Senator Ron Wyden, the Chairman of the Senate Committee on Finance, has sent letters to several crypto exchanges which operate in the US pressing them on consumer protection concerns in the wake of the bankruptcy of FTX.
Senator Wyden contacted the following crypto exchanges; Binance, Bitfinex, Coinbase, Gemini, Kraken and KuCoin. Binance is the largest crypto exchange in the world that operates both domestically and globally.
In the letters, Wyden inquires as to the policies in place to protect customer assets in the event the crypto exchange may file for bankruptcy or encounter “financial distress.”
Senator Wyden references the collapse of FTX due to “outrageous mismanagement” and “misappropriation of customer assets.”
The letter asks each exchange to provide the answers to the following questions:
1. How many subsidiary companies fall under the exchange’s umbrella, and how many entities are otherwise affiliates of the exchange?
a) How does the exchange segregate assets bought or sold on its platform from its subsidiaries or affiliates?
2. Does the exchange segregate customer assets from corporate or institutional assets (including any assets of the exchange’s subsidiaries or affiliates)?
a) If so, what safeguards are in place to ensure these assets are not commingled?
3. Does the exchange use customer funds for any purpose that is not disclosed to the customer?
4. Please provide a list of any real estate acquisitions made by the exchange or any of its executives or directors financed by customer funds.
5. Does the exchange have any policies, procedures, practices or safeguards in place to guard against suspected market manipulation or otherwise suspicious trading, including wash trading? If so, please describe.
6. Does the exchange, its directors, officers or employees, or any subsidiaries or affiliates use customer data to inform institutional or personal trading, including futures or options trading?
a) If so, to what extent does the exchange inform customers that it engages in trading that may disadvantage customers’ trades in favor of its own positions?
7. What is the exchange’s ratio of debt-to-assets and debt-to-equity (including capital)
a) Do you consider the exchange to be highly leveraged?
8. Please provide a copy of the exchange’s most recent balance sheet with a full listing of the company’s assets and liabilities. Please clarify whether this document has been audited and whether the exchange intends to make this document public.
9. How does the exchange hold and safeguard its reserves (with regard to both capital and equity), and will the exchange publish proof-of-reserves?
a) If so, will the proof-of-reserves be externally audited by a firm that follows the Financial Accounting Standards Board’s recommended methods for auditing crypto assets to the greatest extent possible? Please provide any such audits.
b) What amount of the exchange’s reserves, if any, is made up of exchange-issued tokens, or tokens issued by any of the exchange’s affiliates or subsidiaries?
10. Has the exchange had external auditors conduct annual audits of financial statements? If so, please provide the names of the entities that conducted the audits, and whether those entities ever alerted the exchange of any financial irregularities over the course of its audits.
a) Please describe any steps taken by the exchange to address any potential financial irregularities, tax compliance issues or money laundering concerns identified by internal or external auditors, as well as whether the exchange alerted any relevant regulators of these findings.
11. Does the exchange carry any form of insurance that would benefit the exchange’s customers in the event of its bankruptcy, theft or hack, or any other risks to customer funds? If so, please describe, including any limits to insurance coverage.
12. Would the exchange participate in an industry-funded insurance fund, similar to the compensation fund established by SIPC?
13. What steps has the exchange taken to work with other companies in the crypto industry to develop protections for investors and customers?
As has been well covered, FTX filed for bankruptcy as it could not handle a “run on the bank” when customers attempted to withdraw their funds but the company was not able to fulfill the requests. It has been widely reported that FTX provided loans to affiliated firm Alameda Research, which were collateralized by FTX’s native token – a digital asset that has lost most of its value. FTX owes more than $3 billion to creditors and the chapter 11 proceedings are expected to be a drawn out process as management and the courts sort things out.
The failure of FTX has undermined the entire crypto industry due to extensive counterparty agreements. Multiple firms have shutdown or failed in the wake of the FTX implosion.
The inquiry is described as a the first step toward a new crypto consumer protection agenda.
Senator Wyden demands a response to the letters no later than December 12, 2022.