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This Week in FinTech & Compliance #3: The FTX Saga Continues

Cody Foster - March 03, 2023

FinTech Week in FinTech

In some way or another, crypto continues to dominate news cycles. More and more major companies and firms are moving into the blockchain and DeFi spaces. Amazon Web Services recently partnered with Avalanche to try and bring blockchain technology to the masses. Google continues to invest in crypto partnerships to advance their connection to the DeFi world. Whether we as individuals and firms like it or not, crypto is certainly here to stay and is quickly becoming a mainstay piece of the global financial landscape. But, as we’ve previously discussed in other blogs, there’s volatility and danger to cryptocurrency compared to other investment classes. As the markets have skyrocketed up, only to crash down a moment later, thousands of investors are trying to jump on the “Crypto Train”, sometimes with drastic results. 

Recently, the U.S. Securities & Exchange Commission (“SEC”) released their examination priorities for FY 2023. One of these main priorities, which has been a priority since 2020, is “Emerging Technologies, FinTech, and Crypto Assets.” One could assume that the SEC is now staring down the crypto space with an incredibly watchful eye and sifting with a fine-toothed comb. Furthermore, both the SEC and the Commodity Futures Trading Commission (“CFTC”) are embroiled in debates on whom will take over the primary governance of the cryptocurrency space. And as these debates develop, so does the current elephant case with FTX.

If you have watched or paid attention to much financial news, you’re sure to have seen various reports and commentary on the situation surrounding crypto firm FTX and its founder, Sam Bankman-Fried (“SBF”). If you haven’t, you can hop over to a previous FinTech blog to get a little context. In a nutshell, federal prosecutors have alleged that SBF and members of his inner circle at FTX have stolen billions of dollars from investors, funneling the money through crypto-based hedge fund Alameda Research, owned by SBF and Gary Wang, to hide any losses. Along with this, SBF has now been accused of making over 300 illegal political contributions, to the tune of millions of dollars, to various politicians and political workers. Unfortunately, that’s not it. The plot continues to thicken.

On February 28th, the SEC formally charged former FTX Co-Lead Engineer Nishad Singh for his role in a massive multi-year scheme to defraud FTX investors. Singh was one of the co-founders of FTX, along with SBF and engineer Wang. The SEC alleges that Singh himself created software code that allowed FTX investor funds to be illegally diverted to Alameda Research, despite assuring customers that their assets were completely secure and that Alameda itself was just another FTX customer and received no special privileges. On top of these allegations, the SEC complains that Singh directed hundreds of millions of investor dollars into Alameda for other investment ventures and loans to SBF, other FTX executives, and to Singh himself. According to the SEC’s complaint, as FTX neared total collapse and current customer investments could not be made whole, Singh withdrew millions of dollars from FTX for various personal expenses and purchases. All the while, federal courts will determine if civil charges and penalties will also be brought against Singh. As we’ve mentioned, the plot has certainly thickened.

On top of the SEC’s charges, the U.S. Attorney’s Office for the Southern District of New York and the CFTC have now announced formal charges against Singh. 

The investigation is ongoing and, while Singh has been cooperative with the SEC, there are sure to be more developments that will affect the outcome of the case. But a bigger question is, what kind of impact will this massive case have on the cryptocurrency landscape, its governance, and the financial industry as a whole? Will this have the same impact as Bernie Madoff or Enron? No one can be sure, unfortunately, none of us have a crystal ball, but we can certainly say that these kinds of cases keep the SEC and CFTC on high alert and their focus on misconduct, compliance, and investor protection.

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