Introduction

Today, in a historic judgment with a $12.7 billion settlement, the Commodity Futures Trading Commission (Commission or CFTC) announced the entry of a consent order in its litigation against FTX Trading Ltd. (FTX) and Alameda Research LLC (Alameda). Today’s announcement sends a clear message regarding the Commission’s intent to hold fraudsters accountable. The consent order, entered by Judge P. Kevin Castel of the United States District Court for the Southern District of New York, resolves the CFTC’s litigation against FTX and Alameda filed on December 13, 2022.[1] The amended complaint charged defendants with two counts of fraud and material misrepresentations in connection with the sale of digital assets and alleged that defendants’ actions caused the loss of billions of dollars in FTX customer deposits.

FTX and Alameda have agreed to findings of liability on each of the charges alleged in the amended complaint. The consent order, among other obligations, imposes:

• $8.7 billion in restitution;
• $4 billion in disgorgement;
• A permanent injunction prohibiting FTX and Alameda from engaging in further violations of the charged Commodity Exchange Act (CEA) and Commission regulations; and
• A permanent injunction prohibiting FTX and Alameda from trading for themselves or others, soliciting or accepting funds for trading, registering or claiming an exemption from registration with the Commission in any capacity, or acting as a principal of any registered person.

The total restitution and disgorgement amount of $12.7 billion is a historic judgment that will enable the Commission to compensate victims for the losses they suffered as a result of this massive fraud.

Today’s resolution demonstrates the Commission’s strong commitment to achieving accountability, deterring future misconduct, and promoting compliance with the CEA and Commission regulations. The resolution sends a clear message that fraud in the derivatives markets will not be tolerated and that wrongdoers will be held accountable.

I commend the Commission’s Division of Enforcement and the Commission on today’s landmark resolution. Yet, much work is left to be done. Going forward, we must prioritize efforts to protect customers in markets with regulatory gaps, where customers may be at higher risk due to the absence of adequate safeguards.

I have called on the Commission before, and I do so again today, to take urgent action to adopt a holistic rule that directly addresses concerns such as conflicts of interest, risk management, transparency and oversight.[2] Every market for every asset subject to the Commission’s jurisdiction must have effective customer protections including, for example, segregation of customer funds, property, and assets.

Customer Protection Rules are the Cornerstone of Vibrant Derivatives Markets and a Well-Functioning Financial System

The vibrancy of derivatives markets depends on customers’ ability to trust that their funds will be safely held by custodians. Customers must be assured that their hard-earned money will not be misused, lost, or worse yet, stolen, by those whom they have entrusted with its safekeeping. In the absence of trust, the custodial relationship cannot thrive, derivatives markets suffer, and the entire financial system is harmed. Customer protection rules, in particular those rules protecting customer funds, are therefore crucial to the vibrancy of derivatives markets and a well-functioning financial system.[3]

As directed by the CEA, the Commission has developed, adopted, and implemented rules that protect customers in derivatives markets, including rules that protect customer funds, property, and other assets[4] held by a custodian. Such rules require custodians to segregate and separately account for customer funds. A custodian may not commingle customer funds.

As additional safety measures, custodians must also meet certain minimum capital requirements, file periodic and annual financial reports, maintain books and records, be subject to examinations, and comply with a host of other obligations. These measures are intended to promote transparency, monitor and manage risks, and enable oversight over the activities of custodians.

Notwithstanding the Commission’s customer protection rules and efforts to preserve customer funds, customers have experienced significant losses in both heavily regulated markets as well as emerging markets, such as in the digital asset and cryptocurrency space. The rise of retail participation in emerging markets adds to the urgency of ensuring that customer funds are protected and that the integrity and stability of our markets is maintained.

An Absence of Customer Protection Rules and Gaps in Regulation Enabled FTX to Misappropriate Billions of Dollars in Customer Funds

On November 11, 2022, customers and our markets experienced the devastating effects of the precipitous collapse and shocking bankruptcy of FTX, which resulted in the loss of over $10 billion in customer funds.[5] Investigations into FTX’s demise revealed a concerning lack of customer protections, including commingling of customer funds, using customer funds to extend a line of credit to an affiliate, and investing customer funds in nonpermitted investments through an affiliate, among others. Customers and the public were not alerted to FTX’s ongoing misconduct due to the absence of crucial regulation over digital assets needed to establish appropriate risk management mechanisms to address conflicts of interest and other related issues, a lack of transparency, and inadequate oversight.

Conflicts of Interest Plagued FTX and Alameda

From the beginning, FTX and Alameda had significant conflicts of interest issues stemming from their vertically-integrated market structure. A gap in regulation, however, allowed these issues to go unaddressed.

Bankman-Fried founded Alameda in November 2017, as a digital asset trading and investment firm. In late 2018, he and other Alameda employees began to build what would ultimately become FTX, a centralized digital asset trading platform. Once FTX was launched, no later than May 2019, Alameda began operating as the primary market maker on FTX’s trading platform. Bankman-Fried controlled both FTX and Alameda, serving as a signatory on core corporate agreements and bank accounts for both entities. Throughout their operations, FTX and Alameda regularly shared employees, office space, systems, communication channels, and accounts. FTX and Alameda relied on each other’s personnel, assets and resources to conduct their operations. FTX and Alameda also regularly transferred large amounts of assets between the entities, often without documentation or effective tracking.

I have raised the alarm, time and time again, about conflicts of interest and other concerns in emerging asset classes and the urgent need for the Commission to adopt a holistic rule that addresses these issues.[6]

Segregation and Restrictions on the Use and Investment of Customer Funds are Fundamental Customer Protections

At the core of customer protection rules is the fundamental principle that custodians must segregate and separately account for customer funds that they receive to margin, guarantee or secure the trades of the customer. A custodian is strictly prohibited from commingling customer funds with its own funds and from using or investing customer funds in violation of the CEA and Commission regulations.

Transparency and Oversight are Crucial to Detecting and Preventing Misconduct

Disclosures, reporting and examinations are critical to creating transparency into business operations and functions and enabling customers and the public to have proper oversight over business conduct. It is imperative that the Commission and other regulators have proper oversight and transparency into the digital asset and cryptocurrency ecosystem.

On November 11, 2022, FTX and more than 100 of its affiliates filed for Chapter 11 bankruptcy proceedings. FTX’s collapse unleashed a wave of failures across the digital asset and cryptocurrency ecosystem and left numerous customers with devastating losses.

On December 13, 2022, in the criminal case parallel to the Commission’s civil case, the United States Attorney’s Office for the Southern District of New York indicted Bankman-Fried on eight counts, including fraud, money laundering, and campaign finance offenses.[7]

In November 2023, jurors found Bankman-Fried guilty of misappropriating billions of dollars in customer funds deposited with FTX. Bankman-Fried was convicted of two counts of wire fraud, two counts of conspiracy to commit wire fraud, one count of conspiracy to commit securities fraud, one count of conspiracy to commit commodities fraud, and one count of conspiracy to commit money laundering. On March 28, 2024, he was sentenced to 25 years in prison for his role in this massive fraud scheme and has begun serving his sentence.

Conclusion

FTX’s failure and the catastrophic consequences of its collapse confirm that there is no time to waste. The time is now for the Commission to adopt a comprehensive rule addressing customer protections.

I commend the CFTC’s Division of Enforcement, including Carlin Metzger, Nina Ruvinsky, Yusuf Capar, Elizabeth N. Pendleton, Scott R. Williamson, and Robert T. Howell, for their work on this matter.