cftc

CFTC and SEC cases against SBF deferred until after criminal trial

Damian Williams, the U.S. Attorney for the Southern District of New York, had pushed to defer the civil cases due to a major overlap between the CFTC, SEC and DOJ’s cases.

A New York judge has granted a request from prosecutors to defer civil proceedings against Sam Bankman-Fried from the Commodities Futures Trading Commission and the Securities Exchange Commission until after the FTX founder’s criminal trial in October.

U.S. District Judge of Manhattan Kevin Castel on Feb. 13 granted the motions to stay the civil proceedings “without prejudice,” meaning the cases will now be halted until after the Department of Justice’s criminal trial concludes.

The motion was first submitted on Feb. 7 by Damian Williams, the U.S. Attorney for the Southern District of New York, requesting to defer both civil cases against the FTX founder and former CEO.

Citing his reasons for wanting the delay, Williams emphasized that all three cases will most likely be hinged on providing the same evidence against Bankman-Fried, and that the DOJ’s trial in October will have a “significant impact” on these civil cases.

He also suggested that failing to delay the cases may give SBF unfair advantages in the DOJ’s trial, as the FTX founder had the tools to “improperly obtain impeachment material regarding the government’s witnesses, circumvent the criminal discovery rules, and improperly tailor his defense in the criminal case.”

Bankman-Fried’s legal team did not oppose William’s motion to defer the proceedings.

Related: FTX liquidators report exchange held $2.4M ‘fleet of vehicles’ in the Bahamas

In a related court development concerning SBF’s alleged witness tampering antics, Judge Lewis Kaplan of the United States District Court for the Southern District of New York on Feb. 9 extended the FTX founder’s ban on using all encrypted messaging apps until Feb. 21, as part of his bail conditions.

A week prior, SBF’s legal team had negotiated a deal to use certain encrypted apps under strict supervision, however, Judge Kaplan overruled it and suggested that he was more concerned about shutting down any encrypted communication than offering SBF a small convenience.

Ethereum co-founder Joe Lubin says no chance ETH is classed as security

The ConsenSys founder and Ethereum co-founder said it’s as unlikely as ride-sharing service Uber becoming illegal.

Ethereum co-founder and crypto entrepreneur Joseph Lubin is confident that Ether (ETH) won’t be classified as a security in the United States.

Cointelegraph spoke with Lubin, Ethereum co-founder and founder of blockchain tech firm ConsenSys, in Tel Aviv at the Web3 event, Building Blocks 23.

Asked if ETH could be classed as a security in the U.S. after Ethereum’s transition to a proof-of-stake (PoS) consensus model, Lubin said:

“I think it’s as likely, and would have the same impact, as if Uber was made illegal.”

“There would be a tremendous outcry from not just the crypto community but different politicians and certain regulators,” he added.

In September, Securities and Exchange Commission Chairman Gary Gensler suggested that the blockchain’s transition to PoS might have brought ETH under the regulators’ beat.

Gensler believed staking coins gave “the investing public” anticipation of “profits based on the efforts of others.”

Lubin said he was privy to discussions with the SEC and the Commodity Futures Trading Commission “for many years.”

Joseph Lubin speaking with Cointelegraph at Building Blocks 23 in Tel Aviv, Israel in February.

He said around five years ago the regulators were “just trying to wrap their heads around what tokens were.”

“They thought back then that everything was a security. We — I think — helped them significantly understand lots of tokens are not securities, and then they went away and Gary and team now think almost everything’s a security.”

Lubin, however, believes that ETH continues to be “sufficiently decentralized” and pointed to its “many use cases that don’t implicate it as a security.”

“There is no centralized set of promoters or builders that is specifically trying to raise the value of Ether and enrich investors,” he added.

“There’s a court system in the United States of America that I think would be supportive of arguments that would be made that it is not.”

Lubin said that regulators appear to be more focused on another aspect of Ethereum at the moment, noting that people he knows close to the action in Washington D.C. say “most of the focus is on stablecoins right now.”

“Everybody’s talking about it, freaking out. Calling for things to be done.”

In a Feb. 9 Twitter thread, Coinbase founder and CEO Brian Armstrong responded to “rumors” that the SEC was thinking to ban retail consumers from staking crypto.

Related: CFTC head looks to new Congress for action on crypto regulation

“Staking is not a security,” he said, adding it would be a “terrible path for the U.S.” if a staking ban was passed noting it was “a really important innovation in crypto.”

“Hopefully we can work together to publish clear rules for the industry, and come up with sensible solutions that protect consumers while preserving innovation,” Armstrong said.

US Attorney requests SEC and CFTC civil cases against SBF wait until after criminal trial

Lawyers for Sam Bankman-Fried said he consented to staying the SEC and CFTC civil cases, while those for Caroline Ellison and Gary Wang did not objec to staying the CFTC case.

Damian Williams, United States Attorney for the Southern District of New York, has petitioned the court to delay civil proceedings against former FTX chief executive officer Sam Bankman-Fried “until the conclusion of the parallel criminal case”.

In Feb. 7 filings, Williams requested that the court issue an order staying civil proceedings as well as discovery from the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission against Bankman-Fried until after his criminal case, scheduled to go to trial in October. According to Williams, the criminal case against Bankman-Fried was “likely to have a significant impact” on the SEC and CFTC civil cases.

“All of the facts at issue in the Civil Cases are also at issue in the Criminal Case,” said the filing. “Indeed, as to the scheme to defraud FTX.com customers, the scheme to defraud FTX.com investors, the conspiracy to commit securities fraud by materially misleading FTX.com investors, and the conspiracy to commit commodities fraud by misappropriating FTX.com customer funds intended to be used for swaps trading, virtually all of the same documents, witnesses, and other evidence that would be used by the SEC and CFTC to prove their claims arising from these schemes would also be used to prove the Government’s criminal case.”

Regarding staying discovery proceedings, the U.S. Attorney claimed that without intervention, Bankman-Fried had the tools to “improperly obtain impeachment material regarding the Government’s witnesses, circumvent the criminal discovery rules, and improperly tailor his defense in the Criminal Case”. The judge overseeing SBF’s criminal case has already banned the former FTX CEO from using encrypted messaging apps as a condition of his bail after allegations of contacting witnesses potentially involved in the case.

Lawyers for Bankman-Fried said he did not object to staying the SEC and CFTC civil cases until the conclusion of the criminal case. The legal teams for former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang consented to staying the CFTC case. The two have already settled their civil cases with the SEC.

Related: FTX fallout: SBF trial could set precedent for the crypto industry

Both the SEC and CFTC filed separate lawsuits against Bankman-Fried in December, shortly after his arrest in the Bahamas. The SEC’s complaint sought injunctions that could prevent SBF from participating in the issuance, purchase, offer or sale of any securities except for his personal account, while the CFTC said it was looking for injunctive and other equitable relief as well as civil monetary penalties against the former CEO, as well as FTX and Alameda.

CFTC head looks to new Congress for action on crypto regulation

“I will continue to engage and provide technical assistance to draft legislation, as requested,” said Rostin Behnam.

Rostin Behnam, chairman of the United States Commodity Futures Trading Commission (CFTC), has said he will continue efforts for the agency to regulate non-security tokens.

In remarks released for a Feb. 3 American Bar Association event, Behnam pointed to “bankruptcies, failures and runs” as part of the justification for the U.S. Congress to give the CFTC the authority to address regulation for cryptocurrencies. According to Benham, the commission was “well positioned” to address regulatory gaps but deferred to U.S. lawmakers to pull the trigger on legislation.

“Regulation is necessary to protect customers and to prevent failures which cannot predictably be contained within any boundaries across the domestic and global financial markets,” said Behnam. “Regardless of whether one or many occur in 2023 or 2033, we must act. There is a new Congress, and I will continue to engage and provide technical assistance to draft legislation, as requested.”

According to the CFTC chairman, budget increases for the commission would also help grow its enforcement team, which has brought 69 crypto-related actions to date — a list that includes FTX, Ooki DAO and others. Behnam said the team was “working toward another strong year of precedent-setting cases” against fraudulent or illegal digital asset projects.

Related: CFTC slammed for ‘blatant regulation by enforcement’ over Ooki DAO case

Though the political makeup of the 118th Congress differs slightly from that of its predecessor, it’s unclear if the CFTC will be given additional authority under Behnam. One of the pieces of legislation lawmakers may revisit is the Lummis-Gillibrand Responsible Financial Innovation Act — a bill first introduced in June 2022 aimed at addressing the roles of the CFTC and Securities and Exchange Commission on crypto regulation.

Crypto-related enforcement actions by US states rose sharply in 2022: Report

There were almost twice as many state actions as federal in 2022, although both the feds and the states broke previous record by significant margins.

The number of crypto-related enforcement actions in the United States grew notably in 2022, according to a survey released by blockchain risk monitoring firm Solidus Labs. Both federal and state regulators broke records for enforcement actions.

There were 58 actions carried out by the four main U.S. federal agencies engaged in crypto enforcement in 2022. That number surpassed the previous high of 40 recorded in 2020 and rose 65% over the 38 actions seen in 2021.

The agencies – the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC) – all broke their previous records, with the exception of FinCEN, which had one action in 2022 compared to four in other years since 2013.

The SEC led the regulators in 2022 with 30 actions, nine of which were civil suits filed after arrests were made, some of which are ongoing. They netted $242 million in penalties. The report noted:

“The SEC announced 30 crypto-related enforcement actions in 2022, more than any other regulator we identified worldwide.”

The CFTC carried out 19 actions, up 73% from 11 in 2021. Those cases represented 21.95% of the agency’s activity, which was also a record and compares to 4.76% of crypto’s share in SEC cases.

OFAC’s eight cases is up from its previous record of five, with its sanctioning of Tornado Cash being its biggest case. The report noted that activity on Tornado Cash has fallen precipitously since OFAC’s action, in spite of industry pushback.

Related: 350 new ‘scam tokens’ were created every day this year: Solidus Labs

The report also noted that FinCEN activity is likely to pick up this year after the tightening of sanctions on Russia and strengthening of the Treasury Department’s whistleblower program. So far, all crypto-related FinCEN actions have been for violations of the Bank Secrecy Act.

“States have been off to the races,” the report said. States had a combined total of 112 actions in 2022, up from 89 in 2021 and 52 in 2020. Sixteen states made their first-ever action and eight broke their records. An additional 11 states tied their previous enforcement records and in 15 states the record was “not broken.” The report did not say explicitly whether all 50 states took action.

Texas and Alabama regulators were the most active, with six cases each. The Texas State Securities Board, which produced the first-ever crypto-related state enforcement order in 2017, is the all-time state leader with 59 actions, “quadruple that of the next-most active state regulators, the Colorado Division of Securities and Washington State Department of Financial Institutions.”

Regulatory action against Mango Markets exploiter is a win for DeFi — Moody’s

The SEC and CFTC taking action against the alleged fraudster shows that decentralized finance is becoming a “safer and more welcoming environment,” according to credit rating firm Moody’s.

Recent charges brought against Mango Markets exploiter Avraham Eisenberg will have a positive impact on the decentralized finance (DeFi) space, according to credit rating firm Moody’s. 

In a Jan. 31 note from Moody’s Investor Service, assistant vice president of decentralized finance Cristiano Ventricelli stated that enforcement actions brought by the two leading U.S. market regulators in January mean that DeFi is moving toward a “safer and more welcoming environment.”

“The fact that both the SEC and CFTC took action against market manipulation by an alleged rogue trader is a credit positive for the industry as a whole.

Ventricelli stated that these actions could “improve oversight of the DeFi industry” which has for the most part been a difficult area to regulate due to the lack of clarity regarding jurisdiction over open-source protocols.

On Jan. 20, the United States Securities and Exchange Commission (SEC) filed charges against the alleged market manipulator, while the Commodity Futures Trading Commission (CFTC) filed charges against Eisenberg on Jan. 9.

Ventricelli made a similar comment in an article tweeted out by Moody’s on Jan. 26 but he went into more detail in the Jan. 31 note.

The report suggested that DeFi is “no longer a no man’s land,” referring to a June speech by European Central Bank President Christine Lagarde to the European Parliament, where she argued that Europe’s crypto legislation, Markets in Crypto-Assets (MiCA), should be expanded to include a framework for decentralized finance.

Ventricelli suggested that this safer environment could lead to wider adoption among institutional investors “such as banks,” as well as retail investors.

Related: DeFi sees exploits and exit scam drama in the last week of 2022: Finance Redefined

CFTC’s filing alleged that Eisenberg “engaged in a manipulative and deceptive scheme to artificially inflate the price of swaps offered by Mango Markets.”

The SEC filing alleged that Eisenberg’s actions “left the platform at a deficit” when the security price returned to its pre-manipulation level.

Mango Labs, the company behind Mango Markets, filed its own lawsuit against Eisenberg on Jan. 25, demanding $47 million in damages plus interest over his alleged October exploit.

FTX VCs liable to ‘serious questions’ around due diligence — CFTC Commissioner

The lack of recordkeeping of FTX coupled with “an auditor no one’s ever heard of” forces the CFTC to ask questions about the mindset of the institutional investors.

Amid ongoing investigations around the defunct crypto exchange FTX, the Commodity Futures Trading Commission (CFTC) questions the due diligence conducted by institutional investors and their accountability regarding the loss of users’ funds.

CFTC Commissioner Christy Goldsmith Romero stated that VCs that had to write down their investments in millions of dollars to nearly zero raises “serious questions” about the due diligence conducted over the last year, speaking to Bloomberg.

CFTC Commissioner Christy Goldsmith Romero questioning the VCs that once backed FTX. Source: Bloomberg

She raised concerns about FTX CEO John Ray’s revelations in court about not having any records and controls over the exchange’s financials.

The lack of recordkeeping coupled with “an auditor no one’s ever heard of” forces the CFTC to ask questions about the mindset of the institutional investors. In this regard, Romero asked a series of questions:

“How is that possible? So do they turn a blind eye to it? Were they just distracted by this promise of innovation?”

FTX founder and former CEO Sam Bankman-Fried used trust as a marketing technique to gain investor confidence. However, Romero echoed the current investor sentiment while stating that “We know now that that’s not true.”

As a result, she believed that the VCs backing FTX ignored the red flags when it came to due diligence, further questioning their involvement.

“So was there some conflicts that prevented them (VC backers) from really paying attention to the due diligence and the facts that they were uncovering?” asked Romero while concluding the topic at hand.

Related: FTX reboot could falter due to long-broken user trust, say observers

Shark Tank star and investor Kevin O’Leary, who once supported FTX, warned against the possible fall of unregulated crypto exchanges. He stated:

“If you’re asking me if there’s going to be another meltdown to zero? Absolutely. One hundred percent it’ll happen, and it’ll keep happening over, and over and over again.”

As Cointelegraph previously reported, based on a report by the National Bureau of Economic Research, up to 70% of the trading volume on unregulated exchanges is wash trading.

Stellar joins CFTC’s Global Markets Advisory Committee as one of four crypto orgs

Stellar chief operating officer Jason Chlipala said the foundation would bring the unique perspective of Layer 1 to the committee and highlight stablecoin use cases.

The Stellar Development Foundation (SDF) has become the newest member of the United States Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC), the blockchain announced on its blog. The committee is preparing to meet on Feb. 13 for the first time in over a year.

SDF supports the Stellar blockchain, which is used for crypto-fiat transfers. The foundation will be represented on the committee by chief operating officer Jason Chlipala. He wrote in the company blog that “we hope to bring the unique perspective of Layer 1 protocols” to the GMAC and:

“As part of the Committee, SDF will highlight the role of stablecoins in the digital asset markets and real-world use cases, including leveraging stablecoins in the delivery of humanitarian aid.”

Stellar is the issuer of the Stellar (XLM) coin and creator of the Stellar Aid Assist program that “enables aid organizations to deliver cash assistance to vulnerable populations.” It joins crypto-oriented GMAC members CoinFund, Uniswap Labs and the Chamber of Digital Commerce. Traditional finance giants including HSBC, Goldman Sachs and BlackRock are also represented on the 36-member committee.

Related: MoneyGram’s USDC transfer service launches in several countries

CFTC commissioner Caroline Pham is the new sponsor of the GMAC. The first meeting under her sponsorship will be devoted to organizational issues. “Potential topics relating to global market structure and digital asset markets for the GMAC to prioritize in making policy recommendations to the CFTC” will also be discussed.

Pham stated in an interview Jan. 17 that she has held over 75 meetings with various parties on global crypto regulatory standards since she was nominated to the CFTC by U.S. President Joe Biden in January 2022. In September, she proposed the creation of a CFTC Office of the Retail Advocate modelled after the Security and Exchange Commission’s Office of the Investor Advocate.

CFTC commissioner: Crypto exchanges shouldn’t ‘self-certify’ tokens

Commissioner Christy Goldsmith Romero wants crypto exchanges blocked from self-certifying crypto and crypto products before going live on their platforms.

A commissioner from the Commodity Futures Trading Commission (CFTC) has called on Congress to stop allowing cryptocurrency exchanges to “self-certify” and list tokens without oversight.

CFTC commissioner Christy Goldsmith Romero told an audience at a Jan. 18 University of Pennsylvania event focused on FTX that the current process wasn’t adequate to ensure proper oversight, saying:

“I urge Congress to avoid permitting newly-regulated crypto exchanges to self-certify products for listing, under the current process that limits CFTC oversight.”

“It is critical to institute guardrails against regulatory arbitrage, and that includes prohibiting the use of the self-certification process,” she added.

Currently, crypto exchanges can “self-certify” their product’s safety before listing unless the CFTC blocks the listing within 24 hours.

CFTC Commissioner Christy Goldsmith Romero Source: Twitter

She said this process used to list products such as crypto futures isn’t adequate for that type of asset.

Goldsmith Romero added crypto businesses looking to issue tokens could use the CFTC’s crypto regulatory framework to circumvent registration with the Securities and Exchange Commission (SEC).

Proposals to give the CFTC an increased role in oversight of the crypto industry were introduced to Congress in 2022.

Crypto ‘gatekeepers’ need to ‘step up’

During her speech, the commissioner also called on lawyers, compliance professionals, celebrities, venture capital firms and pension fund investors to conduct better due diligence on crypto firms.

“Gatekeepers themselves also need to step up, and call for compliance, controls, and other governance, without allowing the promise of riches and the company’s marketing pitch to silence their objections to obvious deficiencies.”

Remarking on FTX, which declared bankruptcy in November 2022 after mishandling and misplacing customer funds, Goldsmith Romero said these entities “should have seriously questioned the operational environment at FTX in the lead-up to its meltdown.”

“If the digital asset industry wants to regain any amount of public trust, it has some work to do,” she added.

Some crypto industry observers have continued to argue that the circumstances behind FTX’s collapse should not be pegged to the digital asset space or a lack of regulation.

Related: Digital Dollar Project urges US to take action on CBDC development

SEBA Hong Kong’s managing director Ludovic Shum told Cointelegraph during an interview this week that the fall of FTX could have easily happened in any other industry. 

“At the end of the day, it goes back to the trust regarding the checks and balances […] It was just unfortunate that it happened in this fast-growing area of the crypto world where it could have easily happened to banks, securities, houses, asset managers,” said Shum.

Meanwhile, Lachlan Feeney, Founder and CEO of blockchain development agency Labrys said the industry needs more oversight, not necessarily regulation to prevent another disaster.

“The FTX scandal didn’t happen because of a lack of regulation. FTX operated [allegedly] illegally; disregarding the existing regulations rather than capitalizing on an absence of regulation.”

“There should probably be more oversight to stop unscrupulous players and activity before situations escalate, but we don’t need masses of new regulation and red tape that deters innovation. We need clarity on the existing regulations,” he said in a statement to Cointelegraph.

CFTC commissioner: Crypto exchanges shouldn’t ‘self-certify’ tokens

Commissioner Christy Goldsmith Romero wants crypto exchanges blocked from self-certifying crypto and crypto products before going live on their platforms.

A commissioner from the United States Commodity Futures Trading Commission (CFTC) has called on Congress to stop allowing cryptocurrency exchanges to “self-certify” and list tokens without oversight.

CFTC commissioner Christy Goldsmith Romero told an audience at a Jan. 18 University of Pennsylvania event focused on FTX that the current process wasn’t adequate to ensure proper oversight, saying:

“I urge Congress to avoid permitting newly-regulated crypto exchanges to self-certify products for listing, under the current process that limits CFTC oversight.”

“It is critical to institute guardrails against regulatory arbitrage, and that includes prohibiting the use of the self-certification process,” she added.

Currently, crypto exchanges can “self-certify” their product’s safety before listing unless the CFTC blocks the listing within 24 hours.

CFTC Commissioner Christy Goldsmith Romero. Source: Twitter

She said this process, used to list products such as crypto futures, isn’t adequate for that type of asset.

Goldsmith Romero added that crypto businesses looking to issue tokens could use the CFTC’s crypto regulatory framework to circumvent registration with the Securities and Exchange Commission (SEC).

Proposals to give the CFTC an increased role in oversight of the crypto industry were introduced to Congress in 2022.

Crypto “gatekeepers” need to “step up”

During her speech, the commissioner also called on lawyers, compliance professionals, celebrities, venture capital firms and pension fund investors to conduct better due diligence on crypto firms.

“Gatekeepers themselves also need to step up, and call for compliance, controls, and other governance, without allowing the promise of riches and the company’s marketing pitch to silence their objections to obvious deficiencies.”

Remarking on FTX, which declared bankruptcy in November after mishandling and misplacing customer funds, Goldsmith Romero said these entities “should have seriously questioned the operational environment at FTX in the lead-up to its meltdown.”

“If the digital asset industry wants to regain any amount of public trust, it has some work to do,” she added.

Some crypto industry observers have continued to argue that the circumstances behind FTX’s collapse should not be pegged to the digital asset space or a lack of regulation.

Related: Digital Dollar Project urges US to take action on CBDC development

Swiss crypto bank SEBA Hong Kong’s managing director, Ludovic Shum, told Cointelegraph during an interview this week that the fall of FTX could have easily happened in any other industry. 

“At the end of the day, it goes back to the trust regarding the checks and balances […] It was just unfortunate that it happened in this fast-growing area of the crypto world where it could have easily happened to banks, securities, houses, asset managers,” said Shum.

Meanwhile, Lachlan Feeney, founder and CEO of blockchain development agency Labrys, said that the industry needs more oversight, not necessarily regulation, to prevent another disaster.

“The FTX scandal didn’t happen because of a lack of regulation. FTX operated [allegedly] illegally; disregarding the existing regulations rather than capitalizing on an absence of regulation.”

“There should probably be more oversight to stop unscrupulous players and activity before situations escalate, but we don’t need masses of new regulation and red tape that deters innovation. We need clarity on the existing regulations,” he said in a statement to Cointelegraph.