A Possible FTX Revival Hinges on New Leadership Adhering to Legal Standards, SEC Chairman Gensler Emphasizes in DC Fintech Week Interview
Gary Gensler, the SEC chairman, discussed the potential revival of FTX in an interview with CNBC during DC Fintech Week. Gensler stressed the importance of new leadership understanding legal intricacies.
Gensler's comments were in reference to reports that Tom Farley, former president of the New York Stock Exchange, is among the top contenders bidding to acquire the remaining assets of the bankrupt cryptocurrency exchange. Farley, who launched the Bullish digital asset platform in May, is reportedly a finalist in the bankruptcy auction.
"If Tom or any other aspirant wishes to enter this sector, I would say, 'Do it within the legal framework,'" emphasized Gensler on Wednesday. "Build investor trust through proper disclosures and, equally important, avoid the intersection of roles, such as trading against customers or using crypto assets for personal purposes."
Last week, FTX founder Sam Bankman-Fried was found guilty on all seven criminal charges, including fraud and money laundering. The exchange, which filed for bankruptcy a year ago, was accused of channeling customer funds to the Alameda Research hedge fund.
Alameda served as a market maker for FTX and enjoyed privileges, including a $65 billion line of credit without collateral requirements. Unlike other platform users, Alameda was granted the unique ability to take negative positions in its trading bets without facing liquidation.
"We would never allow the New York Stock Exchange to simultaneously operate a hedge fund and trade against its members or customers in the market," stated Gensler.
Despite the supposed separation by a firewall, evidence presented during the month-long trial revealed the practical closeness between FTX and Alameda.
In addition to criminal charges, the SEC and the Commodity Futures Trading Commission filed civil suits against FTX. In December, the SEC accused Bankman-Fried of perpetrating a "brazen" and long-standing fraud.
Gensler emphasized that existing securities laws are robust and strong when considering new regulations for the industry. The key challenge lies in effective enforcement.
"There's nothing about crypto that's incompatible with securities laws," he stated. "You have many global actors currently not complying with these time-tested laws."
FTX, based in the Bahamas and predominantly used by clients outside the United States, had a small American affiliate. The Binance cryptocurrency exchange is under scrutiny from U.S. regulators despite its international operations. Both the SEC and CFTC have brought charges against Binance, alleging that the company and founder Changpeng Zhao worked to circumvent their own controls, allowing high-net-worth U.S. investors to continue trading on its unregulated international exchange.
"Consider how many actors in this space are currently not complying with international sanctions and money laundering laws and are using crypto for nefarious or bad actions," Gensler remarked, without naming specific companies or individuals.
The SEC has faced some interim losses in court recently, including to Ripple over the $1.3 billion the company raised in what the SEC termed an unregistered securities offering, as well as to Grayscale regarding the firm's application to convert its bitcoin trust into a spot bitcoin exchange-traded fund.
Gensler highlighted that over the past six years, the SEC has either brought or settled 150 cases related to crypto. One of its legal disputes involves Coinbase, a publicly traded U.S. crypto exchange considering leaving the country due to regulatory constraints.
Companies in the U.S. must adhere to the law, Gensler emphasized, avoiding specific case references.
"If it's a non-compliant fraudster, why would we want them in our markets?" he questioned.
"FTX and Alameda had an extremely problematic relationship," noted Nic Carter of Castle Island Venture in an interview with CNBC. "Bankman-Fried operated both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated capital markets.