SEC Calls FTX Token (FTT) a Security

• SEC charged Sam Bankman-Fried’s associates, Caroline Ellison and Gary Wang
• The agency alleges that the group defrauded investors out of $1.8 billion
• Its complaint also alleges that FTX’s token FTT is a security

The SEC’s recent filing is making crypto investors nervous. In its complaint against top associates of former FTX CEO Sam Bankman-Fried, the SEC called the FTX token (FTT) a security. The move will likely have important ramifications for the crypto industry. 

The Securities and Exchange Commission (SEC) filed a complaint late Wednesday against Caroline Ellison and Gary Wang. Caroline Ellison is the former CEO of FTX’s sister firm Alameda Research, and Gary Wang is the FTX co-founder. 

The complaint alleges that the pair helped Sam Bankman-Fried in defrauding FTX investors. In addition to the fraud charges, the SEC also claims that FTX issued FTT as an investment contract, which makes the token a security. 

"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 wrote.

Therefore, “FTT investors had a reasonable expectation of profiting from FTX’s efforts to deploy investor funds.” 

The complaint could have significant ramifications for the crypto space. Most crypto tokens, with the likely exception of Bitcoin, could fall in the security category. This would mean that their teams could face SEC fines and comply with securities regulations. 

Earlier, the SEC took criticism for its allegedly inconsistent stance on crypto regulation. For instance, the regulator filed a complaint against Ripple (XRP) years before charging FTX. 

SBF Orchestrated “Massive, Years-Long Fraud”

The SEC complaint alleges that Ellison and Wang “engaged in a scheme to defraud equity investors in FTX Trading” with Sam Bankman-Fried from “at least May 2019 through November 2022.” 

FTX raised more than $1.8 billion from investors who believed that FTX had appropriate risk management, the SEC states. 

"Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire," the report says.

Alameda Research had access to unlimited funding from FTX, ultimately leading to the collapse of FTX. “Those loans were backed in significant part by Alameda’s holdings of FTT—an illiquid crypto asset security that was issued by FTX and provided to Alameda at no cost.”

On the other hand, the assets of Alameda Research consisted largely of “enormous positions in illiquid crypto assets” issued by SBF, including FTT. 

The complaint also alleges that Alameda was “actively manipulating” the price of FTT to boost the value of its holdings.

The SEC alleges that Sam Bankman-Fried failed to disclose these risks to investors, and even told some investors that FTX held no FTT at all. 

On the Flipside

• The SEC’s move could have a positive impact on the crypto space. More regulatory scrutiny could bring transparency to crypto projects. This could protect retail investors and deter bad actors. 
• Moreover, transparency could help the industry grow and attract more investors. 

Why You Should Care

The SEC’s move against FTX and its former CEO could have major implications for the crypto space. Most tokens, with the likely exception of Bitcoin, could be classified as securities by regulators. This means that teams would have to comply with securities regulations and face SEC fines if they fail to do so. 

You may also like: 

SEC Commissioner Calls for Clarity on Howey Test After the FTX Debacle

US Justice Department and SEC are Investigating the FTX Crisis