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Cryptocurrency firms are on notice to start operating more like regulated securities companies.
“The runway is getting shorter” to start following rules and register with the U.S. Securities and Exchange Commission, its chair, Gary Gensler, said in an interview with Bloomberg. “The casinos in this Wild West are non-compliant intermediaries.”
If the comments alone don’t motivate crypto firms to get in line, the recent charges against two Sam Bankman-Fried associates might get their attention. On Wednesday, the SEC filed lawsuits against Caroline Ellison and Gary Wang, former executives at SBF’s Alameda Research, with defrauding investors in FTX, the crypto asset exchange that filed for bankruptcy last month. Both defendants also pled guilty to criminal charges and agreed to cooperate with the U.S. Attorney for the Southern District of New York.
For months, Gensler has been contending that most digital tokens are unregistered securities that should be following the same rules as other securities exchanges.
Problem areas include failing to properly separate different parts of crypto firms’ businesses, such as market-making and custody; and client funds often aren’t properly segregated.
He also questions “proof of reserves reports,” which some companies are publishing in an effort to show customers they have enough funds available to back customers’ deposits. Such reports don’t measure up to regulatory rigor, he said.
“Proof of reserves is neither a full accounting of the assets and liability of a company, nor does it satisfy segregation of customer funds under the securities laws,” Gensler said.
Specifically, crypto firms need to focus on financial recordkeeping, he said. The best way firms can assure customers is by following regulations. “They should do that by coming into compliance with time-tested custody, segregation of customer funds rules and accounting rules,” Gensler said.
John J. Ray, III, who is overseeing FTX’s wind-down, told Congress earlier this month that there was “virtually not internal controls” or recordkeeping at the company. Sifting through FTX’s operations, its new management has identified more than $1B in cash assets. Earlier, Ray reported his team secured more than $1B in digital assets.
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