‘Beware' Of Crypto Investing Or Risk Ending Up In Bankruptcy Court, SEC Chair Warns

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Topline

The head of the Securities and Exchange Commission cautioned Americans about the risks of investing in the lightly regulated cryptocurrency industry Thursday, a dire warning as one of the largest crypto exchanges FTX goes up in flames.

© Provided by Forbes FTX’s liquidity crisis has shaken the crypto market. Getty Images

Key Facts

When you give a crypto exchange your holdings “and they go down, you’re going to just stand in line at a bankruptcy court,” SEC Chairman Gary Gensler told CNBC’s Squawk Box Thursday morning.

Gensler declined to name specific exchanges, but his urging comes just days after FTX collapsed as it proved unable to meet billions of dollars in withdrawal requests.

The bankruptcy court reference is a grim allusion to the fact that FTX users are not guaranteed to ever see their holdings again: Crypto exchanges are not regulated as institutions like FDIC-insured banks are and consumers are not assured their holdings.

After rival exchange Binance withdrew from its bailout agreement of FTX, it’s unclear how individuals may ever see their money again save legal action, as alluded to by Gensler.

The SEC, Department of Justice and Commodity Futures Trading Commission are each investigating how FTX managed consumer funds before the liquidity crisis, according to several outlets.

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Key Background

FTX’s fall from grace happened in a matter of days, with the exchange experiencing a run of withdrawals early this week after Binance CEO Changpeng Zhao expressed concerns about insolvency concerns at his rival. Binance entered an agreement to acquire FTX on Tuesday before bailing a day later, explaining the liquidity “issues are beyond our control or ability to help.” The one-time industry titan FTX dragged down the rest of the crypto market with it, sending the largest coins, bitcoin and ether, down 18% and 21% this week, respectively, while Coinbase shares tanked 23%.

Crucial Quote

When reached via text by Forbes about him dropping from our list of billionaires, Bankman-Fried offered his first public comment since the Binance deal went haywire: “Hey, not totally clear but certainly can’t confidently dispute, will update later if new info comes out…”

Chief Critic

“It’s unbelievably frustrating that we basically have a situation that looks like Theranos,” Galaxy Digital CEO Michael Novogratz told CNBC Thursday, referring to the infamous multi-billion dollar biotechnology firm founded by Elizabeth Holmes that was later revealed to be fraudulent. Novogratz’s firm held $77 million in assets at FTX, money the investor said he’s unsure he’ll ever see again.

Further Reading

Binance Bails On FTX Acquisition — Here’s What Led To The FTX Crypto Crash (Forbes)

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