A United States court has directed the collapsed crypto exchange FTX to pay $12.7 billion to reimburse customers and victims of fraud, a few months after the company’s founder was imprisoned due to his involvement in the company’s downfall. The Commodity Futures Trading Commission (CFTC) announced that this marks the largest recovery in its history, aimed at returning funds to those harmed by the extensive fraudulent activities led by Sam Bankman-Fried, the now-insolvent FTX and a select group of FTX insiders.
FTX failed in 2022 after a notable decline in the price of cryptocurrencies. The creator, Bankman-Fried, was found guilty of conspiracy to commit money laundering and fraud. He was sentenced to 25 years in prison in March and has also been forced to forfeit assets valued at $11 billion.
Once valued at $32 billion, FTX had misused clients’ funds, channeling them into risky ventures via Alameda Research, a closely affiliated hedge fund. Bankman-Fried further exploited clients’ funds for personal gain, obtaining endorsements from high-profile celebrities, buying fancy cars, making substantial political contributions and obtaining residences in the Bahamas.
The true extent of the financial shortfall became apparent when clients began requesting the return of their funds. The prosecution highlighted that Bankman-Fried’s actions were essentially conventional embezzlement concealed under the pretense of contemporary technology. He was charged with embezzling $8 billion from his clients overall.
The recent compensation ruling by the Southern District Court of New York brings an end to an almost two-year legal battle initiated by the CFTC in 2022. The court’s decision permanently prohibits FTX from engaging in trading, receiving or holding funds with the intention of selling or buying digital assets.
Following the ruling, Rostin Behnam, CFTC chair, underlined the necessity for stronger rules to monitor cryptocurrencies and digital assets. “This is just the beginning, as I have been saying for years. Entities will continue to operate discreetly, honing their dishonest tactics and misleading customers in the absence of explicit laws addressing regulatory voids related to digital assets,” he said.
FTX is currently seeking votes on its bankruptcy proposal but is facing resistance from a number of customers who believe they were mistreated by FTX’s decision to compensate them based on far lower crypto values from November 2022. Votes on the proposal are expected by Aug. 16, 2024, and FTX plans to seek final approval of its wind-down strategy on Oct. 7, 2024.
The lessons from the collapse of FTX are unlikely to be lost on other industry actors, such as Stronghold Digital Mining Inc. (NASDAQ: SDIG), because the management failures of the defunct exchange were too glaring for the lessons to be missed.
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