SEC Chairman Gary Gensler met with FTX’s chairman a few months before the collapse

Gary Gensler’s controversial tenure as chairman of the Securities and Exchange Commission could reach a high-stakes drama in a 45-minute Zoom call with former crypto wunderkind Sam Bankman-Fried at the center of the $1 trillion digital currency industry’s biggest debacle ever.

On March 23, about eight months before Bankman-Fried’s crypto empire collapsed and was forced into bankruptcy, Gensler, some crypto veterans, called an extraordinary meeting of several fundraisers for Democratic candidates, including then-billionaire and his boss President Joe Biden. .

Even before the FTX imbroglio, Gensler led an aggressive and some controversial regulatory attack on the crypto business. In public opinion, most digital currencies qualify as unregistered securities, leaving creators facing sanctions similar to those sought from Ripple’s executives, who are facing an SEC lawsuit over the unregistered launch of their own coin, XRP.

While exchanges such as Coinbase, Binance and Bankman-Fried’s FTX allow customers to trade crypto, they operate in a regulatory gray area without express SEC approval, thus opening the administration to potential sanctions.

Sam Bankman-Fried, founder and CEO of FTX Cryptocurrency Derivatives Exchange, speaks during the Institute of International Finance (IIF) Annual Membership Meeting on Thursday, October 13, 2022 in Washington, DC, US. This year’s con (Photographer: Ding Shen/Bloomberg via Getty Images/Getty Images)

Now some crypto players and Gensler’s critics in Congress are questioning why he missed the FTX debacle and recent bankruptcy. At issue: A meeting between Bankman-Fried and Gensler where they discussed an idea for a new SEC-approved crypto trading platform. If approved, the former FTX chief would have a head start on the competition with a trading floor that apparently meets SEC standards, people with direct knowledge of the matter told Fox Business.

Bankman-Fried had a venture with the stock exchange IEX, founded by Brad Katsuyama. The veteran trader was featured as the protagonist in journalist Michael Lewis’s book Flash Boys, which chronicled the antics of high-frequency trading on Wall Street.

Katsuyama and his team, along with Bankman-Fried and his top brass, gave Gensler and senior SEC officials detailed explanations of their idea and questioned existing SEC rules — so-called no-action letters that set industry standards. Apply for their new venture, according to people with first-hand knowledge of the subject.

Gensler was said to be lukewarm to their pitch, and these guys didn’t outright rule it out, but didn’t indicate he’d give it his green light. He wanted an SEC-notified crypto exchange to mirror the standards of public exchanges like Nasdaq and the New York Stock Exchange.

It’s unclear how much Genlser was involved in Blankman-Fried’s nefarious FTX business activities. Bankman-Fried’s resignation from the famously embedded crypto platform exposed a complex matrix of investments in various businesses and an unusual relationship with Alameda Capital, a hedge fund-like investment vehicle Bankman-Fried ran from offices in Hong Kong.

Gary Gensler SEC

The U.S. Securities and Exchange Commission (SEC) on Friday exempted certain assets from a new disclosure rule for off-exchange securities starting Jan. 3, said it would delay implementation until 2022. Photographer: Andrew Harrer/Bloomberg via Getty Images (Photographer: Andrew Horrer/Bloomberg/Getty Images)

Officials from FTX and IEX also held another meeting with the SEC, which began to take shape in the following months. IEX’s executives met separately with SEC officials last week leading up to the FTX bankruptcy.

Katsuyama is reportedly still interested in going forward as a partner even without FTX, perhaps buying FTX’s technology as a conservator in bankruptcy, according to a person familiar with the matter. FTX is also a minority investor in IEX, and IEX officials are trying to buy back the company’s holdings.

In a statement to Fox Business, IEX said, “We maintain regular contact with the SEC on a variety of topics. We engaged with them to better understand their view of the regulatory precedent applicable to digital asset securities. At no time did we request or suggest that any entity may be given special treatment.” ” It added: “FTX US’s recent Chapter 11 filing has had no impact on IEX Group’s business. FTX US has a minority investment in IEX Group and has no relationship or management with any of the IEX operating businesses. Our revenues and cash flows are at record levels. Across all our business lines Our focus and commitment remain unchanged.”

A legal representative for FTX did not return an email for comment. Bankman-Fried could not be reached for comment.

Bankman-Fried, 30, was once worth north of $20 billion, but his fortune has largely evaporated amid the FTX collapse. The relationship between FTX and Alameda has been the focus of several criminal and regulatory investigations following FTX’s bankruptcy and reports that Banker-Fried may have personally used FTX client accounts for risky investments made by Alameda.

The FTX explosion resembled a classic bank run; As word spread of a possible merger between the two businesses (customer accounts to be separated from the other businesses), investors withdrew money from FTX. They unloaded its native currency, the FTT token, which Alameda held a significant amount of and is now virtually worthless.

The news also swayed rival Crypto Exchange Finance, a potential white-night savior, from buying FTX to avoid bankruptcy and the loss of billions of dollars in client funds.

Crypto currencies

Cryptocurrency mixing platform Tornado Cash has been hit by US sanctions over money laundering allegations. Cryptocurrency Illustration Image taken on January 24, 2022. (REUTERS/Dado Ruvic/Illustration/Reuters)

Gensler was appointed SEC chairman two years ago and has ruffled feathers by pushing the SEC’s authority into non-traditional areas such as corporate climate change disclosures. The FTX failure coincides with Gensler’s aggressive crackdown on alleged crypto abuse, despite questions about whether the SEC has the authority to regulate digital currencies.

But he now finds himself in the peculiar position of having to defend himself against attacks from industry executives and Republicans in Congress in what could be the biggest defeat in the industry’s history. -Brother, Sam Bankman-Fried, known for wearing shorts, hoodies, and messy hair.

Known simply as “SBF,” Bankman-Fried was one of crypto’s wealthiest and most recognizable figures. He is the second-largest contributor to Democrats in the midterms behind George Soros, donating about $36 million to Biden’s 2020 presidential campaign on top of the $10 million he gave. Influence came with money: He was called upon by regulators and lawmakers for his ideas on crypto oversight. He was featured on magazine covers as the next Warren Buffett and considered one of the top industry thought leaders.

But now that’s all gone, and his past influence in the crypto industry is under scrutiny from law enforcement and leaders of the GOP-controlled House. Congressman Tom Emmer, a Republican from Minnesota and a member of the House Financial Services Committee, recently tweeted that his meetings with Gensler — first published on the SEC chairman’s public calendar — indicated that the SEC was willing to issue FTX and Bankman-Fried. “Regulatory Monopoly” for New Crypto Exchange.

“My office has been accused of helping SBF and FTX work through legal loopholes to gain a regulatory monopoly. We are looking into this,” Emmer wrote. Fox Business has learned that if the GOP wins control of the House, they will schedule hearings on the Gensler-FTX debate.

FTX

A smartphone screen displays the logo of crypto exchange platform FTX, with a screen showing the FTX website in the background, in Arlington, Virginia on February 10, 2022. – Sam Bankman-Fried is wearing a suit and tie ((Photo by OLIVIER DOULIERY / AFP) (Getty Images by OLIVIER DOULIERY/AFP) / Getty Images)

Of course, it is common for securities industry executives to meet with high-level SEC officials and staff about a variety of matters, including new business ventures that may trigger SEC scrutiny. A spokeswoman for the SEC declined to comment on the CNBC interview other than to refer Fox Business, which said there was nothing inappropriate about Gensler’s meetings with Bankman-Fried, as he usually meets with industry professionals.

“I think we’ve been very clear in the meetings,” Gensler said in the interview, “…non-compliance is not going to work, and the public will suffer…” Fried, a representative for FTX and Bankman, did not return calls for comment.

People with first-hand knowledge of the SEC’s discussions with FTX, including a March meeting with Gensler, say it’s nearly impossible for the SEC chairman to grant a regulatory monopoly to one firm; Competitors can copy the model for their own exchange.

A person familiar with the March meeting with Gensler described Gensler’s “45-minute lecture” on what crypto exchanges must do to comply with current law. Gensler also said that Alameda Fund should be a completely separate entity from any crypto trading venue they plan.

Although Bankman-Fried and Katsuyama came up with a slide deck during their meeting with Gensler, the person said the crypto-trading platform does not yet have a concrete plan.

Frankfurt, Hesse, Germany – April 17, 2018: Many currencies of different cryptocurrencies (iStock/Reuters)

Their main objective is to “get a feel for what the SEC is looking for.” The two sides will meet several more times, with IEX taking the lead in discussions with the SEC in the coming months, these people said.

It’s unclear whether the SEC is ready to greenlight the plan anytime soon. Any new transfer will require the approval of the full commission, which is a timely process.

However, some industry critics of Gensler say the existence of the meetings shows the controversial crypto executive was prioritized by the SEC because of his Democratic Party ties. Industry executives typically meet with the commission on new business plans after the SEC formalizes rules — and it’s unclear whether the SEC will propose new rules specifically on crypto exchanges.

“If the GOP takes over Congress, Gensler will have to answer these questions in hearings,” said a crypto industry insider with close ties to the GOP.

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