November 29, 2022

Wyden Questions Crypto Exchanges on Consumer Protections Following Failure of FTX

Wyden Probes Exchanges’ Safeguards for Customers, Corporate Governance and Financial Transparency As The First Step Toward A New Crypto Consumer Protection Agenda

Washington, D.C. – U.S. Senator Ron Wyden, D-Ore., sought answers from the six largest cryptocurrency exchanges on the risks consumers face when investing on their platforms, including whether the exchanges provide any protections for customers if the company fails. Wyden’s inquiry comes after the bankruptcy of the FTX cryptocurrency exchange and news reports indicating widespread mismanagement and misuse of customers’ funds held by the company. 

Americans who place money at banks or registered securities brokers are usually protected by the Federal Deposit Insurance Corporation, Securities Investor Protection Corporation and similar protection arrangements. That is not the case for crypto investors, Wyden wrote in his letter to Binance, Bitfinex, Coinbase, Gemini, Kraken and KuCoin. 

“Unfortunately, consumers who entrusted their crypto assets to FTX have no such protections.,” Wyden wrote. “As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions and securities brokers. If these protections had been in place before the failure of FTX, far fewer retail investors would be facing precipitous financial harm today.” 

Wyden requested answers to the following questions by December 12, 2022 from each of the six exchanges:

1. How many subsidiary companies fall under the exchange’s umbrella, and how many entities are otherwise affiliates of the exchange?

       a) How does the exchange segregate assets bought or sold on its platform from its subsidiaries or affiliates?

2. Does the exchange segregate customer assets from corporate or institutional assets (including any assets of the exchange's subsidiaries or affiliates)?

        a) If so, what safeguards are in place to ensure these assets are not commingled?

3. Does the exchange use customer funds for any purpose that is not disclosed to the customer? 

4. Please provide a list of any real estate acquisitions made by the exchange or any of its executives or directors financed by customer funds.

5. Does the exchange have any policies, procedures, practices or safeguards in place to guard against suspected market manipulation or otherwise suspicious trading, including wash trading? If so, please describe.

6. Does the exchange, its directors, officers or employees, or any subsidiaries or affiliates use customer data to inform institutional or personal trading, including futures or options trading?

a) If so, to what extent does the exchange inform customers that it engages in trading that may disadvantage customers’ trades in favor of its own positions?

7. What is the exchange's ratio of debt-to-assets and debt-to-equity (including capital)

        a) Do you consider the exchange to be highly leveraged?

8. Please provide a copy of the exchange’s most recent balance sheet with a full listing of the company’s assets and liabilities. Please clarify whether this document has been audited and whether the exchange intends to make this document public.

9. How does  the exchange hold and safeguard its reserves (with regard to both capital and equity), and will  the exchange publish proof-of-reserves?

        a) If so, will the proof-of-reserves be externally audited by a firm that follows the Financial Accounting Standards Board’s recommended methods for auditing crypto assets to the greatest extent possible? Please provide any such audits.

        b) What amount of the exchange’s reserves, if any, is made up of exchange-issued tokens, or tokens issued by any of the exchange’s affiliates or subsidiaries?

10. Has the exchange had external auditors conduct annual audits of financial statements? If so, please provide the names of the entities that conducted the audits, and whether those entities ever alerted the exchange of any financial irregularities over the course of its audits.

       a) Please describe any steps taken by the exchange to address any potential financial irregularities, tax compliance issues or money laundering concerns identified by internal or external auditors, as well as whether the exchange alerted any relevant regulators of these findings.

11. Does the exchange carry any form of insurance that would benefit the exchange’s customers in the event of its bankruptcy, theft or hack, or any other risks to customer funds? If so, please describe, including any limits to insurance coverage.

12. Would the exchange participate in an industry-funded insurance fund, similar to the compensation fund established by SIPC?

13. What steps has the exchange taken to work with other companies in the crypto industry to develop protections for investors and customers? 

See the full letters to Binance, Bitfinex, Coinbase, Gemini, Kraken and KuCoin.


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