SEC and CFTC Charge Co-conspirators in FTX Collapse; FTT Labeled “Crypto Security Token”

Caroline Ellison, the pre-implosion CEO of Alameda Research, and Zixiao (Gary) Wang, the former Chief Technology Officer (CTO) of fallen crypto exchange FTX, have been labeled co-conspirators and charged by US authorities for their roles in the FTX implosion. This comes days after the US authorities filed charges against Sam Bankman-Fried (SBF), the ex-CEO of FTX.

The US Securities and Exchange Commission (SEC) in a released statement said “investigations into other securities law violations and into other entities and persons relating to the alleged misconduct are ongoing.”

The SEC says between 2019 and 2022, Ellison was complicit in a scheme where the price of FTT (FTX’s native token) was manipulated. The SEC also alleges that “FTT served as collateral for undisclosed loans by FTX of its customers’ assets to Alameda.”

During FTX’s active days, SBF touted FTX as a safe and secure cryptocurrency trading platform with adequate risk management systems in place; the SEC alleges that Alameda Research then-CEO Caroline Ellison and FTX co-founder and CTO Gary Wang “knew or should have known that such statements were false and misleading.”

In the Commodity Futures Trading (CFTC) press release, the financial regulator charged Ellison and Wang with “engaging in a fraudulent scheme, along with the previously charged defendants.”

Both the SEC and CFTC accuse Gary Wang of creating backdoors in the software code of the FTX trading platform, which allowed Alameda to divert FTX customer funds.

Caroline Lawson and Gary Wang have pleaded guilty to the charges filed and are reportedly negotiating a plea deal with authorities.

FTT Labeled as a Security Token

The labeling of FTT as a security token by the SEC, in its latest complaint, could have major implications for the crypto industry, and may spillover to the ongoing case between the SEC and Ripple labs.

The SEC’s litigation declares that “If demand for trading on the FTX platform increased, demand for the FTT token could increase, such that any price increase in FTT would benefit holders of FTT equally and in direct proportion to their FTT holdings.”

The SEC noted in its litigation that “The large allocation of tokens to FTX incentivized the FTX management team to take steps to attract more users onto the trading platform and, therefore, increase demand for, and increase the trading price of, the FTT token.”  Implying that FTX funded its business efforts with proceeds from the sale of FTT.

It is unclear what the ramifications of the new SEC stance on FTT will have on other exchange tokens such as Binance’s BNB or Huobi’s HT. At press time, other exchange tokens have not reacted negatively, price-wise, since the SEC’s declaration.

The SEC and Ripple Labs have been in court since December 2020 over the SEC’s view that XRP is a security token. Ripple has refused to enter a plea deal with the SEC and decided to battle it out in court. Responding to an opinion piece by the Wall Street Journal analyzing the SEC Chair’s failure to foresee the FTX collapse, Brad Garlinghouse, CEO of Ripple, called the meetings between SBF and SEC Chair Gary Gensler, prior to FTX collapse, “ridiculous and frankly shameful.”