FTX Trading and its billionaire founder, Sam Bankman-Fried, are being probed by the Texas securities regulator over whether certain lending offerings violate state law.
Texas is investigating whether the company’s yield-bearing crypto accounts are illegal securities offerings being sold to U.S. residents, according to a Oct. 14 court filing in the bankruptcy of Voyager Digital Holdings. Until the state determines FTX is complying with the law, the agency said the company shouldn’t move forward with its $1.4 billion purchase of Voyager assets announced last month.
Texas State Securities Board enforcement director Joe Rotunda said he was able to access the company’s earn program despite FTX not being registered with the state, according to the filing. Generally, investments are labeled as securities when there’s an expectation of profit from management.
Rotunda also cited an article linked to by FTX’s app, which explains users can earn yield by participating in staking.
The state securities regulator detailed the probe in bankruptcy court documents in which it objects to FTX’s purchase of Voyager after winning an auction. The federal judge overseeing Voyager’s bankruptcy will consider the objection before deciding whether to allow the sale to move forward.
“We have an active application for a license which has been pending, and believe we are operating fully within the bounds of what we can do in the interim,” according to an FTX spokesperson. “We are working exceptionally hard to ensure Voyager customers get to the best possible outcome — which we believe will happen if our bid to give assets back to users is approved by the Voyager bankruptcy court.”
Rotunda didn’t immediately respond to a request for comment.
The U.S. Securities and Exchange Commission and state investigators have been probing whether accounts offered by crypto lenders are akin to securities that should be registered with regulators. In February, the SEC and state regulators levied a record $100 million fine against BlockFi, a popular virtual-currency exchange, for failing to register products that pay customers high interest rates to lend out their digital tokens.
Bankman-Fried has been on a shopping spree for distressed assets during the crypto downturn, which earned him comparisons to John Pierpont Morgan in the 1907 banking crisis. But his crypto empire has also come under the attention of some regulators. In August, FTX US received a cease-and-desist letter from the Federal Deposit Insurance Corp. due to “false or misleading statements” about certain products being eligible for insurance protection.
Matt Robinson and Yueqi Yang, Bloomberg