Shalini Nagarajan


<p>The FTX <a href="https://cms.blockworks.co/news/binance-is-buying-ftx-a-timeline-of-events/" target="_blank" rel="noreferrer noopener">brouhaha</a> has further highlighted a problem with US regulation: Securities and Exchange Commission (SEC) ambiguity has forced the top crypto exchanges to operate offshore, leaving customers exposed to bent business practices.</p>



<p>Notably, FTX’s American affiliate, FTX.US, resisted the meltdown. All deposits are backed one-to-one with real money, <a href="https://twitter.com/SBF_FTX/status/1590012133307478016" target="_blank" rel="noreferrer noopener">according</a> to CEO Sam Bankman-Fried, unlike its global counterpart, which seems to have operated more similar to a fractional reserve system.</p>



<p>As well, regulations restricted US-based users from buying FTX’s native token FTT, which <a href="https://cms.blockworks.co/ftx-native-token-ftt-plunges-following-takeover-news/" target="_blank" rel="noreferrer noopener">came under pressure</a> after Binance said it would dump its holdings of the coin, and even moreso once the acquisition fell through.</p>



<p>This ring-fencing by regulators may have encouraged firms like FTX to set up offshore exchanges, effectively leaving customer assets exposed to high-risk unregulated scenarios.</p>



<p>Before it blew up, the flagship FTX platform handled some $2.6 billion in daily trade volume. The US regulated offering was processing just $174 million, now down to $100 million, per Messari.&nbsp;</p>



<p>The same phenomenon happens on Binance, which hails from the Cayman Islands. It’s handling some $18 billion in daily trades, compared to $700 million on Binance.US — a 96% disparity.&nbsp;</p>



<p>Initially based in Hong Kong, FTX <a href="https://cms.blockworks.co/bankman-fried-says-ftx-no-longer-calls-hong-kong-home-heres-why/" target="_blank" rel="noreferrer noopener">moved its headquarters</a> from Hong Kong to the Bahamas in late 2021 because of its friendly crypto framework. </p>



<p>Residents of the US technically can&#8217;t use FTX&#8217;s main platform, a stipulation of its user policy, loosely enforced by geoblockers avoidable via virtual private networks. The US version offers fewer cryptocurrencies and opportunities for leverage, similar to the divide between Binance&#8217;s own platforms.</p>



<p>A <a href="https://help.ftx.com/hc/en-us/articles/360042412652-Location-Restrictions-" target="_blank" rel="noreferrer noopener">page</a> on its website reads: “US users cannot trade on FTX, but residents of the United States <em>can</em> trade on FTX.US.&#8221;</p>



<h3>SEC chief Gensler says FTX is on trend for crypto</h3>



<p>Coinbase CEO Brian Armstrong, in a <a href="https://twitter.com/brian_armstrong/status/1590511022104010753" target="_blank" rel="noreferrer noopener">tweet</a> late Wednesday, butted heads with Sen. Elizabeth Warren, who said FTX’s blowup shows “much of the industry appears to be smoke and mirrors, and called on the SEC for more aggressive enforcement.&nbsp;</p>



<p>Armstrong argued that the enormous amount of offshore trading activity was a direct result from what he sees as lacking SEC clarity on how the industry should operate.</p>



<p>&#8220;The problem is that the SEC failed to create regulatory clarity here in the US, so many American investors (and 95% of trading activity) went offshore. Punishing US companies for this makes no sense,&#8221; Armstrong tweeted.</p>



<p>Ripple CEO Brad Garlinghouse agreed, <a href="https://twitter.com/brian_armstrong/status/1590511022104010753" target="_blank" rel="noreferrer noopener">pointing out</a> that most crypto trading occurs offshore because companies effectively have no guidance on how to comply in the US.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">Compare that with Singapore which has a licensing framework, token taxonomy laid out, and much more. They can appropriately regulate crypto b/c they&#39;ve done the work to define what “good” looks like, and know all tokens aren’t securities (despite what Chair Gensler insists) 2/2</p>&mdash; Brad Garlinghouse (@bgarlinghouse) <a href="https://twitter.com/bgarlinghouse/status/1590559887238758400?ref_src=twsrc%5Etfw">November 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<p>SEC chief Gary Gensler had his own say about the matter. Speaking at a Healthy Markets Association event on Wednesday, Gensler described the FTX situation as part of a wider trend within the crypto industry.&nbsp;</p>



<p>“It’s really part of a pattern of what we have seen over the past six or eight months,” he said. “Investors get hurt when we don’t rely upon the time-tested public policy guardrails.”</p>



<p>The former investment banker, who worked as a partner at Goldman Sachs, also highlighted the risks from the “commingling” of key intermediary functions where the same firm serves multiple roles.&nbsp;</p>



<p>&#8220;We&#8217;ve got a lack of disclosure, a lot of leverage, using other people&#8217;s money, a lot of interconnected-ness. &#8230; The investing public is hoping for a better future,” he added.</p>



<p>FTX is now being <a href="https://www.wsj.com/articles/sec-investigates-crypto-platform-ftx-11668020379" target="_blank" rel="noreferrer noopener">investigated</a> by the SEC over its $8 billion hole on its balance sheet. </p>



<p>Regulation by enforcement and a combative, non-productive approach to working with the industry is what’s driven innovative companies offshore, according to Simon Schaber, chief business development officer at DeFi protocol Spool.</p>



<p>“The FTX fallout is a direct result of SEC failure,” Schaber told Blockworks. “It is once again consumers that suffer the most and his former investment banking employers that benefit the most (domestic competition kept at bay) due to the decisions of Chairman Gensler.”</p>



<p></p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">11/ US lawmakers &amp; regulators have some accountability too. You drove this business offshore because you refused to provide a workable regime under which these services could be offered in a supervised manner. Enforcement wrongfully focuses on convenient, on-shore good actors.</p>&mdash; Jesse Powell (@jespow) <a href="https://twitter.com/jespow/status/1590635242087657473?ref_src=twsrc%5Etfw">November 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<h3>FTX needs emergency funding to make users whole</h3>



<p>FTX founder Bankman-Fried <a href="https://www.bloomberg.com/news/articles/2022-11-09/ftx-investors-told-that-without-more-capital-bankruptcy-likely?utm_medium=social&amp;utm_source=twitter&amp;utm_campaign=socialflow-organic&amp;cmpid=socialflow-twitter-business&amp;utm_content=business" target="_blank" rel="noreferrer noopener">reportedly</a> informed investors on Wednesday that the firm would have to file for bankruptcy unless it received a cash injection.</p>



<p>Bankman-Fried had hoped rival CEO Changpeng Zhao, founder of Binance, would be his White Knight and save FTX from its “liquidity crunch,” but the deal <a href="https://cms.blockworks.co/crypto-equities-slide-as-investors-digest-ftx-fall-midterm-results/" target="_blank" rel="noreferrer noopener">fell through</a> as quickly as the rescue was proposed.</p>



<p>“As a result of corporate due diligence, as well as the latest news reports regarding mishandled customer funds and alleged US agency investigations, we have decided that we will not pursue the potential acquisition of FTX.com,” Binance <a href="https://twitter.com/binance/status/1590449161069268992" target="_blank" rel="noreferrer noopener">said</a>.</p>



<p>Bankman-Fried, <a href="https://edition.cnn.com/2022/11/09/business/sam-bankman-fried-wealth-ftx-ctrp/index.html" target="_blank" rel="noreferrer noopener">barely a billionaire</a> after the shocking downfall of FTX, was on an <a href="https://cms.blockworks.co/sam-bankman-fried-out-to-win-whole-crypto-market-early-ftx-backer-says/" target="_blank" rel="noreferrer noopener">ambitious deal frenzy</a> while chaos played out in crypto markets earlier this year. He sought to rescue beleaguered lenders Celsius, Voyager and BlockFi, but a string of apparent losses eventually led to FTX’s collapse.&nbsp;</p>



<p>He’s now <a href="https://www.wsj.com/livecoverage/stock-market-news-today-11-09-2022/card/ftx-needs-8-billion-bankman-fried-tells-investors-2RSa5oqZyZZ5YrPLuZuL" target="_blank" rel="noreferrer noopener">seeking</a> emergency funding from alternative investors, <a href="https://cms.blockworks.co/news/ftx-turns-to-apollo-in-latest-bailout-bid/" target="_blank" rel="noreferrer noopener">including Apollo Global</a>, to meet FTX’s withdrawal requests and is said to be “<a href="https://www.reuters.com/markets/currencies/ftx-turmoil-causes-crypto-concern-sending-token-prices-sliding-2022-11-09/" target="_blank" rel="noreferrer noopener">exploring all options</a>.”</p>



<p>In a leaked <a href="https://twitter.com/cobie/status/1590610757334728704" target="_blank" rel="noreferrer noopener">Slack message</a>, Bankman-Fried told employees his first priority is to compensate customers before anyone else. He also claimed FTX has discussed fundraising with Tron founder Justin Sun, and hinted at the possibility that a future deal would combine FTX and its US affiliate.</p>



<p>But it shouldn’t have had to take a liquidity scare, withdrawal freeze and <a href="https://cms.blockworks.co/ftx-users-band-together-had-entire-net-worth-on-there-oops/" target="_blank" rel="noreferrer noopener">customers finding their holdings locked up</a> on FTX for the SEC to figure out how to better serve investors.</p>



<p></p>



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Coinbase, Ripple CEOs Blame SEC for FTX User Strife

Sam Reynolds

<div id="highlights-block_61c464f2b8cf5" class="highlights">
        <ul>
                <li>Ripple CEO Brad Garlinghouse said on Twitter that Ripple’s on-demand liquidity have more than doubled since Q3 last year, despite a halt in the US</li>
                <li>Garlinghouse called the attack on Ripple an attack on crypto as a whole, and criticized the SEC’s policy of ‘strategic ambiguity’ towards digital assets</li>
            </ul>
    
</div>



<p>One year ago, then-SEC chair, Jay Clayton, used his last day in office to deliver a lump of coal to Ripple Labs, a company that he thought had been naughty, not nice.</p>



<p>The SEC, on one of the last business days before the Christmas holiday, announced it had <a href="https://www.sec.gov/news/press-release/2020-338" target="_blank" rel="noreferrer noopener">charged </a>Ripple Labs, CEO Brad Garlinghouse, and chairman Christian Larsen with conducting an unregistered securities offering.</p>



<p>The complaint was particularly scathing in its critique of Garlinghouse, <a href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.551082/gov.uscourts.nysd.551082.46.0_2.pdf" target="_blank" rel="noreferrer noopener">noting</a>, &#8220;While he was selling millions of XRP, Garlinghouse frequently told investors that he was invested in XRP, and that he was bullish on the investment.&#8221;</p>



<p>The SEC alleges that Garlinghouse and Larsen took in $600 million from sales of XRP, while being in control of Ripple, and therefore they are personally liable for the securities violations. The agency stopped short of alleging fraud — <a href="https://www.youtube.com/watch?v=P2msnJjMsgg&amp;t=493s" target="_blank" rel="noreferrer noopener">a more difficult charge to prove</a>, according to Gabriel Shapiro, Partner at <a href="https://bsvlaw.com/team/gabriel-shapiro-partner/" target="_blank" rel="noreferrer noopener">BSV Law</a>, who described the case in-depth with his colleague Stephen Palley of <a href="https://www.andersonkill.com/People/Stephen-D-Palley" target="_blank" rel="noreferrer noopener">Anderson Kill</a> in an <a href="https://unchainedpodcast.com/the-secs-lawsuit-against-ripple-and-2-execs-what-you-need-to-know/" target="_blank" rel="noreferrer noopener">interview with Laura Shin</a>.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">The ripple case is the most fraud-like non-fraud filing I think I&#39;ve seen.   It walks all the way up to the edge of 10b5 and then edges back.</p>&mdash; Palley (@stephendpalley) <a href="https://twitter.com/stephendpalley/status/1341523294344896515?ref_src=twsrc%5Etfw">December 22, 2020</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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<div class="wp-block-image"><figure class="alignleft size-medium"><img decoding="async" loading="lazy" width="200" height="300" src="https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-200x300.jpeg" alt="Ripple CEO Brad Garlinghouse by Christopher Michel, <a href=&quot;https://creativecommons.org/licenses/by/2.0&quot;&gt;CC BY 2.0</a&gt;, via Wikimedia Commons" class="wp-image-13092" srcset="https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-200x300.jpeg 200w, https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-172x257.jpeg 172w, https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-174x261.jpeg 174w, https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-146x219.jpeg 146w, https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582-53x80.jpeg 53w, https://cms.blockworks.co/wp-content/uploads/2021/12/Brad_Garlinghouse_15039005582.jpeg 512w" sizes="(max-width: 200px) 100vw, 200px" /><figcaption>Brad Garlinghouse by Christopher Michel, <a href="https://creativecommons.org/licenses/by/2.0">CC BY 2.0</a>, via Wikimedia Commons</figcaption></figure></div>



<p>Predictably, XRP’s price crashed in the weeks after as many exchanges including Coinbase delisted the token. In January 2021, Ripple <a href="https://ripple.com/insights/sec-update-preliminary-ripple-response/" target="_blank" rel="noreferrer noopener">responded to the SEC’s </a>allegations, calling the regulator “out of step” with global affairs and later “picking virtual currency winners and losers.”&nbsp;</p>



<p>But then something else happened. Despite being virtually walled off from the US, the rest of the world moved on and continued to embrace Ripple.</p>



<p>“Proud to say it was Ripple’s strongest year ever,” <a href="https://twitter.com/bgarlinghouse/status/1473727344368041996" target="_blank" rel="noreferrer noopener">tweeted</a> Ripple CEO Brad Garlinghouse recently, pointing out that the protocol’s On-Demand Liquidity network had seen a 130% increase in transactions quarter-over-quarter since Q3 2020 despite the US accounting for zero percent of it.</p>



<p>Garlinghouse said that some of the strongest growth was from entirely new payment corridors such as Japan and crypto-friendly United Arab Emirates.</p>



<p>Earlier this year, Ripple announced the launch of a white-label version of the XRP Ledger specifically designed for developing central bank digital currencies, to capitalize on increased interest in the currency type from central banks.</p>



<h3><strong>Wild West, or Tamed East?</strong></h3>



<p>As many countries such as the <a href="https://cms.blockworks.co/uae-sees-tokenization-digital-economy-as-key-to-future-growth/" target="_blank" rel="noreferrer noopener">UAE </a>and <a href="https://cms.blockworks.co/hong-kong-and-singapore-take-different-approaches-to-regulating-digital-assets/" target="_blank" rel="noreferrer noopener">Singapore</a> develop comprehensive digital asset frameworks to regulate the industry — and at the same time attract significant inbound investment — the US is maintaining a policy of “strategic ambiguity”, according to Garlinghouse, with regulators stuck with a view that crypto continues to be the ‘Wild West’ despite the east having figured out a way to regulate it.</p>



<p>“As Chair Gary Gensler seeks to expand its remit, he has taken an aggressively anti-crypto approach and companies are already moving outside the US. Web2 was built with many American companies, but Web3?” Garlinghouse <a href="https://twitter.com/bgarlinghouse/status/1473727347878772737?s=20" target="_blank" rel="noreferrer noopener">tweeted</a>.</p>



<blockquote class="wp-block-quote"><p><strong>“Ignoring its prior statements, the SEC today won’t answer questions about the legal status of ETH, much less anything else. Is the agency actually living up to its mission of protecting investors with regulation by enforcement and what Hester Peirce calls ‘strategic ambiguity’?”</strong></p></blockquote>



<p>Garlinghouse ended his Twitter thread by calling on his followers to write to their local Congressmen to ask them to take action on crypto legislation, “before the industry gets…another lump of coal.”</p>



<p>XRP is up almost 115% from the day prior to the SEC&#8217;s suit, according to <a href="https://www.coingecko.com/en/coins/xrp">Coi</a><a href="https://www.coingecko.com/en/coins/xrp" target="_blank" rel="noreferrer noopener">n</a><a href="https://www.coingecko.com/en/coins/xrp">Gecko</a>, with around 17% of that happening in the past week. From a low at 17 cents on Dec. 29, it&#8217;s more than quintupled and is currently trading for 97 cents, down from a peak this year in April of $1.84.</p>




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<p><em>This story was updated on December 23 at 12:05 pm ET to clarify the percentage change in the XRP price over the past year.</em></p>



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