Week In Crypto: US Lawmakers Call For DOJ Hardball Following FTX Collapse

November 25, 2022
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US senators call on the Department of Justice (DOJ) to get tough on FTX’s former CEO and executives in the wake of its collapse, while Singapore’s financial regulator attempts to justify its lack of action to protect consumers from the fallout. In the UK, several major banks halt transacting with crypto firms.

US senators call on the Department of Justice (DOJ) to get tough on FTX’s former CEO and executives in the wake of its collapse, while Singapore’s financial regulator attempts to justify its lack of action to protect consumers from the fallout. In the UK, several major banks halt transacting with crypto firms.

Two US senators have written to the DOJ to demand that “disturbing allegations” of fraud and other illegal activity by FTX are investigated to the “fullest extent of the law”.

In an open letter published on Wednesday (November 23), Senators Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-RI) called on Attorney General Merrick Garland to honour his previous commitments to prosecute those who commit white-collar crime.

Earlier this year, during speeches at the American Bar Association, Garland said the DOJ intends to “[hold] individuals accountable for white-collar crime, as opposed to only levying fines on companies”.

He added that, under his watch, the DOJ would “increase its focus on the flesh-and-blood victims of white-collar wrongdoing”.

Warren and Whitehouse pointed out that FTX, despite being valued at $32bn just over a year ago, now owes up to $8bn to more than 1m customers who were unable to withdraw from the exchange prior to bankruptcy.

“Through high-dollar advertisement placements and celebrity endorsements, FTX created a false sense of safety and legitimacy, and encouraged consumers to pour their hard-earned money into investments on the exchange,” said the senators.

“Now, working- and middle-class retail investors from around the world are unable to access money they held on FTX.”

Warren and Whitehouse emphasised that the public statements of Sam Bankman-Fried, former CEO of FTX, appear to suggest a deliberate attempt to defraud customers, right up to the day of his resignation and FTX’s bankruptcy filing.

In since deleted tweets, Bankman-Fried assured customers that “FTX has enough to cover all client holdings”, and that FTX does not invest client assets, not even in US Treasury bills.

“However, when customers attempted to withdraw deposits, it became clear that Mr. Bankman-Fried and company representatives were lying,” wrote Warren and Whitehouse.

In mid-November, a source who wished to remain anonymous told CNBC that he had sat in investor meetings with Alameda Research, the FTX-owned trading firm, in which Bankman-Fried said that about $10bn in customer deposits had been lent out without their consent.

If true, as the senators pointed out, this would constitute a violation of both US securities laws and FTX’s own terms of service.

“The fall of FTX was not simply a result of sloppy business and management practices, but rather appears to have been caused by intentional and fraudulent tactics employed by Mr. Bankman-Fried and other FTX executives to enrich themselves,” said Warren and Whitehouse.

The source’s allegations have since been corroborated by court filings submitted by bankruptcy lawyer John Jay Ray, who took over as FTX CEO following Bankman-Fried’s resignation.

Ray said FTX had used software to “conceal the misuse of customer funds”, adding that financial statements produced under Bankman-Fried could not be trusted.

The senators concluded: “We urge the Department to center these ‘flesh-and-blood victims’ as it investigates, and, if it deems necessary, prosecute the individuals responsible for their harm.”

Singapore distances itself from FTX fallout

Over in Singapore, regulators have been taking steps to distance themselves from FTX, following losses among Singaporean customers.

In a statement published on Monday (November 21), the Monetary Authority of Singapore (MAS) sought to address “misconceptions that have arisen in the wake of the FTX debacle”.

In response to claims that the MAS could have protected local users by “ringfencing” their assets or ensuring that they were sufficiently backed, the MAS said it could not have taken these steps because FTX operates offshore and is not licensed in Singapore.

“MAS has consistently warned about the dangers of dealing with unregulated entities,” it said.

Another claim that was rebutted by the MAS was that Singaporean customers could have salvaged their funds had they been deposited with Quoine, a local crypto exchange that was purchased by FTX earlier this year.

On the contrary, the MAS noted that Quione and almost all other FTX overseas subsidiaries were included in FTX’s US bankruptcy filing and have suspended withdrawals.

The MAS also took the opportunity to clarify how and why Binance and FTX have been treated differently under Singapore regulations.

Although neither Binance or FTX holds a licence to operate a crypto exchange in Singapore, the difference between them is that Binance had previously solicited customers from Singapore, whereas FTX had not.

Between January and August 2021, the MAS received multiple complaints about Binance’s unlicensed solicitation of customers, leading to the central bank placing Binance on its Investor Alert List (IAL) — a roster of firms that the MAS believes are “wrongly perceived” as being licensed in Singapore.

In contrast, FTX had never solicited Singapore customers specifically, or offered Singapore dollar trading pairs, so the MAS did not place it on the IAL.

For Binance, in addition to the IAL listing, the MAS found the exchange to be in violation of the Payment Services Act, and ordered it to geo-block Singapore IP addresses and remove its mobile app from Singapore app stores.

The MAS defended its light-touch approach towards FTX by saying that there are hundreds of crypto exchanges and thousands of non-crypto financial firms that operate overseas, and although it is “not possible” to list all of them, it does not mean they are “safe to deal with”.

In Singapore, as in the UK and most other jurisdictions, licences are offered to crypto exchanges only to green-light their anti-money laundering (AML) controls, not to protect customers or investors.

“The most important lesson from the FTX debacle is that dealing in any cryptocurrency, on any platform, is hazardous,” said the central bank.

“As MAS has repeatedly stated, there is no protection for customers who deal in cryptocurrencies. They can lose all their money.”

UK banks hit pause on crypto transactions

In the UK, this week several major banks joined a growing number of firms that will no longer process transactions to crypto firms following the FTX bankruptcy.

On Tuesday (November 22), Starling Bank posted a notification to its app informing customers that they will no longer be able to transact with crypto firms.

“We always review our position in relation to financial crime” and “We consider crypto activity to be high risk”, the bank said in a statement.

“We’ve taken the decision to prevent all card payments to crypto merchants and to implement further restrictions on outgoing and incoming transfers.”

Similarly, a Nationwide spokesperson informed the Telegraph that it will soon be introducing a daily limit on payments to crypto firms

Earlier this month, Santander announced that it has placed a limit of £1,000 per transaction and £3,000 per month to crypto exchanges, while Virgin Money introduced a total ban on payments to crypto exchanges from personal and savings accounts.

This adds to a number of major banks, including Nationwide, Barclays, HSBC and Santander, who had all restricted payments to Binance due to licence ambiguities similar to those described by the MAS.

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