Tag Archives: cryptocurrency

FTX Sues Founder Bankman-Fried’s Parents



Bankrupt crypto exchange FTX on Monday sued the parents of founder Sam Bankman-Fried, saying that Stanford professors Joseph Bankman and Barbara Fried used the company to enrich themselves at the expense of FTX’s customers, Reuters reported.

FTX, now being led by turnaround specialist John Ray, said that company founder Sam Bankman-Fried ran FTX as a “family business” and misappropriated billions in customer funds for the benefit of a small circle of insiders, including his parents.

According to Reuters, Sam Bankman-Fried has pleaded guilty to charges that he defrauded FTX customers by using their funds to prop up his own risky investments. He is currently jailed ahead of a trial scheduled to begin Oct. 3. Other former FTX executives have pleaded guilty to criminal charges.

Bankman and Fried’s attorneys, Sean Hecker and Michael Tremonte, said in a joint statement that FTX’s claims were “completely false” and the the new lawsuit was a waste of funds that could be returned to FTX customers.

FTX’s lawsuit alleges that Bankman and Fried accepted a $10-million cash gift and $16.4-million luxury property in the Bahamas from FTX, even as the company teetered on the brink of collapse. Bankman and Fried also pushed FTX to make tens of millions of dollars in charitable contributions, including to Stanford University, FTX said.

Fortune reported that in a late court filing on Monday, the bankruptcy estate of FTX sued the parents of Sam Bankman-Fried, seeking to recover millions of dollars that it alleges were fraudulently transferred and misappropriated.

In the 63-page lawsuit, the estate alleges that FTX was a self-described “family business” despite its appearance as a sophisticated cryptocurrency exchange that was “fueled by fraud.” Allan Joseph Bankman, Bankman-Fried’s father, is a top tax law professor at Stanford Law School, and the lawsuit alleges that he played a key role in “perpetuating this culture of misrepresentations and gross management” and in covering up allegations that would have exposed the fraud, Fortune reported.

According to Fortune, the lawsuit also alleges that Bankman-Fried’s parents “siphoned millions of dollars” from the crypto empire for “their own personal benefit,” with the estate now seeking to claw back the funds as part of its bankruptcy process.

The Block reported that bankrupt cryptocurrency exchange FTX has sued Joseph Bankman, and Barbara Fried, the parents of its founder Sam Bankman-Fried, aiming to recover millions of dollars in “fraudulently transferred and misappropriated funds.”

According to The Block, a Monday court filing showed that debtors of FTX and Alameda Research filed a complaint to recover damages caused by fraudulent transfers, breaches of fiduciary duties and other alleged misconduct.

“As Bankman-Fried’s parents, Bankman and Fried exploited their access and influence within the FTX enterprise to enrich themselves, directly and indirectly, by millions of dollars, and knowingly at the expense of the debtors in these Chapter 11 Cases and their creditors,” the filing said.

In my opinion, it seems very odd that the parents of Sam Bankman-Fried allegedly made what appears to be problematic decisions regarding the amount of money they received from FTX. One would assume that Bankman, who is a top tax law professor, would know better.


Coinbase Introduces The Stand With Crypto Alliance



Coinbase has introduced the Stand With Crypto Alliance. It starts with a “TL;DR” (posted yesterday) that said: Today marks the launch of the Stand with Crypto Alliance, an advocacy organization focused on mobilizing the crypto community to directly engage in the legislative process. Join the Alliance to help secure the future of crypto in America by helping drive clear, sensible regulation.”

From the Coinbase blog:

With more than 50 million Americans holding a digital asset, crypto is bigger than Coinbase. Today, with the launch of the Stand with Crypto Alliance, the crypto community will be unleashed as a core constituency in the legislative process.

In particular, the Stand with Crypto Alliance will leverage the underlying technology of the blockchain to help organize the community into a powerful voice advocating for policies that will update our financial system and support economic empowerment. The Alliance is the nation’s first ever independent and unchain advocacy organization, powered by and for crypto supporters.

Building on recent historic, bipartisan legislative momentum in Congress, the Stand with Crypto Alliance is crypto’s first true grassroots movement that will be organized onchain. By providing a launch pad, the Alliance is mobilizing the full force of the decentralized crypto community to tell lawmakers: Recess is over. America’s crypto constituency is strong – and will be holding them accountable this fall when Congress votes on common-sense legislation to protect consumers and their right to crypto…

The Block reported that crypto advocated have ramped up efforts over the past few months to get legislation passed that would improve regulation of the crypto industry in the country. Some have criticized regulators, like the Securities and Exchange Commission, for what they call a regulation by enforcement approach.

Two bills are teed up to be voted on in the full House, including one bill that would direct regulators to create a clear path for how a digital asset can transition from being a security to a commodity. The other would create a comprehensive framework to regulate payment stablecoins. Both passed certain House committees last month.

CNN reported that the Stand with Crypto Alliance’s primary mission is to mobilize support for legislation that would create a US regulatory framework for digital assets – something of a sore subject in the feud between crypto advocates and US regulators, who have fundamental disagreements about how the industry should operate.

According to CNN, a central sticking point is the question of how crypto tokens should be regulated. The Securities and Exchange Commission, Wall Street’s top cop, contends that most crypto products are investment contracts and therefore fall under its jurisdiction – an argument the crypto industry is fighting.

CNN also reported that crypto adoption has been growing, though it remains far from the mainstream and still lacks obvious use cases for most people. The promise of crypto, broadly, is a world in which financial transactions can be executed instantly, free of charge. Advocates envision blockchain, the infrastructure on which crypto is built, as the future of all global finance.

In my opinion, it seems unlikely that the U.S. Securities and Exchange Commission will accept the Stand with Crypto Alliance. CNN reported that in June, the SEC escalated its enforcement campaign when it sued both Coinbase and Binance, the world’s top two crypto exchanges, saying the companies are illegally selling securities on unregistered exchanges.


U.S. Judge Sends FTX’s Sam Bankman-Fried To Jail



Sam Bankman-Fried, the disgraced wunderkind whose cryptocurrency exchange platform FTX imploded last November, will go from house arrest at his parents’ home to jail, a judge has ordered ahead of his trial on fraud charges, Rolling Stone reported.

In a Friday hearing, Judge Lewis Kaplan of Federal District Court in Manhattan formally revoked Bankman-Fried’s bail, ending his residence with his family in Palo Alto, California, as he prepares a legal defense for a blockbuster case centered on the ruins of a company once valued at $32 billion. The 31-year-old, admired as a brilliant crypto kingpin until his downfall, had been extradited from the Bahamas, where FTX was headquartered, in December. He originally posted a bond of $250 million to be released into his parents’ custody.

Sam Bankman-Fried headed to jail on Friday after a judge sided with a request by federal prosecutors to revoke the FTX founder’s bail over alleged witness tampering, CNBC reported. Bankman-Fried was remanded to custody directly from a court hearing in New York and sent to Brooklyn’s Metropolitan Detention Center, Bureau of Prisons records show.

Judge Lewis Kaplan denied Bankman-Fried’s request for delayed detention pending on appeal. Unless the appeal is successful, he is expected to remain in custody until his criminal trial, which is due to begin on Oct. 2.

“My conclusion is there is probable cause to believe the defendant tried to tamper with witnesses at least twice,” said Judge Kaplan during his ruling.

According to CNBC, the government had requested that Bankman-Fried be remanded to a jail in Putnam, New York, where he’d have access to a laptop with internet access for defense preparation, as opposed to sending him to the Metropolitan Detention Center, the facility closest to the courthouse with limited internet access for prisoners.

CNN reported that prosecutors sought to revoke bail after what they described as a series of violations by Bankman-Fried, including contacting potential witnesses against him, using a virtual private network to subvert monitoring and speaking with a reporter about former FTX executive Caroline Ellison.

Ellison, who is also Bankman-Fried’s ex-girlfriend, is one of several former business partners who has taken an appeal deal and plans to testify against him.

According to CNN, Judge Kaplan on Friday sided with the prosecutors’ claim that Bankman-Fried was “covering his tracks” when he allegedly leaked Ellison’s personal documents to the New York Times by allowing a reporter to review them in-person. Kaplan added that leaking an ex-girlfriend’s intimate writings would only be done “to hurt, discredit and frighten the subject of the material.”

Since his arrest in December, he has repeatedly broken with standard legal advice when it comes to speaking to the media. CNN reported that he has blogged, tweeted, and appeared on live interviews to broadcast his version of FTX’s downfall. In his telling, he admits to making mistakes as CEO but says he never knowingly committed fraud.

I suppose the lesson of what happened to Sam Bankman-Fried is one that other CEOs of crypto companies should pay attention to. Some mistakes, whether done with intent or carelessness, can send a crypto CEO to jail.


New York’s Attorney General Seeks Broader Authority To Police Crypto



New York Attorney General Letitia James is proposing new legislation that would give her office more authority to regulate the increasingly tumultuous cryptocurrency industry, The Wall Street Journal reported.

The bill would give the attorney general’s office broader enforcement authority over crypto firms that have operations in the state, while codifying the New York State Department of Financial Services’ authority to license participants in the sector and oversee the state’s digital asset licensing regime.

The bill, called the Crypto Regulation, Protection, Transparency and Oversight Act, or CRYPTO, will be submitted by Ms. James’s office to the New York State Senate and Assembly for consideration during the 2023 legislative session, which runs through June 8.

The New York attorney general, an elected official, is seeking jurisdiction to enforce crypto firms’ violations of the law, issue subpoenas and impose civil penalties of $10,000 per violation for each individual or $100,000 per violation from each crypto firm, according to a statement from the attorney general’s office. The attorney general is also seeking to shut down businesses that are engaging in alleged fraud and illegality, The Wall Street Journal reported.

The website of New York Attorney General Letitia James posted: “Attorney General James Proposes Nation-Leading Regulations on Cryptocurrency Industry”. Here are some parts of the press release:

New York Attorney General Letitia James today announced landmark legislation to tighten regulations on the cryptocurrency industry to protect investors, consumers, and the broader economy. The multi-billion dollar industry lacks robust regulations making it prone to dramatic market fluctuations, and has been used to hide and facilitate criminal conduct and fraud.

Attorney General James’s program bill, which proposes the strongest and most comprehensive set of regulations on cryptocurrency in the nation, would increase transparency, eliminate conflicts of interest, and impost commonsense measures to protect investors, consistent with regulations imposed on other financial services…

Here is an overview of the CRYPTO bill:

Stop Conflicts of Interest

Preventing common ownership of crypto issuers, marketplaces, brokers, and investment advisers and preventing any participant from engaging in more than one of those activities;

  • Preventing crypto brokers and marketplaces from trading for their own accounts;
  • Prohibiting marketplaces and investment advisers from keeping custody of customer funds;
  • Prohibiting brokers from borrowing or lending customer assets; and
  • Prohibiting referrals from marketplaces to investment services for compensation

Require Public Reporting of Financial Statements

  • Undergo mandatory independent auditing and publish audited financial statements;
  • Provide investor with material information about issuers, including risks and conflict-of-interest disclosures;
  • Require cryptocurrency promoters to register and report their interest in any issuer whose crypto assets they promote

Require Public Reporting of Financial Statements

  • Enacting and codifying “know-your-customer” provisions, meaning brokers would have to know essential facts about their customers, and requiring crypto bankers and marketplaces to only conduct business with first that comply to KYC provisions;
  • Banning the use of the term “stablecoin” to describe market digital assets unless they are backed 1:1 with U.S. currency or high-quality liquid assets as defined in federal regulations; and
  • Requiring platforms to reimburse customers who are victims of unauthorized asset transfers resulting from fraud.

It sounds to me like Attorney General Letitia James is wanting to treat crypto companies in a way that is similar to how banks are treated. That said, I think those companies will attempt to push back against this proposed bill.


Coinbase Warned By SEC Of Potential Securities Charges



The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of U.S. securities law, CNBC reported.

According to CNBC, Coinbase shares fell nearly 12% in extended trading after the news broke on Wednesday, adding to an 8.16% drop during regular trading hours.

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

CNBC also reported that the SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022.

Coinbase posted some information on its website. Here is from the TL:DR (too long, didn’t read) section:

“Today, the SEC gave Coinbase a “Wells notice” regarding an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation. We are prepared for this disappointing development. We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets. Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.”

The Wall Street Journal reported that the Securities and Exchange Commission has told Coinbase Global Inc. that it plans to take enforcement action against the company, escalating its crackdown on digital-currency firms by targeting the biggest U.S. crypto exchange, Coinbase said Wednesday.

According to the Wall Street Journal, Coinbase said it received a letter from the SEC known as a Wells notice, in which regulators say they believe companies or individuals violated investor-protection laws. The notices aren’t final because the agency’s commissioners must authorize any lawsuits or enforcement settlements.

By warning Coinbase about a potential lawsuit, The Wall Street Journal reported, the SEC is setting its sights on one of the biggest names in crypto, a publicly traded company that has helped bring tens of millions of customers into the digital-currency markets since it was founded 2012.

A lawsuit would represent SEC Chair Gary Gensler’s biggest step to assert his agency’s jurisdiction over crypto. If Coinbase prevailed in a lawsuit, it would embolden the crypto industry’s claims that Mr. Gensler has overreached and that virtual currencies shouldn’t be subject to U.S. securities laws.

TechCrunch reported that in response to receiving a Wells notice from the FTC, Coinbase’s CEO Brian Armstrong struck a confident posture, tweeting that his company is “right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.”

In a separate tweet, Armstrong wrote: “Two years ago the SEC reviewed our business in detail and approved Coinbase to go public. Our S1 clearly explained our asset listing process and included 57 references to staking. Coinbase runs a rigorous asset review process and has rejected more than 90% of assets that have applied to be listed on the platform.”

It is unclear to me exactly how this particular situation will end up. I suppose there will eventually be an announcement if something changes.


The Collapse Of SVB Affected The Cryptocurrency Companies



The sudden collapse of Silicon Valley Bank on Friday set off panic across the technology industry. But crypto executives and investors – who have endured a year of near-constant upheaval – seized on the moment to preach and scold, The New York Times reported.

Centralized banking was to blame, the crypto advocates said. Their vision of an alternative financial system, unmoored from big banks and other gatekeepers, was better. They argued that the government regulators that recently cracked down on crypto firms had sown the seeds of the bank’s implosion.

“Fiat is fragile,” wrote the Bitcoin advocate Erik Voorhees, using a common shorthand for traditional currencies.

“We’re seeing glitches in the machine,” said Mo Sheikh, chief executive of the crypto company Aptos Labs. “This is an opportunity to take a breath and consider the practicalities of decentralization.”

And the finger-pointing went in both directions. Some tech investors argued that the crypto world’s procession of bad actors and overnight collapses had conditioned people to panic at the first sign of trouble, setting the stage of the crisis at Silicon Valley Bank. In November, FTX, the crypto exchange run by Sam Bankman-Fried, went out of business after the crypto equivalent of a bank run exposed an enormous hole in its accounts.

“People are just traumatized. They’re financially shellshocked,” said Sam Kazemian, the founder of the crypto project Frax. “As soon as you see something, you wonder if there’s a fire over there because it smells like smoke. And then you can treat it like everything is burning and get out while you still can.”

CNBC reported that the U.S. cryptocurrency firm Circle’s USD Coin lost its dollar peg and fell to a record low Saturday morning after the company revealed it has nearly 8% of its $40 billion in reserves tied up at the collapsed lender Silicon Valley Bank.

USDC is known as a stable coin, which means the value of the virtual currency is supposed to be pegged to a reference currency. USDC is designed to trade at $1, but it fell below 87 cents on Saturday, according to CoinDesk.

In a tweet Friday, Circle said it has $3.3 billion in remaining reserves at SVB. The company called for the continuity of the bank and said it will follow guidance from regulators.

THE BLOCK reported that crypto lender BlockFi has $227 million in “unprotected” funds in Silicon Valley Bank, according to a bankruptcy document, and may be in violation of U.S. bankruptcy law.

That $227 million is also not insured by the Federal Deposit Insurance Corporation since it is in a money market mutual fund, the U.S. Trustee overseeing BlockFi’s Chapter 11 bankruptcy case said in the filing. The standard deposit insurance amount is $250,000 per depositor, per insured bank for each account ownership category, according to the FDIC’s website.

THE BLOCK also reported that Circle, the crypto payments firm behind stablecoin USDC, confirmed late Friday evening that $3.3 billion of the cash backing its coin remain left with Silicon Valley Bank.

Circle, which had early tweeted that Silicon Valley Bank was among its six banking partners managing about 25% of the total reserves of USDC, was criticized by Crypto Twitter for not being more transparent about its exposure to the popular tech banker. In the wake of the original tweet, USDC de-pegged from $1, falling around 2% on certain decentralized finance platforms.

In my opinion, the collapse of SVB appears to have hit several cryptocurrency companies really hard. This was not something that occurred in the 2008 bank collapse, because cryptocurrency did not exist back then.


New York Attorney General Cracks Down On Unregistered Crypto Platforms



New York Attorney General Letitia James sues KuCoin for allowing investors in New York to buy and sell Crypto without registering with the state. This lawsuit marks James’ eight action to rein in shadowy cryptocurrency platforms. From the press release:

New York Attorney General Letitia James continued her efforts to crack down on unregistered cryptocurrency platforms by filing a lawsuit against KuCoin for failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange.

The Office of the Attorney General (OAG) was able to buy and sell cryptocurrencies on KuCoin in New York even though the company was not registered in the state. Through this enforcement action, Attorney General James seeks to stop KuCoin from operating in New York and to block access to its website until it complies with the law. Today’s action is the latest in Attorney General James’ efforts to rein in cryptocurrency platforms.

“One by one my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk,” said Attorney General James. “Today’s action is the latest in our efforts to rein in shadowy cryptocurrency companies and bring order to the industry. All New Yorkers and all companies operating in New York have to follow our state’s laws and regulations. KuCoin operated in New York without registration and that is why we are taking strong action to hold them accountable and protect investors.”

KuCoin is a virtual currency trading platform that allows investors to buy and sell cryptocurrency through its website and app. On its platform KuCoin investors can buy and sell popular currencies, including ETH, LUNA and TerraUSD (UST), which are securities and commodities. This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security.

The petition argues that ETH, just like LUNA and UST, is a speculative asses that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.

KuCoin also sells unregistered securities in the form of KuCoin Earn, its lending and staking product. New York law requires securities and commodities brokers to register with the state, which KuCoin failed to do. The OAG was able to create an account with KuCoin using a computer with a New York based IP address and buy and sell digital tokens, for which KuCoin charged a fee. The OAG was also able to deposit digital tokens into the KuCoin Earn product, for which KuCoin also charged a fee…

…Through her lawsuit, Attorney General James seeks a court order that stops KuCoin from misrepresenting that it is an exchange, prevents the company from operating in New York, and directs KuCoin to implement geo-blocking based on IP addresses and GPS location prevent KuCoin’s mobile app, website, and services from New York…

Reuters reported that cryptocurrency token Ether fell to its lowest in two months on Friday after the New York attorney general labeled it a security, bracketing it with assets such stocks and bonds and fueling fears of a wider regulator crackdown.

According to Reuters, KuCoin is one of the biggest cryptocurrency platforms in the United States. The world’s second-biggest cryptocurrency token was trading around $1,390, its lowest since January 10.

In my opinion, KuCoin could have prevented being sued by New York Attorney General James. Unfortunately, KuCoin apparently believed it could get away with selling cryptocurrency in New York without registering to do so. My best guess is that KuCoin will – eventually – face some penalties for making that decision.