US Probes FTX Empire Over Handling of Client Funds, Lending (1)

US regulators are investigating whether beleaguered crypto-exchange FTX.com mishandled customer funds, and they’re looking into the firm’s relationships with other parts of Sam Bankman-Fried’s crypto empire.

The inquiries by the Securities and Exchange Commission and the Commodity Futures Trading Commission relate to the liquidity crisis that has pushed FTX to the brink, according to three people familiar with the matter. The SEC’s scrutiny started months ago as a probe into FTX US and its crypto-lending activities, said two of the people, who who weren’t authorized to speak publicly on the matter.

FTX’s turmoil led to a tentative rescue offer by rival exchange Binance Holdings Ltd., which now may balk as the scope of FTX’s distress becomes more apparent. American regulators are also looking into the platform’s relationship with its American counterpart FTX US and Bankman-Fried’s trading house Alameda Research, two of the people said.

Sam Bankman-Fried

Photographer: Ting Shen/Bloomberg

Representatives for the SEC and Binance declined to comment. The CFTC, FTX and FTX US didn’t immediately respond to requests for comment.

The troubles at FTX.com follow high-profile collapses this year by crypto firms that have prompted calls for more US regulation. Although various Washington agencies claim some turf, questions over who should oversee trading platforms continue to swirl.

The CFTC’s jurisdiction over crypto is generally limited to derivatives, but the agency can take enforcement action if it believes there’s fraud or manipulation in the underlying market. The SEC claims oversight over digital coins that qualify as securities under its rules. Both regulators also oversee investment firms.

Read More: FTX’s Financial Black Hole Leaves Binance Balking at Rescue Plan

In recent days, the regulators have asked for details about the ownership structure of FTX US and FTX.com, which caters to non-American clients, according to two of the people. Regulators are interested in any overlap between management and board structures, and the financial relationship between the two entities. The agencies have also asked for details on whether customer accounts were properly segregated and the composition of the investor base at FTX.com, said one of the people.

SEC Chair Gary Gensler has repeatedly warned about risks associated with digital-asset exchanges. He has said that many platforms may be violating securities laws by offering unregistered securities to Americans, improperly providing loans, or even front-running their clients’ trades. Gensler has also raised concerns that firms may be engaged in conflicting lines of business and suggested that they should potentially split up the different functions.

Top CFTC officials have expressed concerns about the risk of crypto platforms mishandling customer assets. “There is not enough awareness or attention on this critical area where customer protections dovetail with financial stability risks,” Democratic CFTC Commissioner Christy Goldsmith Romero said in a speech last month without mentioning any firms by name.

Bitcoin, the largest token by market value, fell as much as 9.9% to $16,853 on Wednesday. That brings this week’s decline to almost 20%.

(Updates with details on probe starting in seventh paragraph.)

To contact the reporters on this story:
Lydia Beyoud in Washington at lbeyoud2@bloomberg.net;
Yueqi Yang in New York at yyang492@bloomberg.net;
Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story:
Ben Bain at bbain2@bloomberg.net

Stephanie Stoughton

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