SEC Chair Gary Gensler mocks putting a gun to his head in response to a “Blazing Saddles” reference by Rep. Emanuel Cleaver, D-Mo., during the House Financial Services Committee hearing titled “Oversight of the Securities and Exchange Commission,” in Rayburn Building on Tuesday, April 18, 2023.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
WASHINGTON — A revived FTX could work if new leadership does so with a clear understanding of the law, SEC chair Gary Gensler told CNBC on the sidelines of DC Fintech Week.
Gensler was referring to reports that Tom Farley, a former president of the New York Stock Exchange, is among a short list of three bidders vying to buy what remains of the bankrupt crypto exchange. Farley launched his own digital asset exchange in May called Bullish, which is reportedly one of the final contenders in the bankruptcy auction.
“If Tom or anybody else wanted to be in this field, I would say, ‘Do it within the law,'” Gensler said on Wednesday. “Build the trust of investors in what you’re doing and ensure that you’re doing the proper disclosures — and also that you’re not commingling all these functions, trading against your customers. Or using their crypto assets for your own purposes.”
FTX founder Sam Bankman-Fried was found guilty last week on all seven criminal counts against him, including fraud and money laundering charges. His exchange, which filed for bankruptcy a year ago, was funneling customer money to sister hedge fund Alameda Research, according to the charges.
Alameda was a market maker for the FTX exchange, and was given privileges, such as a $65 billion line of credit requiring no collateral. Unlike other customers on the platform, Alameda was also granted the unique ability to go negative in its trading bets, without having its positions liquidated.
“We would never let the New York Stock Exchange also operate a hedge fund and trade against their members or trade against customers in the market,” said Gensler.
FTX and Alameda were supposed to be separated by a firewall. But the evidence presented in the monthlong trial made clear how cozy they were in practice.
“FTX and Alameda had an extremely problematic relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried operated both an exchange and a prop shop, which is super unorthodox and just not really allowed in actually regulated capital markets.”
Sam Bankman-Fried stands as forewoman reads the verdict to the court.
Artist: Elizabeth Williams
Separate to the criminal charges, the SEC and the Commodity Futures Trading Commission brought civil suits against FTX. The SEC in December accused Bankman-Fried of running nothing less than a “brazen,” yearslong fraud “from the start.”
Gensler said that, when it comes to considering new rules regulating the industry, existing securities laws are “very robust and strong.” They just need to be enforced.
“There’s nothing about crypto that’s incompatible with securities laws,” he said. “You’ve got just a lot of worldwide actors that are currently not complying with these time-tested laws.”
FTX was based in the Bahamas and used mostly by customers outside the U.S., though it had a small American affiliate. Crypto exchange Binance is under fire from U.S. regulators even though it operates an international business. The SEC and CFTC have both brought charges against Binance, alleging the company and founder Changpeng Zhao have worked to subvert “their own controls” to let high-net-worth U.S. investors and customers continue trading on its unregulated international exchange.
“Think about how many actors in this space are not complying right now with international sanctions and money laundering laws and are using crypto for nefarious or bad actions,” Gensler said, without naming companies or individuals.
The SEC has recently suffered a few interim losses in the courts, including to Ripple over the $1.3 billion the company raised in what the SEC called an unregistered securities offering, as well as to Grayscale, related to the firm’s application to convert its bitcoin trust into a spot bitcoin exchange-traded fund.
Gensler said that over the last six years, the SEC has either brought or settled 150 cases in crypto. One of its legal spats is with Coinbase, a publicly traded crypto exchange in the U.S. that’s threatening to leave the country over regulatory constraints.
Gensler said companies here have to obey the law, though he avoided references to specific cases.
“If it’s a non-compliant fraudster, why would we want them in our markets?” he said.