This Week in FinTech & Compliance #2: FTX & Crypto's Recent Rollercoaster Ride

This Week in FinTech & Compliance #2: FTX & Crypto's Recent Rollercoaster Ride
12/30/2022

FTX, Crypto, and the Compliance Rollercoaster Ride

Here at Joot/FinTech Law, we talk a lot about cryptocurrency and decentralized finance (“DeFi") and the impact it can have on our clients and their investors. As DeFi becomes more advanced and ingrained in the financial sphere, both nationally and internationally, governments around the world – particularly the U.S. government – are working to find ways to protect investors and their wallets. Even though the crypto market saw a drastic decline in valuation over the course of 2022, that hasn’t stopped investors from jumping on new altcoins or trade opportunities. Unfortunately, not all those opportunities have been prosperous. Some have even been disastrous or fradulent.

By now most casual news readers have read about the scandal swirling around FTX Trading Ltd. (“FTX”), FTT (FTX’s crypto coin), and FTX co-founder Sam Bankman-Fried. If you’re like us and have been paying close attention, you may have seen that last week the SEC formally charged former crypto hedge fund Alameda Research CEO Caroline Ellis and former FTX CTO Gary Wang with defrauding equity investors in FTX. Recall that Alameda was the affiliated hedge fund that was getting undisclosed loans from FTX; when Alameda defaulted on those loans, FTX collapsed. SEC Chair Gary Gensler stated, “As part of [Alameda's] deception, we allege that Caroline Ellison and Sam Bankman-Fried schemed to manipulate the price of FTT, an exchange crypto security token that was integral to FTX…” Regarding Gary Wang, Chair Gensler mentioned, “[w]e further allege that Ms. Ellison and Mr. Wang played an active role in a scheme to misuse FTX customer assets to prop up Alameda and to post collateral for margin trading. When FTT and the rest of the house of cards collapsed, Mr. Bankman-Fried, Ms. Ellison, and Mr. Wang left investors holding the bag.”

Other investigations regarding FTX, Bankman-Fried, Wang, and Ellison regarding securities infractions are still ongoing. This situation is certainly going to be closely scrutinized by investment managers and investors as the situation progresses and impacts the crypto markets. We’re going to keep an eye on everything and make sure you’re updated with the necessary information regarding any SEC regulation or rule changes. But what does the FTX debacle mean for investors now and what can we think about moving forward?

As a compliance management firm, Joot can help you ensure that your policies and due diligence identify legitimate crypto and DeFi opportunities. Together, our goal is to make sure our clients keep themselves and their investors safe. More and more investment advisers and fintech companies are getting involved in the tumultuous sea of cryptocurrency without a life preserver set aside for the betterment of themselves and their investors. Before getting involved in crypto or DeFi, it’s important for advisers and fintech companies to know the current rules and regulations set forth by the SEC. It’s important to understand what administrative changes or disclosures need to be made for the benefit of the firm and its investors. Crypto and DeFi can be a lucrative space but, like anything else, it can be dangerous. While we watch the proceedings of the FTX case, it’s important to make sure you have the necessary life preservers and safety nets in place. Don’t let your firm or investors sink. Whether you’re moving along with business as usual or thinking about diving into the crypto deep end, contact the Joot team to make sure your compliance is in order and you’re ready to swim the deep waters.

Click here to read the SEC's full press release.