and havoc for supply chains, grain markets and even the coming holidays. Read more here.
August retail sales rose a stronger-than-expected 0.3% as Americans spent on new cars while weekly jobless claims came in lower for a fifth-straight week and import prices dropped 1%. Elsewhere, the Empire State manufacturing index perked up on the heels of a deep negative reading, but the Philly Fed factory index worsened. Industrial production and business inventories are still to come.
Adobe shares
ADBE,
+0.85%
are dropping after a report the software company is mulling a $20 billion deal to buy graphic design startup Figma .
Vitalik Buterin, one of the co-founders of Ethereum, says the so-called “merge” is done, meaning the birth of a more environmentally friendly crypto. Ethereum
ETHUSD,
-1.22%
is up just a little right now.
A new lawsuit claims Tesla
TSLA,
+3.59%
has made false promises over Autopilot and Full Self Driving features. And move over Tesla, Apple
AAPL,
+0.96%
is now Wall Street’s biggest short bet.
Ericsson
ERIC,
-3.32%
ERIC.A,
-1.78%
ERIC.B,
-3.34%
is dropping after a double downgrade at Credit Suisse, who cited inflationary headwinds. Analysts lifted Nokia
NOKIA,
-0.51%
NOK,
-0.40%
to outperform, though the stock is barely moving.
Cathie Wood’s Ark Investment Management went on a dip-buying spree after Tuesday’s market meltdown, scooping up chiefly Roku
ROKU,
+0.44%.
Opinion: Pinterest never considered itself a social network. Until now.
Patagonia billionaire Yvon Chouinard is donating his entire company — worth $3 billion — to the climate fight.
Best of the web
No U.S. shale rescue for Europe.
Turkey finds an extra $24.4 billion laying around.
Queue to pay respects to Queen is 2.6 miles long and counting.
The tickers
These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern Time:
Ticker
Security name
TSLA,
+3.59%
Tesla
GME,
+1.01%
GameStop
AMC,
+1.95%
AMC Entertainment
BBBY,
+4.66%
Bed Bath & Beyond
HKD,
+311.78%
AMTD Digital
NIO,
-0.14%
NIO
AAPL,
+0.96%
Apple
APE,
+0.94%
AMC Entertainment preferred shares
AMZN,
+1.36%
Amazon
NVDA,
-0.02%
Nvidia
Random reads
Scientists try to teach robots comedic timing
Sausage, mozzarella, batter. Meet South Korea’s hot dog.
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WASHINGTON—Securities and Exchange Commission Chairman
Gary Gensler
signaled that he would support Congress handing more authority to the SEC’s sister markets regulator to oversee certain cryptocurrencies such as bitcoin.
Mr. Gensler, speaking at an industry conference, said Thursday he looked forward to working with Congress to give the Commodity Futures Trading Commission added power, to the extent the agency needs greater authority to oversee and regulate “nonsecurity tokens…and the related intermediaries.”
The remarks come amid an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto.
Cryptocurrencies remain largely unregulated by the federal government, leaving investors without protections from fraud and market manipulation that come with many other types of investments. The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers.
The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
Mr. Gensler, who headed the CFTC from 2009 to 2014, qualified his remarks by saying he welcomed working with lawmakers as long as it doesn’t take away power from the SEC.
“Let’s ensure that we don’t inadvertently undermine securities laws,” he said. “We’ve got a $100 trillion capital market. Crypto is less than $1 trillion worldwide. But we don’t want that to somehow undermine what we do elsewhere.”
SHARE YOUR THOUGHTS
What should be the next priorities for the SEC? Join the conversation below.
Leaders of the Senate Agriculture Committee, which oversees the CFTC, are pitching legislation that would assign oversight of the two largest cryptocurrencies—bitcoin and ether—to that agency. At present, the CFTC generally has the power to regulate derivatives—such as futures and swaps—as opposed to cash or spot markets where the underlying assets are bought and sold for immediate delivery.
The SEC has declined for years to assert jurisdiction over bitcoin and ether, which proponents say are more “decentralized” than other cryptocurrencies. Mr. Gensler noted Thursday that bitcoin is often likened to a digital form of gold, and that it doesn’t bear all of the characteristics of a security.
The bill from the leaders of the agriculture panel is one of several that lawmakers have offered to more tightly oversee cryptocurrencies. In his remarks, Mr. Gensler didn’t express support for any particular bill.
CFTC Chairman
Rostin Behnam
has asked Congress to pass a law that would allow the CFTC to regulate cash markets for certain types of cryptocurrencies and provide it with funding to conduct additional oversight.
After objecting for years to meaningful federal oversight, cryptocurrency lobbyists have recently shifted their focus to convincing lawmakers and regulators that the CFTC should have primary jurisdiction over their industry. They say the SEC’s rules for traditional securities like stocks and bonds don’t fit because cryptocurrencies aren’t organized as traditional corporations with stockholders.
Jake Chervinsky, head of policy at the Blockchain Association, a crypto lobbying group, said in a statement that “decades of legal precedent shows that most digital assets” are commodities.” He said lawmakers should address the issue.
“This is a matter for Congress rather than regulators, and we’re glad to see consensus in Congress that the CFTC, not the SEC, should regulate spot markets,” he said.
While Mr. Gensler’s comments suggest that his agency shouldn’t oversee bitcoin, he said the majority of crypto tokens are securities that fall under his agency’s jurisdiction and should comply with investor-protection laws. Mr. Gensler also said it is possible some crypto intermediaries would need to be dually registered with both his agency and the CFTC, similar to the way some brokers and mutual-fund firms are overseen by both agencies.
Mr. Gensler has also repeatedly demanded that cryptocurrency-trading platforms such as Coinbase Global Inc. register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.
WSJ’s Dion Rabouin explains why many investors are still betting on crypto, even with the very real threat of losing all their money. Illustration: Rami Abukalam
—Paul Kiernan contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
U.S. stock indexes were lower Tuesday as investors monitored earnings reports and economic data ahead of inflation figures due later in the week.
The S&P 500 slipped 0.7%, a day after the broad index finished with modest losses. The Dow Jones Industrial Average slid 0.4% while the technology-heavy Nasdaq Composite fell 1.5%.
Investors await consumer-price data on Wednesday that could set expectations for how the Federal Reserve will approach monetary policy at its coming meetings. In recent weeks, better-than-expected corporate earnings and strong labor-market data have eased concerns about an imminent U.S. recession, helping stock markets rebound from their lows.
With inflation running at a multidecade high, investors say Wednesday’s consumer-price index update will be key to the outlook for rates and the direction of the market.
“The market has enjoyed a risk-on environment since the lows of mid-June, and investors interpreted Chair [Jerome] Powell as more dovish than he had hoped at the last Federal Reserve meeting,” said Quincy Krosby, chief global strategist for LPL Financial. “But today’s market is tomorrow’s market—Wednesday’s inflation data will provide a clearer picture as to whether this bear market is truly behind us.”
According to Ms. Krosby, inflation is the No. 1 concern for the market, including not only whether it is subsiding, but how quickly.
Earnings season is winding down, though some major companies are still set to report figures. Roblox, Coinbase Global and Wynn Resorts will release results after markets close. Chip maker
Micron Technology
fell 4.7% Tuesday after issuing a revenue warning, just a day after
Nvidia
offered similar preliminary guidance.
Norwegian Cruise Line Holdings
fell 11% after reporting a wider-than-expected quarterly loss. Shares of peer cruise line
Carnival Corporation
fell 5.7% as the pockets of the travel sector struggle to recover from its pandemic lows.
Energy stocks gained 1.7% in the morning session, led by shares of Occidental Petroleum which advanced 4.4% on the back of news Monday that Warren Buffett’s Berkshire Hathaway took its stake in the company past the 20% mark.
Traders worked on the trading floor at the New York Stock Exchange on Monday.
Photo:
ANDREW KELLY/REUTERS
Brent crude prices flip-flopped in Tuesday trading, swinging 1.8% in either direction. Barrels of the crude benchmark lurched into positive territory early in the morning after Moscow cut the flow of oil through a pipeline to Europe, and last traded nearly flat at $96.62 per barrel.
“Oil prices are still driven by the near-term macroeconomic outlook,” said
Robert Thummel,
managing director and senior portfolio manager of TortoiseEcofin. “Concerns remain that the Federal Reserve will continue slowing the economy if Wednesday’s inflation data comes in higher than expected, but markets still see persistent undersupply and high demand as creating upward pressure on oil prices.
Data released Tuesday showed U.S. labor productivity declined for a second straight quarter while labor costs were more elevated than economists expected.
The yield on the benchmark 10-year U.S. Treasury note edged up to 2.800% from 2.763% on Monday, while the two-year yield rose to 3.263% from 3.214%. With shorter-term yields significantly above longer-term ones, the yield curve remains inverted, a key recession indicator.
Overseas, the Stoxx Europe 600 fell 0.7%, with losses led by travel and technology firms. In Asia, stock markets were mixed. In Japan, the Nikkei 225 fell 0.9% while in China, the Shanghai Composite Index rose 0.3%. In Hong Kong, the Hang Seng Index weakened by 0.2%.
Write to Will Horner at william.horner@wsj.com and Eric Wallerstein at eric.wallerstein@wsj.com
WASHINGTON—Leaders of a Senate committee are pitching legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest-rate swaps.
Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich.) and top-ranking Republican John Boozman of Arkansas unveiled a plan Wednesday that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class. Currently the CFTC has authority to police derivatives, such as futures and swaps, rather than underlying commodities.
The bill marks the latest salvo in an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto. Thirteen years after bitcoin was created, cryptocurrencies remain largely unregulated by the federal government, leaving investors without key protections from fraud and market manipulation.
The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers. The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
“‘When there’s a topic as hot as crypto, everybody wants a seat at the table.’”
“When there’s a topic as hot as crypto, everybody wants a seat at the table,” said
Aaron Klein,
a senior fellow at Brookings Institution who focuses on financial regulation. “The question is, are we going to have regulatory turf paralysis?”
In practical terms, for federal agencies such as the CFTC, Securities and Exchange Commission, and Federal Reserve, adding crypto to their remit would bring bigger budgets, greater influence and more job opportunities for officials who leave public service. For members of the congressional committees that oversee such regulators, a new industry in their sandbox would create another stream of lobbyists and campaign donations.
“We need to treat this seriously and take our responsibilities seriously for protecting consumers,” Ms. Stabenow said in a virtual press conference alongside Mr. Boozman.
Washington has introduced a flurry of bills in recent months to draw jurisdictional lines. Sens.
Cynthia Lummis
(R., Wyo.) and
Kirsten Gillibrand
(D., N.Y.) unveiled a proposal in June that would create exemptions for cryptocurrencies in securities laws, banking statutes and tax code. In July, leaders of the House Financial Services Committee said they were working on a bill to grant the Federal Reserve a greater role in regulating some stablecoins, crypto tokens pegged against the dollar and other official currencies.
When cryptocurrency lending platform Celsius froze user accounts amid a plunge in valuations, it sent ripples across the industry and raised questions about what happens to user assets if a crypto platform files for bankruptcy. WSJ’s Vicky Ge Huang explains. Photo illustration: Jordan Kranse
Agencies also are seeking to claim territory. CFTC Chairman
Rostin Behnam,
a former staffer to Ms. Stabenow, said last week his agency is “ready and well situated” to oversee spot markets for some cryptocurrencies. He has worked with his former boss for months to help craft legislation that would authorize the CFTC to do so, people familiar with the matter say.
Meanwhile, SEC Chairman
Gary Gensler
has repeatedly demanded that cryptocurrency-trading platforms such as
Coinbase Global Inc.
register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.
“Four years ago when I started this job, there were some people that just thought this thing was all going to blow up and go away, that this was sort of a passing fad,” said Kristin Smith, executive director of the Blockchain Association, a trade group representing crypto firms.
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Now, she said, “We’ve got all these regulators suddenly vying for control.”
After the SEC alleged in an insider-trading case in July that at least seven cryptocurrencies listed on Coinbase should have been registered as securities, Republican CFTC Commissioner
Caroline Pham
accused the SEC of “regulation by enforcement.”
“The SEC is not working together with the CFTC,” Ms. Pham said in an interview. “They go out unilaterally to try to establish precedent that’s going to dramatically reshape the landscape as to what’s a security and what’s a commodity.”
Ms. Pham has posted photos to her
Twitter
account of herself posing alongside crypto lobbyists and executives including
Sam Bankman-Fried,
the billionaire founder of trading platform FTX.
Ms. Pham said that crypto is one of the areas she is focused on, and, “I take pictures with everybody. Like, literally, everybody.”
At the heart of the turf war are questions about how cryptocurrencies fit into the definition of a security, the legal classification that includes stocks and bonds.
Coinbase and other firms have lobbied Congress to create a new category for digital commodities and empower the CFTC to regulate it.
Photo:
Shannon Stapleton/REUTERS
A 1946 Supreme Court case created a test that focuses on whether investors buy an asset in hopes of profiting from the efforts of other people. If so, the issuer is required to register with the SEC and publicly disclose any information that may be material to the security’s price.
Even though investors in bitcoin and ether rely on a network of users and programmers to validate transactions and perform software updates, cryptocurrency enthusiasts insist those groups are too decentralized for the assets to be regulated like securities. Instead, they argue, the assets should be considered commodities, which have a broader definition and no full-time regulator.
Firms such as Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and empower the CFTC to regulate it. The agency has roughly one-sixth the head count of the SEC, and its rules are seen by the industry as easier to comply with than securities laws.
“When you ask the people that are in the industry…almost all feel like the regulator should be primarily the CFTC,” Mr. Boozman said. “The fact that they’re fairly united on that makes it easier on members.”
Crypto skeptics worry that creating a new legal concept for cryptocurrencies could create an alternative to securities registration for a wider variety of assets.
“People who are taking action that could undermine our securities law are playing with fire,” said Dennis Kelleher, president of investor-advocacy group Better Markets. “You may love or hate the SEC, but transparent disclosure, clear rules…and enforcement is what builds trust and confidence in our markets.”
The legislation being unveiled Wednesday would seek to exclude securities from the definition of digital commodities, making it narrower in scope than that of other crypto-related bills floated in recent months, such as the Lummis-Gillibrand proposal.
Ms. Stabenow said she expects the Agriculture Committee to hold a hearing on the bill as early as September.
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The bill would require any entity acting as a digital commodity platform—including crypto exchanges such as Coinbase and FTX—to register with the CFTC as trading facilities, dealers or brokers. The exchanges would have to monitor trading, protect investors from abuse and only offer assets that are resistant to market manipulation, among other requirements.
Platforms also would be obliged to disclose some information about the assets they list, such as operating structure and conflicts of interest. Such information would likely fall short of the extensive disclosures required by the SEC for securities.
The derivatives markets the CFTC currently oversees are dominated by professional investors, such as banks and hedge funds. Crypto markets, by contrast, draw legions of small investors who are more vulnerable to scams.
If the agency wins jurisdiction over bitcoin and ether, the CFTC would have to write rules from scratch to protect such investors.
“How robust would they be and how long would that take?” asked Tyler Gellasch, executive director of the Healthy Markets Association, an investor trade group.
is slashing about 23% of its full-time staff as the flashy online brokerage continues to reel from a sharp slowdown in customer trading activity.
The job cuts mark the second round of layoffs this year at Robinhood, which in April reduced its staff by about 9%. Together, the two rounds have cut more than 1,000 jobs from the company.
The layoffs come alongside a broader company reorganization,
Vlad Tenev,
Robinhood’s chief executive, said in a message posted to the company’s blog. In the statement, Mr. Tenev said the previous round of layoffs in April “did not go far enough” in helping the company cut costs.
“Last year, we staffed many of our operations functions under the assumption that the heightened retail engagement we had been seeing with the stock and crypto markets in the Covid era would persist into 2022,” Mr. Tenev said in the message. “In this new environment, we are operating with more staffing than appropriate. As CEO, I approved and took responsibility for our ambitious staffing trajectory—this is on me.”
Robinhood also moved up the release of its second-quarter results a day earlier than scheduled, reporting its monthly active users tumbled to 14 million, down 34% from a year earlier. Revenue fell 44% to $318 million.
Launched less than a decade ago, Robinhood ushered in a free-stock trading phenomenon during the Covid-19 pandemic, thanks to its easy-to-use, mobile-first online brokerage platform.
By the second quarter of last year—Robinhood’s best, according to public filings—the company boasted more than 21 million active users, who flocked to the app to trade flashy meme stocks, options and cryptocurrencies.
But the pandemic-darling has seen its fortunes unwind this year as markets have tumbled and customers are no longer stuck at home like they were during the Covid-19 pandemic. Revenue tied to customers’ trading activity dropped 55% in the latest quarter to $202 million.
Robinhood’s stock price plunged this year and finished Tuesday at $9.23, down 76% from its initial public offering price last year of $38 a share. Its stock fell 1.6% in recent after-hours trading.
Robinhood scaled up staffing quickly during the Covid-19 pandemic to meet the surge in demand for its services. On the company’s earnings call in April, Mr. Tenev said the company grew its head count to nearly 3,900 in the first quarter of this year from roughly 700 at the end of 2019. Tuesday’s reduction will bring the head count to about 2,600.
In his blog post, Mr. Tenev said all employees would receive an email and a Slack message with their employment status immediately following Tuesday’s companywide meeting where the layoffs were announced. Employees who were laid off will be able to remain employed through October, Mr. Tenev said.
“The reality is that we over-hired, in particular in some of our support functions,” Mr. Tenev said later on the call with reporters. He noted that employees in support, operations, marketing and program management would be most acutely affected.
A number of technology companies have laid off employees in recent months as they grapple with a slowdown in growth and the threat of a looming recession.
Twitter Inc.,
Netflix Inc.
and
Tesla Inc.
are among those that have made staff cuts.
Within the brokerage landscape, Robinhood has found itself more deeply affected by the current market environment. Compared with larger, entrenched players in the industry, Robinhood’s users tend to be younger and have less money in their brokerage accounts. Jason Warnick, Robinhood’s chief financial officer, said Robinhood customers tend to invest in growth stocks and cryptocurrencies. Both categories were hammered by a downturn in markets this year.
In addition to slowing growth, Robinhood has found itself under the watchful eye of regulators. The New York State Department of Financial Services said Tuesday that it imposed a $30 million fine on Robinhood’s cryptocurrency trading unit for alleged violations of anti-money-laundering and cybersecurity regulations.
The company, meanwhile, has encountered questions about the future viability of part of its business model, after Securities and Exchange Commission Chairman
Gary Gensler
earlier this year outlined a revamp of trading rules that could threaten one of the key ways Robinhood makes money.
As its business has struggled this year, Robinhood has increasingly been considered a takeover target by some market watchers, especially in the highly competitive brokerage industry. In May, one of the biggest names in cryptocurrency,
Sam Bankman
-Fried, unveiled a roughly $648 million investment in Robinhood in exchange for 7.6% of the company’s Class A shares.
Any outside investor, including Mr. Bankman-Fried, would face an uphill battle in mounting an aggressive takeover bid for Robinhood, due to a dual-class share structure that gives the majority of voting control to Mr. Tenev and
Baiju Bhatt,
Robinhood’s other co-founder.
Mr. Warnick reiterated on Tuesday’s media call that Robinhood intends to continue as a stand-alone, independent company.
“We’ve got an incredibly strong balance sheet with $6 billion in cash and we’ve got a lot of momentum on the product side,” he said. “To the contrary of being acquired, we actually think that we should be looking more aggressively at opportunities to acquire other companies that would help speed our innovation.”
Mr. Warnick added that Robinhood plans to roll out tax-advantaged retirement accounts later this year, following its earlier launch of other products including a new debit card. Some former employees, customers and analysts, however, have criticized the brokerage for being too slow to unveil new products that could diversify its revenue stream.