FTX founder Sam Bankman-Fried
By Luke Cohen
NEW YORK (Reuters) – Sam Bankman Fried may struggle to seek the dismissal of fraud charges against him due to uncertainty about how U.S. law will handle cryptocurrencies, as other defendants in cases involving digital assets have done.
Legal experts told Reuters this is because US prosecutors’ accusations of the founder of bankrupt cryptocurrency exchange FTX have largely derailed the debate over whether cryptocurrencies should be regulated as securities or commodities.
Bankman-Fried, 30, has been charged with two counts of wire fraud and six counts of conspiracy in Manhattan federal court to steal deposits from FTX clients to pay off debts to his hedge fund, Alameda Research, and lie to investors about the clause. FTX Funding. pleads not guilty.
“It’s a simple tactic,” said Shane Stansbury, a professor at Duke University School of Law and a former federal attorney. “You don’t really need to go into the intricacies of how we view cryptocurrency.”
The question of whether cryptocurrencies are considered securities, such as stocks or bonds, or commodities — a category in the US that includes the trading of foreign exchange as well as commodities such as crude oil — remains largely unresolved.
But experts say the uncertainty is not relevant to most of the charges against Bankman-Fried, as he faces a charge of conspiracy to commit securities fraud, without prejudice to the nature of the assets.
“There is no need to determine whether what customers bought with fiat currency was a security, a commodity, or something else,” said Mark Kasten, an attorney at Buchanan Ingersoll & Rooney. “Customers put money into the platform and the money has to be used in a certain way. According to the allegations in the indictment, this did not happen.”
Lawyers for Bankman Fried did not respond to a request for comment. The former billionaire previously acknowledged deficiencies in FTX’s risk management practices, but said he did not believe he was criminally liable for the company’s collapse.
Bitcoin is a commodity, said Gary Gensler of the US Securities and Exchange Commission (SEC), but other digital assets behave like securities — contracts in which investors benefit from the efforts of others — because their value is derived from promotion.
The debate is important because it can determine which agency regulates businesses with digital assets. The CFTC is considered by many names in the cryptocurrency market as friendlier than the SEC.
Blockchain payments firm Ripple is competing in a 2020 SEC filing that accuses it of making an unregistered securities offering. The company argues that the XRP token is not a security and is therefore not subject to SEC oversight. The case is ongoing.
Manhattan’s top federal prosecutor, Damien Williams, has made cryptocurrency-related financial crime a focus of his tenure.
In 2022, in its first “inside trading” case involving digital assets, his office brought wire fraud charges against Nathaniel Chastain, a former employee of non-fungible token (NFT) firm OpenSea, and Ishan Wahi, a former director of cryptocurrency at brokerage Coinbase.
Both argued that insider trading fees should be rejected because they should have been involved in securities or commodities. By making allegations of wire fraud in both cases, the plaintiffs avoided taking a position on how to classify cryptocurrencies, or NFTs.
In October, a judge dismissed arguments presented by Chastain’s attorneys to dismiss the charges.
Kasten said it is unlikely that Bankman-Fried supporters would try to make a similar argument because the wire fraud charges are simpler.
