CFTC - Meta Digest

CFTC shift attention to Binance with lawsuit

Josh Barter on September 25, 2023

CFTC — The cryptocurrency sector in the United States is in disarray, with entrepreneurs clashing with regulators.

Crypto enthusiasts in the United States, for example, are not allowed to trade cryptocurrency derivatives.

To further aggravate the situation, major overseas trading platforms for crypto futures do not allow Americans to trade the products.

Only if they are registered with the Commodities Futures Trading Commission (CFTC), a formidable federal regulator, may they do so.

The CFTC has filed a lawsuit against Binance, the world’s most well-known cryptocurrency exchange, for trading without first registering with the agency.

Binance apparently contemplated bailing out rival exchange FTX in November 2022.

Yet, Binance withdrew after closely monitoring the exchange platform, preventing a big federal fraud investigation on FTX.

What happened?

Binance and its CEO, Changpeng Zhao, were accused by the CFTC with breaking US laws.

Among the alleged violations is privately advising “VIP” clients in the United States on how to dodge compliance rules.

In addition, the commission regulates derivatives trading in the United States.

According to the CFTC, Binance and Zhao urged employees and customers to avoid compliance protections in order to increase corporate profits.

The CFTC does not have the ability to pursue criminal charges.

But, the regulator has the authority to levy substantial fines, which might preclude Binance from registering in the US in the future.

The potential ban might be disastrous for the company, given the United States is home to hundreds, if not millions, of cryptocurrency enthusiasts.

The response

As the news of the lawsuit came, Binance noted that it was unexpected and disappointing.

The company stressed that it has spent a significant amount of money in the previous two years to ensure that US-based investors are not active on the platform.

Zhao tweeted the number 4 after the lawsuit was announced on Monday, referring to a previous statement he made:

“Ignore FUD, fake news, attacks, etc.”

FUD is an acronym that stands for “fear, uncertainty, and doubt” in the crypto world.

Binance has long claimed that it is not subject to American legislation since it does not have a physical presence in the country.

Despite its location in China, the crypto trading platform lacks a physical headquarters.

Changpeng Zhao believes that the headquarters of the corporation are wherever he is.

Binance’s technique, according to the CFTC’s complaint, was a willful attempt to avoid regulation.

The bigger picture

The CFTC action is a setback for Binance, but it has far-reaching repercussions for the cryptocurrency sector.

But, the case is not as important as everything else that happened in 2022.

For example, the FTX bankruptcy triggered a chain reaction throughout the crypto sector, causing firms and projects exposed to the corporation to either freeze or shut down.

Terra/Luna also had a collapse, resulting in a drop in the value of crypto assets and NFTs.

Yet, significant progress has been made on the Terra/Luna issue in 2023.

Prices for the two major cryptocurrencies, Bitcoin and Ethereum, fell by more than 3% on Monday, a regular day for cryptocurrency trading.

Worst-kept secret

The CFTC’s lawsuit is remarkable for naming one of its worst-kept Bitcoin secrets.

Consumers in the United States have incredibly simple access to potentially dangerous offshore crypto derivatives, which should be prohibited.

Because crypto derivatives are leveraged bets on very volatile assets, they are accessible to anybody with a VPN.

While this method is straightforward, it is strongly discouraged.

The endgame

The most likely outcome, according to Blockchain Intelligence Group crypto compliance and regulation specialist Timothy Cradle, is that Binance will pay hundreds of millions of dollars in fines to the CFTC.

Furthermore, the company would be prevented from registering derivatives exchanges.

The move would not only be disastrous for American customers, but it would also have a significant impact on Binance’s revenues.

According to the lawsuit, US consumers account for 16% of the revenue generated by Binance’s derivatives products.

Other regulators

The revelation on Monday only adds to the regulatory pressure on one of cryptocurrency’s most well-known characters.

According to Bloomberg, the US Tax Administration and the Securities and Exchange Commission are also investigating Binance.

This week, the SEC issued a Wells Notice to Coinbase, one of the top US-listed crypto exchanges, for possible securities law violations.

Silvergate and Signature Bank, two major connections to the traditional banking sector, were lost to the crypto industry in early March.

Jon Tester, US Senator, still dismissive of crypto

Clara Emily on February 27, 2023

Jon Tester, the Montana farmer and teacher who became a US Senator, recently appeared on NBC’s “Meet the Press” Sunday.

Tester shared that cryptocurrency regulation will encourage people to “think it’s real.”

Speaking with host Chuck Todd, the Senator said crypto failed his “smell test.”

The news

Democratic Senator Jon Tester was invited to “Meet the Press,” where he discussed the defection of former Democratic Senator Kyrsten Sinema.

Toward the end, he talked about cryptocurrency.

“You used some colorful language to describe crypto,” asked Chuck Todd. “Should the government be regulating it or banning it?”

“One or the other,” replied Tester.

“I have not been able to find anybody who’s been able to explain to me what’s there other than synthetics – which means nothing,” the Senator continued.

“The problem is… if we regulated it, it may give the ability to think it’s real.”

Jon Tester concluded his thoughts regarding cryptocurrency by saying:

“I’m not a regulator, and I’m not a financial person that does regulation.”

“I see no reason why this stuff should exist. I really don’t.”

Role

Although Jon Tester claims he is not a regulator, his role on the Senate Banking Committee means he can influence one of the key decision-making bodies debating regulation of the struggling crypto industry.

In addition, Jon Tester’s website says:

“Senator Tester brings a rural perspective to this committee to make sure that laws and policies work for small banks, credit unions, small businesses and consumers in rural America.”

The Senator has never shied away from his disdain for cryptography.

Last week, he told Semafor that it was all “bullshit.”

DCCPA

After the midterm election in the United States, Democratic senators regrouped on the Banking Committee agenda.

A roll call report says party leaders were skeptical of the Digital Commodities Consumer Protection Act (DCCPA).

This would make the CFTC the primary crypto regulatory agency in the United States, rather than the Securities and Exchange Commission or other agencies.

The DCCPA is also known as the Stabenow-Boozman bill.

In addition, the decision to authorize the CFTC was also supported by Sam Bankman-Fried.

SBF has become an international pariah since the collapse of FTX and Alameda Research.

According to Roll Call, Senator Jon Tester warned against giving cryptocurrency a wider reach.

He also objected to the fact that the Stabenow-Boozman bill was presented to the Senate Agriculture, Nutrition and Forestry Committee, of which Republican Senator John Boozman is a senior member.

“It needs to be done in this committee, not [agriculture], so CFTC is a ‘no,'” said Tester.

Past criticisms

In 2019, Senator Jon Tester was an outspoken critic of Facebook’s failed Libra cryptocurrency initiative.

He compared the threat of inadequate controls in crypto to the 2008 financial crisis.

“In 2008, there was a run on the banks, there were some big companies that went belly up, including 157 banks, Lehman Brothers, WAMU, Bear Sterns, and others, said Tester.

“Nobody anticipated that there was going to be a run like this. Nobody.”

The Senator wondered if Facebook could avoid a similar collapse.

“I still felt confident my money was safe [in 2008],” he continued.

“How can you assure us, how can we be assured, that our money is going to be there?”

Reference:

US Senator says he sees ‘no reason why’ crypto exists

Caroline Ellison’s statements implicates SBF

Hector Andrews on December 27, 2022

Caroline Ellison: Alameda’s previous CEO admitted in court that she had misled lenders about their financial information.

Caroline Ellison and Sam Bankman-Fried came to an agreement to deliver “materially misleading financial statements” to Alameda’s lenders.

The news

Caroline Ellison’s transcript was made public three days after she spoke in court on December 19.

Until SBF’s $250 million bond release three days later, it was kept sealed.

The former CEO of Alameda testified before Judge Ronnie Abrams of the US District Court, saying: “I am truly sorry for what I did – I knew that it was wrong.”

“Did you also know that it was illegal?” the court asked her to clarify.

“Yes,” Ellison answered.

Federal charges

The co-founder of FTX, Gary Wang, and Caroline Ellison also confirmed last week that they engaged in the frauds that resulted in the collapse of the company.

On Wednesday, the attorneys for the Southern District of New York filed charges against the two.

They were charged with participating in a fraud to mislead equity investors, said the Securities and Exchange Commission.

A revision was made to its fraud case, according to the Commodities Futures Trading Commission (CFTC).

According to US Attorney Damian Williams, Ellison and Wang filed guilty pleas.

Williams also expressed gratitude for the help of the Bahamas, the US Embassy there, and the Justice Department’s Office of International Affairs.

Gary Wang and Caroline Ellison are now cooperating with the Southern District of New York.

They remained tightlipped about their plea bargains until after Sam Bankman-Fried had flown from the Bahamas to the US.

The financial statements

Caroline Ellison confirmed that the misleading financial statements came from “quarterly balance sheets that concealed the extent of Alameda’s borrowing and the billions in loans that Alameda had made.”

“I agreed with Mr. Bankman-Fried and others not to publicly disclose the true nature of the relationship between Alameda and FTX, including Alameda’s credit arrangement,” said Ellison.

The following reported about the transcript:

New York Times
Reuters
Bloomberg

Additionally, Inner City Press’ Matthew Russell Lee tweeted a section of the transcript.

Early reports

According to reports that emerged last week, the workers of FTX and Alameda were either aware of or oblivious of what was going on between the companies.

There was much discussion regarding the uncertainties before Ellison and Wang’s admission of guilt to their charges.

Caroline Ellison’s statements, however, supported accusations that FTX had treated Alameda differently.

Alameda was permitted to withdraw funds from its sister company.

Ellison said:

“I understood that FTX executives had implemented special settings on Alameda’s FTX.com account that permitted Alameda to maintain negative balances in various fiat currencies and crypto currencies.”

“In practical terms, this arrangement permitted Alameda access to an unlimited line of credit without being required to post collateral, without having to pay interest on negative balances and without being subject to margin calls or FTX.com’s liquidation protocols.”

Ellison said that she, along with others, were aware of the large debt the company owned, as well as the implications it had.

“I understood that if Alameda’s FTX accounts had significantly negative balances in a particular currency,” she continued.

“It meant that Alameda was borrowing funds that FTX’s customers deposited onto the exchange.”

SBF

Caroline Ellison claims that Sam Bankman-Fried and other executives made a number of “large illiquid venture investments” while collecting loans from Alameda.

In order to repay the loans, Ellison said that she and other people had agreed to borrow from FTX in the billions of dollars.

“I understood that FTX would need to use customer funds to finance its loans to Alameda,” Ellison shared.

“Most FTX customers did not expect that FTX would lend out their digital asset holdings and fiat currency deposits to Alameda in this fashion.”

Caroline Ellison also expressed her regrets to the FTX collapse victims, saying:

“I want to apologize for my actions to the affected customers of FTX, lenders to Alameda, and investors in FTX.”

“Since FTX and Alameda collapsed in November 2022, I have worked hard to assist with the recovery of assets for the benefit of customers and to cooperate with the government’s investigation.”

“I am here today to accept my responsibility for my actions by pleading guilty.”

References:

Caroline Ellison ‘knew that it was wrong,’ implicates Sam Bankman-Fried

Caroline Ellison, Gary Wang plead guilty, cooperating in FTX investigation

SEC says Ellison, Wang ‘knew or were reckless in not knowing’ about FTX fraud

FTX collapse perpetrators plead guilty to charges

Josh Barter on December 22, 2022

FTX: Gary Wang, a co-founder of FTX, and Caroline Ellison, a former co-CEO of Alameda Research, both pleaded guilty on Wednesday to federal charges.

The charges

US Attorney Damian Williams states that the two FTX associates pleaded guilty in the Southern District of New York.

The following offenses were those to which Gary Wang pleaded guilty:

Conspiracy to commit wire fraud
Wire fraud
Conspiracy to commit commodities fraud
Conspiracy to commit securities fraud

However, Caroline Ellison was charged with further offenses, such as the following:

Two counts of wire fraud
Two counts of conspiracy to commit wire fraud
Conspiracy to commit commodities fraud
Conspiracy to commit securities fraud
Conspiracy to commit money laundering

Their claims were made public the evening before Sam Bankman-Fried, the former CEO of FTX, was due to fly from the Bahamas to New York.

The same federal prosecutors who approved the plea agreements for Ellison and Wang are prosecuting him for eight federal felonies.

Their plea agreements were finalized on Monday, just in time for SBF’s planned departure for the US following a heated court appearance in the Bahamas.

“As I said last week, this investigation is very much ongoing,” said Williams in a prerecorded message.

“I also said that last week’s announcement would not be our last. And let me be clear, once again, neither is today’s.”

SBF

After being detained in the Bahamas the week prior, Sam Bankman-Fried was charged in the Southern District of New York.

His willingness to be extradited to the US has been the subject of intense judicial proceedings over the past few days.

He was brought to a Bahamas jail following a contentious courtroom meeting held on Monday, during which a reported plan to resist his extradition to the US stalled.

According to media accounts, he instructed his Bahamian attorney to begin the extradition process later that day.

Sam Bankman-Fried will appear in court this week once more.

According to earlier reports, he would agree to extradition, but SBF on Monday offered a different opinion.

He insisted on seeing a copy of his federal indictment before agreeing to return to the United States.

However, Bankman-Fried opted to remain in custody rather than turn himself in to US authorities.

The SEC

The Securities and Exchange Commission and Commodity Futures Trading Commission filed cases against Gary Wang and Caroline Ellison.

According to the SEC, a “multiyear scheme to defraud equity investors” targeted the cryptocurrency trading platform FTX, which Samuel Bankman-Fried and Wang co-founded.

The CFTC’s expanded complaint contains the following accusations:

“Ellison with fraud and material misrepresentations in connection with the sale of digital asset commodities in interstate commerce.”

According to the indictment, Wang is accused of fraud “in connection with the sale of digital asset commodities in interstate commerce.”

According to the CFTC statement, Wang and Ellison reportedly consented to the claims made against them.

Caroline Ellison was singled out for willfully manipulating FTT (FTX’s self-issued token) to increase Alameda Research’s loanable collateral.

Ellison and Wang are cooperating with the investigation, according to the SEC.

FTX and Alameda

Alameda Research was linked to numerous loans from well-known crypto companies that filed for bankruptcy, most notably Voyager Digital and BlockFi Lending.

Damian Williams avoided going into specifics on the charges levied against Wang and Ellison.

They allegedly assisted Sam Bankman-Fried in defrauding FTX clients while doing their respective duties at Alameda and FTX, claims the SEC.

Alameda allegedly used a backdoor Wang built into the software to access customer funds through the FTX platform.

Sam Bankman-Fried led Alameda until Caroline Ellison and Sam Trabucco assumed charge in 2021 (Trabucco departed the company in August 2022).

Ellison, 28, and Wang, 29, were the second and third individuals accused in relation to the FTX collapse.

Sam Bankman-Fried, 30, was charged with a federal offense this month.

“Bankman-Fried and Wang thus gave Alameda and Ellison carte blanche to use FTX customer assets for Alameda’s trading operations and for whatever other purposes Bankman-Fried and Ellison saw fit,” said the SEC.

They claimed that Trabucco had no association with any wrongdoing.

Wang’s attorney then made the following statement:

“Gary has accepted responsibility for his actions and takes seriously his obligations as a cooperating witness.”

References:

FTX’s Gary Wang, Alameda’s Caroline Ellison plead guilty to federal charges, cooperating with prosecutors

FTX founder Bankman-Fried sent back to Bahamas jail in day of courtroom chaos

Sherrod Brown wants cryptocurrency banned in the US

Clara Emily on December 19, 2022

Sherrod Brown: Sherrod Brown, a US senator, recently suggested that US government organizations take cryptocurrency prohibition into consideration.

He especially named the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The news

Despite suggesting the ban, Brown acknowledged that it would be “very difficult” to put into effect during an appearance on “Meet the Press” on NBC.

According to the US senator, the cryptocurrency industry may move overseas.

He also referred to a number of American regulators, saying:

“We want them to do what they need to do at the same time – maybe banning it.”

“Although banning it is very difficult because it will go offshore and who knows how that will work.”

Sherrod Brown used several examples to support his claims, including “the threat to national security from Korean cyber criminals to drug trafficking and human trafficking and financing of terrorism and all things that can come out of crypto,” along with other instances.

The collapse of FTX is yet another good illustration.

The FTX collapse

At the beginning of November, the cryptocurrency exchange FTX failed and declared bankruptcy.

The corporation said it would file for Chapter 11 bankruptcy and then start analyzing and liquidating assets.

A trade company and related corporation named Alameda Research also declared bankruptcy.

The filing, however, excludes a few businesses, including:

Ledger X LLC
FTX Digital Markets Ltd.
FTX Australia Pty Ltd.
FTX Express Pay Ltd.

In the release, company founder and CEO Sam Bankman-Fried announced his departure.

John J. Ray III took over and said:

“The FTX Group has valuable assets that can only be effectively administered in an organized, joint process.”

What happened

In the world of cryptocurrencies, Sam Bankman-Fried once enjoyed rockstar status but swiftly lost it.

Last year, Binance began selling its holdings of FTT (FTX’s native exchange token) as part of an equity exit from the business.

As the token’s value dropped, investors started withdrawing funds from the FTX, which led the platform to block withdrawals and declare a panic.

Brown’s sentiments

Earlier this month, Sherrod Brown asked that several government organizations collaborate to address the problem of capturing cryptocurrency.

“Single regulatory agencies currently generally do not have a comprehensive view of crypto asset entities’ activities,” he declared in a statement.

In the US government, Brown, a Democrat who has served as the representative for Ohio since 2007, is not the only high official who has advocated for more crypto regulations.

Senator Elizabeth Warren proposed a new bitcoin regulation bill last month.

The proposed legislation is referred to as the Digital Asset Anti-Money Laundering Act.

It attempts to require crypto asset producers to deliver audited financial accounts.

Additionally, the bill wants to put in place capital norms akin to those used by banks and other conventional financial institutions.

Finally, the proposal would grant the SEC greater control over the asset class.

Offshore crypto movement

Contrary to what the US Senator indicated, the cryptocurrency industry is already moving operations abroad due to the US government’s uncertain regulatory future.

In a tweet from November, Coinbase CEO Brian Armstrong addressed the problem.

“FTX.com was an offshore exchange not regulated by the SEC.”

“The problem is that the SEC failed to create regulatory clarity here in the US,” he continued.

“So many American investors (and 95% of trading activity) went offshore.”

Armstrong continued by calling the sanctions scenario against US firms ridiculous.

After FTX’s bankruptcy, Brian Armstrong emphasized his desire for US lawmakers to seize the initiative and lead the world’s race toward crypto legislation.

He claimed that Coinbase has been a significant proponent of the regulation of cryptocurrencies and contrasted the tactics of his site with that of a Bahamian-based “offshore exchange.”

References:

Banking committee chair: US regulators should ‘maybe’ ban crypto

FTX files Chapter 11 bankruptcy, SBF steps down as CEO

FTX crisis an ‘opportunity’ for US to clarify crypto regulations: Coinbase CEO