CRYPTO NEWS ▸ US Prosecutors Looking At Fraud & Market Manipulation Bloomberg reported on December 9 that US prosecutors were gathering evidence for a fraud case. The prosecutors are looking at whether hundreds of millions of dollars were transferred to accounts in the Bahamas in anticipation of FTX's bankruptcy filing. They are also focusing on whether funds were improperly transferred to Alameda Research, FTX's sister company. Concurrently, the US Attorney's office in the Southern District of New York met with FTX investigators. Prosecutors are looking into whether Bankman-Fried steered the price of TerraUSD and Luna to benefit the entities he controlled, FTX and Alameda Research.
▸ CEO of The Block Took Money From FTX Perhaps one of the most highly regarded crypto industry publications is The Block. This week, the former CEO of The Block, Michael McCaffrey, resigned after he failed to disclose that he had received loans from FTX. The first loan, $12M, was used to buy out other investors. The second loan, $15M was for operations at The Block. And a third loan of $16M was used to purchase real estate in the Bahamas. The new CEO said, “No one at The Block had any knowledge of this financial arrangement besides Mike. From our own experience, we have seen no evidence that Mike ever sought to improperly influence the newsroom or research teams, particularly in their coverage of SBF, FTX and Alameda Research.”
▸ FTX Invited to House Financial Services Committee Hearing After Sam Bankman-Fried and Rep. Maxine Waters, D-CA, Committee Chair tweeted to each other about SBF testifying before comment, Bankman-Fried agreed to testify at Tuesday, 10:00 am. SBF gave $40M to politicians and PACs before the midterm election. He was the second largest donor to Democrats after George Soros.
CRYPTO CLASS – How to Prevent the Next FTX A subscriber/friend/industry insider shared a terrific Bloomberg article entitled, "A Handful of Simple Rules Might Have Prevented FTX's Demise." Reporters Allyson Versprille and Linda Beyoud lay out five topics for regulators to consider as they begin hearings on regulating crypto. The most glaring reasons the digital asset industry has been pummeled with unscrupulous behavior leading to spectacular failures is lack of regulations and jurisdictional control. The reporters interviewed security experts and regulators. 1. Commingling of Assets
FTX lent its customer funds to Alameda Research, a hedge fund controlled by Sam Bankman-Fried. Alameda lost those funds in poor investments. The Securities & Exchange Commission Chair Gary Gensler has argued that most digital assets are securities and subject to securities laws. Had FTX registered as a security, customer funds would have been required to be segregated. Crypto currencies considered commodities, like bitcoin, would fall under the Commodities Future Trading Commission. However, CFTC authority is limited to crypto derivates, like futures. CFTC has asked Congress to expand its authority. 2. Separate Business Lines Traditional financial firms with separate lines of business comply with regulations for each business. In crypto exchanges, there are no clear boundaries between market making, trading, custodianship, and securities lending. 3. Disclosure SEC disclosure requirements exist to protect retail investors. Regulating crypto so that investors are aware of the risks can be accomplished by applying existing SEC rules. Also, state securities regulators are looking at disclosure requirements for companies with valuations greater than $700,000. 4. Advertising Standards Celebrities have been paid to endorse crypto products. The SEC fined Kim Kardashian for her failure to disclose a payment she received to promote a crypto company on an Instagram post. The Federal Trade Commission (FTC) has not assertively used its authority to prevent crypto promotional activities that are "deceptive or unfair." 5. Corporate Governance FTX's new CEO, John Ray III, who is overseeing the bankruptcy has reported to the bankruptcy court about FTX's disregard of corporate governance. However, privately held companies would not need to share their internal financial audits with the US regulators.
Resource – Video, Podcast, Blog Cathie Wood, CEO Ark Invest, explains why Sam Bankman-Fried did not have bitcoin in his entities' accounts. Wood said, "Why didn't he like it? It's decentralized, it's fully transparent, and he couldn't control it."
CRYPTO WORD – Shadow Banking Many crypto commentators refer to crypto's decentralized finance (defi) products as shadow banking. Here's Investopedia's definition: " The shadow banking system is a group of financial intermediaries which facilitate the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. These companies are often known as nonbank financial companies (NBFCs). The shadow banking system also refers to unregulated activities by regulated institutions."
OH, ONE MORE THING – If Bitcoin is Popeye, what is his spinach? Is it central banks, government distrust, fear of CBDC, big banks, remittance fees, and the bankless?
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