Is FTX Breaking the Law? The Texas State Securities Board Thinks So

FTX is offering yield products to Texas residents despite apparently not having the state’s regulator’s approval. 

FTX in Hot Water

Sam Bankman-Fried’s empire is facing scrutiny from a Texas regulator.

According to a court document filed late last week, Texas State Securities Board Director of Enforcement Division Joseph Rotunda believes that FTX, FTX.US, and FTX founder Sam Bankman-Fried may be violating the Texas Securities Act by offering unregistered securities in the form of yield-bearing accounts. Rotunda furthermore suggested the platform was possibly engaging in fraud.

Rotunda detailed in his filing how, despite being a resident of Austin, Texas, he had been able to earn yield on deposits made to his account on the FTX Trading app. Rotunda had previously submitted his personal information, including full name and address, to comply with the app’s Know-Your-Customer (KYC) requirements. 

Rotunda believes the yield program to be an investment contract, which would make it regulated as a security in the state. He pointed out that neither FTX nor FTX.US (the United States branch of the cryptocurrency exchange) had registered to offer or sell securities in Texas, and that the two companies may therefore be in violation of the Texas Securities Act. Rotunda stated the yield program itself hadn’t been registered either, making it a separate offense of selling unregistered or unpermitted securities. 

Rotunda also argued that the FTX Trading app and FTX.US possibly weren’t disclosing sufficient information to their clients prior to opening accounts and providing yield services and were, therefore, possibly engaging in fraud. He pointed to Bankman-Fried, FTX co-founder Gary Wang, and FTX head of engineering Nishad Singh as possibly violating disclosure agreements. Rotunda stopped short of drawing any definitive conclusions, citing the need for further investigation to determine whether the accused parties were really violating the Securities Act.

Crypto Briefing’s Take

These new accusations against FTX and the larger Bankman-Fried empire are an interesting development in a year that has seen U.S. agencies and policymakers step up their regulatory efforts regarding cryptocurrencies. The Securities and Exchange Commission (SEC) has been particularly active these past few months; the Commission’s main focus, however, has been over the status of cryptocurrencies themselves. SEC Chair Gary Gensler seems to believe that most tokens, including perhaps ETH, should be considered securities and regulated as such. Consequently, according to Gensler, FTX and other cryptocurrency exchanges like Coinbase and Kraken should be regulated the same way as traditional securities exchanges.

Rotunda and the Texas State Securities Board seem to be thinking a different way. At no point in his statement does Rotunda call into question the statutory nature of cryptocurrencies themselves—rather, he seems solely concerned with FTX’s yield product offering. In that sense, his probe differs markedly from recent SEC probes into crypto exchanges. It’s worth noting however that Coinbase had already encountered major regulatory headwinds when it tried to launch its USDC earn program; the exchange eventually had to drop the project. Should Rotunda be correct in his assessment, it’s possible that centralized exchanges may need to severely limit, or entirely drop, their yield programs, at least for U.S. customers.

The filing was also notable in that it concerned itself with Voyager’s bankruptcy proceedings. Voyager is a crypto exchange and lending company that suffered a liquidity crisis earlier in the year due to its exposure to now-defunct crypto hedge fund Three Arrows Capital. After Voyager filed for bankruptcy FTX won an auction to buy the distressed company’s assets. Rotunda pointed out, however, that Voyager had already been accused of selling unregistered securities. Rotunda stated that, as FTX and FTX.US were now being suspected of similar violations, FTX should not be allowed to purchase Voyager’s assets until their regulatory status had been cleared. 

Disclaimer: At the time of writing, the author of this piece owned BTC, ETH, and several other cryptocurrencies.