FTX is an online trading company that allows you to buy, sell, and store Bitcoin, Ethereum, and many other cryptocurrencies and digital assets. The company’s offshore status and its willingness to keep American traders off its Bahama-based exchange successfully shielded it from the strict U.S. Laws which regulate how investments of this caliber can be sold to the public. However, the recent implosion of the company is raising many people’s eyebrows back in the states.
Exposed by Affiliates
The company and its founder may be subject to criminal liability due to FTX’s implosion last week and reports the company used customer funds to back an affiliate’s risky venture investments. According to people familiar with the matter, the Manhattan U.S. Attorney’s Office is investigating FTX’s collapse. FTX will, at least initially, be investigated for reports that it loaned customer funds to Alameda Research, a crypto-trading firm that traded on FTX. Sam Bankman-Fried, who resigned as CEO of FTX on Friday, also founded and owns Alameda Research.
Without investors’ consent, it is generally forbidden to use customer funds for proprietary trading or loaning in the regulated securities and derivatives markets.
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Unregulated Crypto Market
The unregulated crypto market is much different, however, and no such customer protection rules exist. But, using customer funds for a purpose that wasn’t disclosed can still constitute as embezzlement fraud, according to legal experts. “What this will boil down to is, were there deliberate lies to convince depositors or investors to part with their assets?” said Samson Enzer, a former Manhattan federal prosecutor. “Were there statements made that were false, and the maker of those statements knew they were false and made with the intent to deceive the investor?”
Prosecutors can also dive into comments Bankman-Fried made on Twitter last week, saying FTX was “fine” and that his customers’ assets were safe. Comments he later deleted.
Wrap Up
For now, to warrant any punishment prosecutors will need to prove the company’s intent to mislead customers. Intent can be extremely hard to prove however, other facts such as any secret efforts FTX took to prop up Alameda, can support the case.