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Where Was Biden’s SEC Sheriff on Sam Bankman-Fried? – Allysia Finley / WSJ

Gary Gensler has been the ‘cop on the beat’—but he took little interest in FTX as the scandal developed.

Securities and Exchange Commission Chairman Gary Gensler during a meeting in Washington, Dec. 16.
Securities and Exchange Commission Chairman Gary Gensler during a meeting in Washington, Dec. 16. (Ting Shen / Bloomberg)

By Allysia Finley

Securities and Exchange Commission Chairman Gary Gensler is trying to spin the FTX blow-up as a cautionary tale about the crypto “wild West.” But where was the SEC sheriff when Sam Bankman-Fried was funneling FTX customers’ funds to his Alameda Research trading house to finance risky bets and a lavish lifestyle?

In September 2021, Mr. Gensler rejected major industry players’ contention that he needed congressional authorization to regulate crypto products. “We have robust authorities at the Securities and Exchange Commission and we’re going to use them,” he told the Washington Post. “We’ll also be the cop on the beat, bringing those enforcement actions.” And the commission has—but not against FTX.

Mr. Gensler has claimed that all cryptocurrencies except Bitcoin and a few others that he won’t specify are securities subject to SEC regulation and thus require the same robust investor disclosures as stocks and bonds. He has also claimed jurisdiction over crypto lending platforms and trading exchanges on the premise that digital assets are securities.

Under his watch, the SEC has continued litigation launched by his predecessors against tokens XRP and LBRY. A federal judge on Nov. 10 ruled for the SEC that LBRY was selling an unregistered security. Last fall Mr. Gensler threatened to sue crypto exchange Coinbase if it proceeded with plans to pay interest on customer deposits of a stablecoin pegged to the U.S. dollar.

In October the SEC charged celebrity Kim Kardashian with touting digital tokens on social media without disclosing the remuneration for her endorsement. (She settled with the SEC for $1.26 million without admitting or denying its findings.) Mr. Gensler has repeatedly admonished crypto exchanges for “commingling” activities by serving as custodians for customer deposits, market-makers and lenders.

“There’s going to be a problem on lending platforms or trading platforms,” Mr. Gensler warned in September 2021. “And frankly, when that happens, I think a lot of people are going to get hurt.” Last month his prophesy came true as Mr. Bankman-Fried’s “house of cards,” to quote the SEC complaint, collapsed.

According to the commission, starting in 2019 FTX “lent” Alameda billions of dollars from customer accounts to fund its trading, amounting to an unlimited no-interest line of credit. When crypto prices plunged in May 2022, Alameda’s lenders demanded repayment. Mr. Bankman-Fried directed FTX to divert more customer funds to the trading house. During the summer he continued to dig the hole by transferring more customer funds to finance venture investments and personal loans to FTX executives.

The music stopped on Nov. 2, when the crypto website CoinDesk reported that Alameda held a large position in FTX’s proprietary token. Alameda CEO Caroline Ellison said in September that the company was at “arm’s length” from FTX. The CoinDesk report better described it as a pinky-finger’s length relationship, which wasn’t surprising since the two shared a corporate campus in the Bahamas. Mr. Bankman-Fried and Ms. Ellison were also romantically involved.

Customers rushed to sell their FTX tokens and withdraw deposits, while Mr. Bankman-Fried assured everyone that everything was all right. “Assets are fine. . . . FTX has enough to cover all client holdings,” he tweeted. “We don’t invest client assets (even in treasuries). We have been processing all withdrawals.” He later deleted the tweet. FTX soon halted withdrawals and declared bankruptcy.

Billions of dollars of customer funds are now missing and may never be returned. Mr. Gensler attributes the FTX crack-up to the less regulated nature of crypto markets. But the government doesn’t need more regulations to target fraud, which is illegal under the laws already on the books.

That FTX hadn’t registered with the SEC doesn’t let Mr. Gensler off the hook. For months he’s claimed to have authority over crypto and warned about self-dealing at their exchanges. Why didn’t he investigate the company? That would have given the SEC records of FTX’s sloppy bookkeeping and perhaps its alleged fraud.

A charitable explanation is that he considered his progressive regulatory agenda a higher priority, including a climate rule requiring public companies to disclose their greenhouse-gas emissions. An SEC inspector general report in October warned that Mr. Gensler’s aggressive rule-making agenda was overwhelming staff and diverting resources from investor protection. It’s also likely that Mr. Bankman-Fried’s $36 million in donations to Democratic causes bought him political protection.

A cynic might wonder if Mr. Gensler was waiting for a crypto disaster to serve as the impetus for Congress to grant him authority to regulate the industry aggressively. Increased regulation wouldn’t necessarily have prevented the FTX crack-up, though it would have raised the barriers to entry for competitors, as Mr. Gensler noted in an MIT lecture on crypto-regulation.

This isn’t the first time customer funds went missing on Mr. Gensler’s watch. In 2011 more than $1 billion disappeared from the failed MF Global brokerage firm, run by former Democratic New Jersey Gov. Jon Corzine. The CME futures exchange reported that MF Global hadn’t been complying with federal rules on segregating client funds.

Mr. Gensler, then chairman of the Commodity Futures Trading Commission, was MF Global’s primary regulator. During Beltway stints, he and Mr. Corzine helped write the 2002 Sarbanes-Oxley Act tightening securities regulation in the wake of the Enron fraud. Its main effect has been burdening small public companies.

Regulators “can’t actually distinguish between good and bad,” Mr. Bankman-Fried told a Vox reporter last month. At least it doesn’t seem as if Mr. Gensler can.


Allysia Finley is a member of the Journal’s Editorial Board. Ms. Finley joined The Wall Street Journal in 2009 after graduating from Stanford University with a bachelor’s degree in American Studies. During college, she edited the opinions section for The Stanford Review and wrote columns for The Orange County Register. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by The Wall Street Journal (WSJ), on December 18, 2022. All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld.

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