Gary Gensler’s controversial tenure as chairman of the Securities and Exchange Commission may come to a dramatic climax during a 45-minute Zoom call with Sam Bankman-Fried, the former crypto tycoon at the center of the biggest failure the $1 trillion digital coin industry has ever seen.
On March 23, nearly eight months before Bankman-Fried’s crypto empire collapsed and was forced into bankruptcy, Gensler accused some cryptocurrency players of being unfriendly with the then-billionaire and his boss, a massive fundraiser for Democratic candidates, including President Joe Biden. organized a regular meeting. .
Even before the FTX imbroglio, Gensler launched an aggressive and some would say controversial regulatory attack on the crypto business. In public comments, he said that most digital coins are classified as unregistered securities, and thus creators could face sanctions similar to those demanded of Ripple executives, who faced an SEC lawsuit over the unregistered issuance of its native coin, XRP.
While exchanges such as Coinbase, Binance and Bankman-Fried handle cryptocurrency transactions for clients, they operate in a regulatory gray area without explicit approval from the SEC, thus opening management to possible sanctions.
Now, some crypto players and Gensler’s critics in Congress are questioning why he missed the FTX failure and eventual bankruptcy during his large-scale crackdown. Issue: A meeting between Bankman-Fried and Gensler where they discussed the idea of a new SEC-approved crypto trading platform. If approved, the former FTX chief would get a leg up on the competition with a trading platform that clearly meets SEC standards, people with direct knowledge of the matter told Fox Business.
Bankman-Fried was looking for a venture with the IEX exchange founded by Brad Katsuyama. The veteran trader is featured as a protagonist in journalist Michael Lewis’ Flash Boys, a book about the frenzy of high-frequency trading on Wall Street.
Katsuyama and his team, along with Bankman-Fried and their top brass, presented Gensler and senior SEC officials with a broad outline of their idea and asked whether existing SEC rules—drafted through so-called standstill letters that set industry standards—were not enough. apply to their new venture, according to people with first-hand knowledge of the matter.
Gensler has been said to be lukewarm on his voice, which people aren’t outright ruling out, nor are they suggesting he’ll give it the green light. He wanted any new cryptocurrency exchanges announced by the SEC to mirror the standards of public exchanges such as Nasdaq and the New York Stock Exchange.
It is unclear how much Genlser was involved in Blankman-Fried’s failed FTX business operations. Bankman-Fried resigned from the popular crypto platform, exposing both a complex matrix of investments in various businesses and an unusual connection to something called Alameda Research, a hedge fund-like investment vehicle that Bankman-Fried ran from its Hong Kong offices.
Officials from FTX and IEX held another meeting with the SEC on the concept as it began to take shape in the coming months. IEX executives met separately with SEC officials before last week’s FTX bankruptcy, these people said.
A person with knowledge of the matter said Katsayuma is still interested in moving forward without FTX as a partner, possibly buying FTX’s technology as a trustee in bankruptcy. FTX is also a minority investor in IEX, and IEX officials are trying to buy back the company’s holdings.
In a statement to Fox Business, IEX “regularly engages with the SEC on a variety of topics. We reached out to them to better understand their views on the regulatory paradigm that should apply to the digital asset securities space. At no time did we seek, nor did the SEC ever propose, He added, “FTX US’s recent Chapter 11 filing has no bearing on IEX Group’s business. FTX US has a minority investment in IEX Group and has no relationship or control with any IEX operating entity. Our revenue and cash flows remain at record levels, and our focus and commitment across all our lines of business remains unwavering.”
A legal representative for FTX did not return an email for comment. Bankman-Fried could not be reached for comment.
Bankman-Fried, 30, was once worth $20 billion, but his wealth largely evaporated during the FTX collapse as he faced mounting legal troubles. The relationship between FTX and Alameda has been the focus of multiple criminal and regulatory investigations since FTX’s bankruptcy, and Bankman-Fried may have used FTX client accounts to privately fund risky investments made by Alameda.
The FTX breakout looked like a classic bank run; As word spread of a possible tie-up between the two businesses (which would involve segmenting client accounts from other businesses), investors pulled money out of FTX. They unloaded their native coin, the FTT token, which was held by Alameda in significant amounts and is now virtually worthless.
The news also distracted rival cryptocurrency exchange Binance, a potential white knight savior, from buying FTX to avoid bankruptcy and the possible loss of billions of dollars of client funds.
Gensler was appointed SEC chairman two years ago and ruffled feathers by pushing the SEC’s authority into non-traditional areas such as corporate climate change disclosure. The FTX failure coincides with Gensler’s aggressive fight against alleged cryptocurrencies, despite questions about whether the SEC has the authority to regulate digital coins.
But he now finds himself in the unique position of having to defend himself against attacks from industry executives and congressional Republicans for missing out on perhaps the biggest failure in the industry’s history, and a personal meeting with the man at the center of it all, a politically connected cryptocurrency. -brother, Sam Bankman-Fried, famous for wearing shorts, hoodies and messy hair.
Bankman-Fried, known simply as “SBF,” was one of the richest and most recognizable figures in cryptocurrency until his recent fall from grace. He is also the second-biggest contributor to Democratic midterm elections behind George Soros, donating $36 million to Biden’s 2020 presidential campaign on top of $10 million. The impact has arrived with money: regulators and lawmakers are starting to get ideas for cryptocurrency oversight. He appeared on the cover of magazines like the next Warren Buffett and was considered one of the top thought leaders in the industry.
But now that’s all gone, and his past influence in the cryptocurrency industry is attracting the attention of law enforcement and possibly leaders of the GOP-controlled House. Congressman Tom Emmer, R-Minnesota and a member of the House Financial Services Committee, recently tweeted that his meetings with Gensler — first disclosed on the SEC chairman’s public calendar — indicated the SEC was willing to inform FTX and Bankman-Fried. . “regulatory monopoly” for new cryptocurrency exchanges.
“Reports to my office alleged that he (Gensler) helped SBF and FTX exploit legal loopholes to obtain a regulatory monopoly. We are investigating,” Emmer wrote. Fox Business has learned that if the GOP wins control of the House, they are planning hearings on the Gensler-FTX debate.
To be sure, it’s common for securities industry executives to meet with senior SEC officials and staff about a variety of issues, including new business ventures that could trigger SEC scrutiny. An SEC spokesman declined to comment to Fox Business other than to refer to a CNBC interview in which Gensler said there was nothing inappropriate about his meetings with Bankman-Fried because he usually meets with industry professionals.
“I think we’ve been clear in the meetings,” Gensler said in an interview, “…noncompliance will not work, the public will suffer…” Fried, a representative of FTX and Bankman, did not return calls for comment.
People with first-hand knowledge of the SEC’s discussions with the FTX, including the March meeting with Gensler, say it’s almost impossible for the SEC chairman to give one agency a regulatory monopoly; competitors could simply copy the model for their own exchanges.
A person with knowledge of the March meeting with Gensler described it as a “45-minute lecture” on what Gensler believes cryptocurrencies need to do to comply with existing laws. Gensler also said the Alameda fund should be a completely separate entity from their planned cryptocurrency trading venue.
Bankman-Fried and Katsuyama did not yet have concrete plans for a crypto-trading platform, although they came up with a slide deck to describe their offering during their meeting with Gensler, the person said.
Their main goal was to “get a feel for what the SEC is looking for.” The two sides will meet several more times, with IEX taking the lead in discussions with the SEC in the coming months, these people said.
It’s unclear whether the SEC is ready to greenlight the project anytime soon. Any new exchange would also need approval from the full commission, which is a timely process.
Still, some industry critics of Gensler say the existence of the meetings suggests the SEC is favoring a controversial crypto executive because of his Democratic Party ties. Industry executives typically meet with the commission on new business projects after the SEC formalizes rules, and it’s unclear whether the SEC will propose new rules for cryptocurrency exchanges.
“If the GOP takes over Congress, Gensler will have to answer these questions in hearings,” said one crypto industry insider with close ties to the GOP.