SEC, DOJ Investigate FTX — Regulators Suspect Crypto Exchange Mishandles Customer Funds

The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are reportedly investigating cryptocurrency exchange FTX. The crypto firm is suspected of mishandling customer funds and breaking securities laws. Regulatory probes are among the key reasons why Binance walked away from the acquisition of FTX.

Several U.S. authorities are reportedly probing FTX, the embattled cryptocurrency exchange founded by Sam Bankman-Fried.

The U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are looking into the turmoil surrounding FTX.com and its liquidity crisis, Bloomberg reported Thursday, citing a person familiar with the matter. The Justice Department prosecutes criminal violations, such as fraud, while the SEC focuses on securities law violations.

Moreover, the SEC and the Commodity Futures Trading Commission (CFTC) are investigating whether FTX.com mishandled customer funds, the publication conveyed, adding that the financial regulators are also looking into the firm’s relationships with other parts of Bankman-Fried’s crypto empire.

According to the Wall Street Journal, the SEC has been investigating FTX for months, with a focus on the firm’s U.S. arm, FTX US. The securities regulator has now expanded its investigation into the crypto platform.

The SEC believes that some of the dozens of crypto tokens listed on the FTX US exchange and the company’s lending product may constitute securities under U.S. securities laws and should have been registered with the SEC before being sold to investors. If this is the case, then FTX’s handling of customer assets might also violate U.S. exchange laws.

SEC Chairman Gary Gensler stressed his concerns Wednesday during a Healthy Markets Association conference amid uncertainties surrounding FTX. Emphasizing that the crypto industry has been operating outside of traditional financial markets’ oversight, he reiterated:

I’ve been saying this for well over a year now in this job: Come in, get registered, come within the securities laws.

Gensler emphasized the risks from crypto companies “commingling” key intermediary functions where the same companies serve multiple roles, such as exchanges and market makers.

Regulatory investigations and reports that FTX may be mishandling customer funds have caused concerns for Binance which was considering acquiring FTX.com. Following due diligence, the company decided not to proceed with the acquisition.

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